Chapter 7 - Accounting For Receivables
Chapter 7 - Accounting For Receivables
Chapter 7 - Accounting For Receivables
Credit Sale:
Accounts Receivable 1,000
Sales Revenue 1,000
Example: Accounts Receivable
Assume merchandise is sold on account for $1,000.
The terms of the agreement were 2/10, n/30. The
entries are as follows:
Credit Sale:
Accounts Receivable..... 1,000
Sales Revenue......... 1,000
Collection--2/10,n/30:
Cash.............................. 980
Sales Discounts............. 20
Accounts Receivable 1,000
Uncollectible Accounts
•Direct Method
Or:
•Allowance Method
EXAMPLE:
If We Have $100,000 in A/R
Invoice
ABC Inc. $
They would be represented by a
stack of invoices
Under the
Direct Method
• All invoices are presumed to be good . . .
• (Valued at $100,000)
• until we discover someone can’t pay
the amount owed.
Direct Method
be uncollectible — it must be
removed from A/R.
Invoice
ABC Inc. $
Dr. Cr.
Bad Debt Expense 500
Accounts Receivable 500
Direct Method
Problem:
Invoice
ABC Inc. $
Invoice
ABC Inc. $
Like all assets, the value of A/R is
only what you expect to collect.
Allowance Method
Invoice
ABC Inc. $
If We Have $100,000
in A/R
Dr. Cr.
Bad Debt Expense 2000
Allowance for Doubtful Accounts 2000
To record estimated bad debts
Balance Sheet Presentation
Assets:
Cash 20,000
Accounts Receivable 100,000
Supplies 2,500
PP&E The Allowance
3,000,000
for Doubtful
Total Assets 3,120,500
Accounts is a
contra asset
that follows A/R
Balance Sheet Presentation
Assets:
Cash 20,000
Accounts Receivable 100,000
Less Allowance for DA 2,000
Net Accounts Receivable 98,000
Supplies 2,500
PP&E 3,000,000
Total Assets 3,120,500
Dr. Cr.
Allowance for Doubtful Accounts 500
Accounts Receivable 500
To write off Smith Co. (in bankruptcy)
Direct vs. Allowance Methods
Eliminate Receivable:
Cash 500
Accounts Receivable 500
Payment for written-off receivable.
Estimating the Allowance for
Uncollectible Accounts
350 Balance
350 Balance
Percentage
Estimated to be
Age Balance Uncollectible Amount
Current.............. $10,000 1.5 $ 150
1-30 days.......... 4,000 4.0 160
31-90 days........ 2,100 20.0 420
Over 90 days..... 1,000 40.0 400
$17,000 $1,130
Example 2: Bad Debt Expense
The XYZ Company had credit sales during the year of
$200,000. Using the Aging Method, determine the
journal entry needed. The beginning balance for the
Allowance for Doubtful accounts is $150.
Uncollectible
Account Allowance for
Expense Doubtful Accounts
150 Balance
150 Balance
Principal
(amount)
Computing Interest
Principal Interest
(amount)
X Rate (%)
Computing Interest
Equals
Interest
Owed
Example: Interest
The Ohio Company signed a 90-day, $5,000 note
payable to the Florida Company in settlement of
existing accounts payable. The interest rate of the
agreement is 14 percent. Calculate the interest
cost.
Example: Interest
The Ohio Company signed a 90-day, $5,000 note
payable to the Florida Company in settlement of
existing accounts payable. The interest rate of the
agreement is 14 percent. Calculate the interest
cost.
Principal x Interest Rate x Time = Interest