For accounting students Section A – C /1st course

Prepare matches, and process receipts.

What do you understand by prepare match and process receipt?
It emphasis receiving, identifying and recording receipts, matches receipts to
documentation, entering data into organizational operating / accounting systems and filing
necessary documentation.

1. The meaning of receipts

A receipt is a written acknowledgement that something of value has been transferred from one
party to another. In addition to that the receipts consumers typically receive from vendors and
service providers. Receipts are also issued in business to business dealing as well as a stock
market transaction.

Receipts are an official record that represented proof of a financial transaction or purchase.

Receipts are issued in business to business dealing as well as stock market transactions.

Receipts are also necessary for tax purposes as proof of certain expenses.

In accounting receipts can also refer the total cash inflows over a specific period of time.

A Typical receipt states the time and value of a transaction and may also include information on
the type of services or products, being provided, the method of payment and any additional taxes
of fees.

Receipts are used to document payments and business transaction. Companies and other
entities used receipts to truck their cash flows, reimburse eligible payments or claim certain
benefits on their taxes. In some countries, businesses are required to provide a receipt for each
transaction.

The importance of preparing receipts are-

It is written proof that a seller received monetary compensation in exchange for a product or
service provided to the buyer/ customer/.without the business receipt and the information it
contains there is no official record of the shift in ownership following a purchase, or a request for
a refund or exchange

Receivables are money that is owed to business. Receivable can be broadly classified into
trade receivables and non-trade receivables.

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Trade receivable is the amount owed to be the company for goods and services sold in normal
course of business.

Non-trade receivable is arise from many other sources such as advance to employee,
interest receivable, rent receivables, and loan to affiliated companies. We will assume that all
receivables in this unit are trade receivable.

Based on the above classification trade receivables can be further classified into account
receivable and note receivable.

1. Account receivable is to amounts due from customers for credit sales. These receivables
are supported by sales invoice or other documents for credit sales rather than any other
written promises. Such account receivables are normally expected to be collected with in
relatively short period, such as 30 or 60 days. They are classified on the balance sheet as
a current asset.
2. Note receivable is to amounts that customers owed for which a formal written instrument
of credit has been issued. Notes are usually used for credit periods of more than sixty
days and for transactions of relatively large value. Note may also be used in settlement of
an open account and in borrowing or lending money.

Internal control over receivable

These control procedure should apply on receivables. Because of they are one of the asset
elements of the organization. For example, the individual responsible for the sales should be
separate from the individual accounting for the receivables and approving credit. By doing so,
the accounting and credit approval functions service as independent checks on sales. Separation
of responsibility for related functions reduces the possibility of errors and misuse of funds.

Approval control over accounts receivable begins with the approval of the sale by a
responsible company official or the credit department, after the customer’s credit rating has been
received.

Adjustment of account receivable, such as for sales return and allowance and sales discount,
should be authorized or reviewed by a responsible party.

Effective collection procedure should also be established to ensure timely collection of

receivable and to minimalize loss from uncollectable accounts.

Characteristics of notes receivables (short pieces of witting to help you remember)

A chain supported by a note has some advantages over a chain in the form of an account
receivable.by signing a note, the debtor recognize the day and agree to pay according to the
terms listed. a note is there for a strong legal claim if there is a court action.

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A promises note is a written promise to spay a sum of money on a demand or at a definite time.it
is payable to the order of a person or firms or to the bearer or holder of the note. The person or
firm that makes the promises signs it. The one to whose order the note payable is called the
payee, and the one making the promise is called the maker.

1. Due date: - the date a note is to be paid is called the due date or maturity day. The
period of time between the issuance date and the due date of a short term note may be
sated in either days or months. When a term on a note is expressed in days. The maturity
date is the specified number of days after the notes date.

Example: - a five day note date January -1 matures and is due on January -6. A 90- days note
dated March -10, Maturity on June -8. This due date June- 8 is computed as:-

 Term of the note -----------------------------------------------------90

 Days in March --------------------------------------------------------31
 Minus the date of the note ------------------------------------------ 10
 Days remaining in March ---------------------------------------------21
 Add days in April ---------------------------------------------------- 30
 Add days in May -------------------------------------------------------31
 Number of days remaining to equal ---------------------------------- 90 days

(90 - 82 = 8)--------------------------------------------------------------------------------- 8

There for due date is June- 8

The period of a note is sometimes expressed in months. When months are used, the note matures
and is payable in the month of its maturity on the same date of the month as its original date.

A three month note- dated march -10 for instance is payable on June -10.

2. Interest computation
Interest is the cost of borrowing money for the borrower. It is the profit from lending
money for the lender. The interest rate on notes is normally stated in terms of per-year,
regardless of the actual period of time involved.
The formula for computing interest is
Interest = principal x annual x time
Principal means face account of the note
Annual means interest rate
To illustrate the formula the interest on a Br. 10,000, 12%, 60 days note is computed as
Br. 10,000x 12% x60/360 = 200
N.B. to simplify the interest computations for note with periods expressed in days. It
is common to treat a year as having 360 days.
3. Maturity value

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The amount that is due at a maturity or due date is called the maturity value. The
maturity value of a note is the sum of the face amount and the interest.
In the above example: - the maturity value is Br. 10200, which are (Br, 10,000 face
amount plus Br. 200 interest) i.e. MV= FV+I where:- MV= maturity value
FV = face value
I = interest
Accounting for note receivable
Note receivable is usually recorded in a single note. Receivable account is to simplify
record keeping. We need only one account, because the original notes are kept on file.
This means the maker rate of interest due date and other information can be learned by
examining the actual note.
To illustrate the recording of the receipts of a note, assume that on junuary-10, Nile co.
sales merchandize on account to Tana co. and receive a Birr 5,000, 90 days, 12%,
promissory note
This transaction recorded as :- June- 10 note receivable --------------- 5,000
Sales--------------- 5,000
The makers of the note usually honor the note and pay it in full. The entry required to
record the receipts of cash by Nile Co. from Tana Co. as:-
April -10 cash------------------ 5150

Note receivable ---------------------------------------- 5,000

Sales----------------------------------------- 150
Company can sometimes accept a note for overdue customers as a way of granting at
time extension on a past due account receivable. To illustrate assume that a 60 days, 10%
note dated September -5. 20x1 is accepted by Awash Co. in settlement of the amount of
Happy Co. which is past due and has a balance of 10, 000. The entry to record the
transaction is
September - 5 N/R ------------------------------ 10, 000
A/R------------------------------ 10, 000
Received a note to settle account
Recording dishonored note
When a note is maker is unable or refuse to pay at maturity. The act of dishonoring a note
does no relive the maker of the obligation to pay. The payee should use every legitimate
means to collect. But how do companies report these events. The balance of the note
receivable account normally includes only those notes that have note mature, .when a
note is dishonored. Therefore remove the amount of the note from the notes receivable
account and charge to an account receivable from its maker. Assume that
Example: - Nile Co. holds a Br. 1000, 12%. 30 days note of Ato Alemu at maturity,
Alemu dishonored the note, Nile, Co. records this dishonoring of its N/R on Oct -25 as
Oct-25 A/R---------------------------------Ato Alemu 1010

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 N/R------------------------------ 1000
Interest Rev. --------------------- 10
To record dishonored note and interest of 1000 x 12%x30/360 = 10
The above entry record interest of Br.10 which has been earned even through the note has
been dishonored
End of period interest adjustment.
When notes receivable are out standing at the end of an accounting period, accrued interest is
computed and recorded. For example:-on December 20, 20x1 Nile ,Co accepted a Br. 2000,60
days, 12% note from a customer in granting an extension of a past due account. Assuming that
the accounting period ends on Dec.31, the entries to record the receipts of the note accrued
interest and payment of the note at maturity are
Dec.19. N/R ----------------------------------------2000
A/R customers x ------------------------2000
Received note of in settlement of A/R
Dec.31 interest receivable ----------------------------------8
Interest revenue ------------------------------- 8
Adjusting entry for account need
Interest Br. 2000x12% x12/360 =8
Feb.17. cash --------------------------------------------------2040
N/R --------------------------------------------------2000
Interest record-------------------------------------------8
Interest revenue --------------------------------------32
Received pay of note and interest at mature.
To adjusting entry above on Dec. 31 20x2 was required to show the interest earned for the period
on the income statement.
Converting receivables to cash before maturity
Sometimes companies convert receivable into cash before them due, because the need for cash or
a desire, not to be involved in the collection activities.

Converting receivable is usually done either:-

1. By selling them
2. By using them as security for a loan.

Notes receivable can be converted to cash by discounting them at a financial institution such as
Bank the process has three steps

 The maker receive goods and services or cash from the payee in exchange for the note
 The payee discounts the note with a Bank receive the monetary value of the note less a
discount ( a fee charged by a Bank)
 The maker pays the Bank at the maturity of the note/

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Note receivables are discounted with or without recourse, where a note is discounted without
recourse. The bank assumes that the risk of bad debt loss and the original payee does not have a
contingent liability.

A contingent liability is an obligation to make a future payment if and only if an uncertain

future event occurs. A note discounted without recourse is like an outright sale of an asset. If a
note is discounted with recourse and the original maker of the note fails to pay the bank, when it
matures the pay of the note must pay for it .this means a company discounting a note (an
endorser) with recourse has a contingent liability and the bank is paid.

Accompany should disclose contingent liability in the accompanying note to its financial
statement.

To illustrate assume that a 90 days , 12%, Br. 20,000 N/R from Hiwot Co. dated jan.1,20x2 is
discounted at the payees bank on the February 12, 20x2 at the discount rate of 15% . the steps to
determine the proceeds (the amount to be received by the payee from the bank upon discounting
are:- step 1.- Determine the maturity date and maturity value.

MD= April -1 and MV = FV+1 = 20,000+ (20,000x12% x 90/360) = 20,600

Step.2. - Determine the bank discount (bank discount is an interest that is charged by
the bank and is computed based on the maturity value of the note for the discount period.

Discount period is the time the bank must hold the note before it becomes due.

Bank discount = MV X DR X DP where NV = maturity value (20,600)

DR= discount rate (15%)

Discount = 20,600 x 15% x 48/360 DR = discount period ( from

February- 12 to April -1 = 412

Step3. - Determine proceed (proceed is the amount of cash paid to the endorser other
deducting discount. I.e. proceed = MV-D 20,600-412 = 20,188

Step4. – record the necessary journal entry at the date of discount. (here record interest revenue
which is the excess of proceeds from the face value or record interest expense when the proceed
is less than the face value of the note)

Feb.12 cash ------------------------------------------ 20, 188

N/R -------------------------------------- 20,000

Interest revenue ------------------------188.00

Discount Br. 20,000, 90 days, 12% note at 15%

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The length of discount period and the difference between the interest rate and the discount rate
determine whether interest expense or interest revenue will result from discounting.

When a discount note receivable is dishonored the bank notifies the endorser and asks for
payment of there is no statement that limits the responsibility of the endorser. In some cases the
bank may charge a protest fee of notifying the endorser that a note has been dishonored. The
entire amount paid to the bank by endorser including the interest and protest fee, should be
debited to the A/R of the maker.

Example: - assume that the maker Hiwot Co. dishonored the above discount note at maturity.
The bank charges a protest fee of Br, 25 the endorser’s entry to record the payment to the bank
is:- April -2 A/R Hiwot Co. --------------------------------------------20, 625

Cash----------------------------------------------- 20, 625

Paid dishonored discounted note

Exercise 2
Chilallo Co. issued a 60 days 12% note for 40,000 dated February -12 Garra Muleta Co an
account

a. Determine the due date of the note

b. Determine the maturity value of the note
c. Present entry required to record the following/
 Receipt of the note by the payee.
 Receipt by the payee of payment of the note at maturity.

Accounting for uncollectable accounts receivable

When credit is extended some amount of collectable receivable is generally inevitable regardless
of the care taken in granting credit and the control procedures used . The operating expense
incurred because of the failure to collect receivables is called uncollectable accounts expense
or bad debts expense or doubtful account expense.

When does an account as a note become uncontrollable? There is no general rule for
determining when an account receivable becomes uncontrollable. The fact that a debtor fails pay
an account receivable according a sale contact or fails to pay a note or the due date does not
necessarily mean that he account receivable will be uncontrollable.

There are two methods of accounting for uncontrollable receivables

The allowance method which provides an expense for uncontrollable receivables in advance of
their write off (removed from the ledger) and

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The direct write off- method: - which recognize the expense, when account receivables are
judged to be worthless.

The allowance method

The allowance method of accounting for bad debts matches the expected loss from
uncollectable. A/R against the sales they helped produce. We must use expected losses, since
management can not exactly identify the customers who will not pay their bills at the time of
sale. This means at the end of each period the allowance method requires us to estimate the total
bad debts expected to result from that period s sale. An allowance is then recorded for the
expected loss. This method has two advantages over the direct write-off method.

1. Bad debt expenses are charged to the period in which related sales are recognized.
2. A/R reported on the balance at the estimated amount of cash to be collected.

The allowance method estimates bad debt expense at the end of each accounting period and
records it through an adjusting entry. To illustrate this method assume the A/R accounts has a
balance of Br. 50, 000 and based on carful study of the expense of other companies Nile Co.
estimates that a total of Br.2000 will be uncontrollable.

This estimated expense is recorded through the following adjusting entry.

Dc- 31 uncollectible accounts expense -------------- 2000

Allowance for doubtful accounts -------------- 2000

To record estimated bad debts

The amount Br. 2000 is an estimated reduction in A/R but it cannot be credited to specific
customer accounts or to the A/R controlling account. Instead a contra asset account entitled
allowance for Doubtful account is credited.

As with all periodic adjustments the above entry serves two purposes.

 It reduces the value of the receivable to the amount of cash expected to be realized in the
future. This amount which is Br.48, 000 (50,000-2000) is called the net realizable value
of the receivable.
 The adjusting entry reaches the Br. 2000 expenses of uncollectible account with the
related revenue of the period.
Write-off to allowance account
When specific accounts are identified as uncontrollable they are written off against the
allowance for doubtful accounts. Assume after spending some time trying to collect from
Shalla Co. Nile Co. decides that Shallas br. 200 accounts receivable is uncollectible and
makes the following entry to write it off.

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 Jan -25 allowance for doubtful account --------------- 200
A/R Shallas Co. --------- 200
To write- off uncollectible account.
Note two aspects of this entry and its related accounts
Before write- off after write-off
A/R -------------------------------- 50,000 ------------------------- 49,800
Less allowance for doubtful accounts 2000 ------------------------ 1,800
NRV ----------------------------------- 48,000 ----------------------- 48000
Neither total asset nor net income is affected by the write-off of a specific account but
both total assets and net income are affected by the recognized bad debt expenses for the
year in the adjusting entry.
Recovery of uncollectible accounts
When the customers fail to pay and the accounts written off as uncollectible his or her
credit standing is jeopardized. To help restore credit standing a customer may later
choose to voluntarily pay all or part of the amount owed. A company makes two entries
when collecting an account previously written-off. The first is to reverse the original
write-off and reinstate the customer’s account.
Example: - assume the amount written-off in the processing entry is later collected on
February -15
On Feb.-15 the entries to record this recovery are:-
On Feb.-15. A/R Shallla Co. ------------------------ 200
Allowance for doubtful account ----------------------200
To reinstate accounts previously written-off
Feb. 15. Cash ------------------------------------------------200
A/R Shalla Co. -----------------------------------------------200
To record full payment of account
Estimating uncollectible
The allowance method of according for bad debts requires an estimate of bad debts
expenses to prepare the adjusting entry at the end of each accounting period. How does a
company estimate bad debts expense? There are two common methods
1. Based on the income statement relationship between bad debts expense and
sales.
2. Based on the balance sheet relationship between A/R and allowance for
doubtful accounts. Both methods require an analysis of past experience.

Estimating based on sales

Accounts receivables are created by credit sale. The amount of credit sales during the
period may there for be used to estimate the account of a collectible account expenses.

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The amounts of this estimate as added to whatever balance exist in allowance for
doubtful accounts.
To illustrate assume that Wonji Co. has credit sales of Br. 50,000 in 20x2. Based on past
experience and the experience of other Cos. Wonji Co. estimated o0.007% of credit sales
are uncollectible. Using this prediction the adjusting entry for uncollectible accounts at
the end of the priod.20x2 is as follows.
Dec.31 uncollectible accounts exp. (50,000x0.007%) =3500
Allowance for doubtful accounts ----------------------- 3500
Estimate based on analysis
The longer an A/R remains outstanding the less likely that it will be collected. Thus we
can base the estimate of uncollectible account or how long the accounts have been
outstanding for these purposes. We can use a process is called ageing receivables which
examines each A/R to estimate the amount of an collectible. Receivables are classified by
how long they are past their due date. Then estimate of uncollectible are made assuming
the longer an amount is past due the more likely it is to be collectible. After the
outstanding amounts are classified and analyzed in the aging schedules the expected
balance for the allowance for doubtful accounts will be estimated.
Let as assume that the amount estimated is Br. 5000 so do you think this is the adjustment
amount required for the current period? No.
Because this estimated amount is expected balance of the allowance for doubtful account
after advisement rather than the current year provision for uncollectible account expense.
There for to determine the current year provision we must take in to account balance,
before adjusting in the allowance for doubtful account.
To illustrate assume there is a credit balance of Br. 1300 in the allowance account before
the adjustment. The amount to be added to this balance is therefore Br. 3800 (Br.5000-Br.
1200) and the adjustment entry is as follows.
Dec.31. uncollectible account expense ---------------------------- 3800
Allowance for doubtful accounts ------------------------------------ 3800
To record uncollectible expense
Alliteratively, if the allowance for doubtful accounts had an adjusted debt balance of
Br.700, then the required adjustment is Br. 5700 (Br.5000-Br.700) and the adjustment
entry is as bellow.
Dec.31, uncollectible account expense -----------------------5700
Allowance for doubtful account ------------------------------5700
The direct- writ-off method
The direct writ-off method of accounting for bad debts records loss from a collectible.
A/R at the time it is determined to be uncollectible. No attempt is made to predict
uncollectible accounts expense. Bad debts expense is recorded when specific accounts are
determined to be worthless. If Wonj. Co. uses a direct write-off method and determined

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 on February 20. It cannot collect from a customer. Home Co. Br.500. the entry to writ-off
the customer’s account is as follows./
Feb. 20 uncollectible account expense ----------------------- 500
A/R. Home Co. -------------------------------------------------- 500
To write-off Uncollectible accounts.
Sometimes an amount previously written –off is later collected. This can be due to factors
such as continual collection efforts or the good fortune of a customer. If the account of
Home.Co.that was written –off directly to bad debt expense is later collected in full the
following two entries recorded this recovery
Mar. 5. A/R Home Co. -------------------------500
Uncollectible account expense --------------- 500
To reinstate the account
Mar. 5. Cash --------------------------------500
A/R Home Co. -----------------------------500
To record full payment of account
If the recovery is in the year following the write off there is no balance in the
uncollectible account expense account related to the previous year write-off and no other
write- off are expected. So the credit portion of the entry recording the recovery can be
made to bad debts recovers revenue account.
To conclude that part companies must weigh at least two principles when considering use
of the direct write-off method.

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 2nd course: - Process payment documentation.
A) General payment will be based on receipt of a proper invoice and satisfactory
contract performance.
B) Content of invoice
A proper invoice must include the following items (except for interims payments on
cost reimbursement) repayment contract for services.)
1. Name and address of the contractor.
2. Invoice number and invoice date? /Contractors should date invoices as close as possible
to the date of mailing or transmission/
3. Contract number and other authorization for supplies delivered or service performed
(including order number and contract line item number)
4. Description quantities unit of measure, unit price, and extended price of supplier
delivered or service performed
5. Shipping and payment terms e.g. Shipment number and date of shipment.(discount for
proper payment terms)
6. Name and address of contractor official to whom payment is to be sent. (must be the
same as that in the contract or in proper notice of assignment)
7. Name (where practicable , title, phone number, and mailing address of persons to notify
in the event of a detective invoice)
8. Tax payer identification number (TIN) the contractor must include its TIN in the invoice
only if required by agency producers.
9. Electronic fund transfer (EFT) banking information.

C. authorization to pay

D. billing office

E. payment office.

1. Entering data to system.

1.1 Entering data into system.
Data is entered into systems without error and within the time requirements as specific in
relevant organizational policy and procedures.

Organizational policy and procedures may include.

 Computer system documentation

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  Internal control guidelines
 Operations manuals.

1.2. Allocating data to system

Data is allocated to the correct system and accounts and related systems are updated.
Related system can included
 Assets system = receivables
 claims = reinsurance
 Commission and fees = tax related
 Holding suspense accounts
a. maintain system controls
1.3 System control is maintained to ensure to the integrity of clients and payee
database.

System controls:-

 Protect against the corruption of payee such as name, address, and bank account
details

2. Creating payment facilities.

b. Processing payment facilities payment facility is processed accurately in
accordance with organization policy and procedure.
c. Maintaining documentation
 Documentation is maintained in a secure manner to protect the
privacy and interest of all parties.
 Documentation may include authorization slip, batch records
Cheque- cancellation ,delivery dockets, invoices, payment request,
periodic approval, signature verifications, and stop payments
3. Verifying payments against documentation
3.1. Conforming authorization for payment authorization for payment is
confirming with information on payment facility, matching approved documentation.
3.2. Identifying discrepancy.
Discrepancy is identified and followed up promptly.

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 4. Effecting payment.
4.1. Making payment
Payment is made within agreed credit arrangements in accordance with
organization policy and procedures and industry and legislative requirements.
Industry and legislative requirements covers:-
 Relevant financing laws
 Trade practice and consumer protection proclamations.
 Industry codes of practice
 Occupational health and safety (OHS) guidelines.
 Relevant insurance laws
 Taxation laws

4.2. Signing payment instruments

 Payment instruments are signed in accordance with relevant

authority levels and related systems update promptly to ensure that the
integrity of accuracy system and maintained.

4.3. Collecting documentation

 Primary documentation associated with payment is cancelled or
noted to ensure multiple payments are not made.
5. Filling documentation
5.1. Filling documentation
 Documentation filed promptly in accordance with organizational
policy and procedures.
5.2. Locating documentation
Location of filed documentation is easily accessible and traceable.

Assessment requires evidences that the candidates are:-

1. Interpret and apply organization, industry, and legislative requirements for
processing payment documentation.
2. Accurately enter data in organization system
3. Create payment facilitation and verify payment against documentation.

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