C7 - 1
Learning Objectives
Power Notes
1,Classification of Receivables
2,Internal Control of Receivables
3,Uncollectible Receivables
4,Uncollectibles – Allowance Method
5,Uncollectibles – Direct Write-Off Method
6,Characteristics of Notes Receivable
7,Accounting for Notes Receivable
8,Balance Sheet Presentation
9,Financial Analysis and Interpretation
Chapter F7
C7
Receivables
C7 - 2
Receivables – Classification and Control
Uncollectibles – Direct Write-Off Method
Uncollectibles –Allowance Method
Accounting for Notes Receivable
Balance Sheet Presentation
Accounts Receivable Turnover
Number of Days’ Sales in Receivables
Slide # Power Note Topics
2
4
6
15
20
21
22
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F7
Receivables
C7 - 3
Classification of Receivables
Accounts Receivable – used for selling
merchandise or services on credit,and normally
expected to be collected in a relatively short
period.
Notes Receivable – used to grant credit on the
basis of a formal instrument of credit,called a
promissory note.
Other Receivables – interest receivable,taxes
receivable,and receivables from officers or
employees.
C7 - 4
Accounting for Uncollectible Accounts Receivable
This method is not consistent with the
matching principle.
Accounts that prove to be uncollectible are
written off in the year they become worthless,
Uncollectible Accounts Expense is debited and
Accounts Receivable is credited for each such
transaction.
The Direct Write-Off Method
C7 - 5
Journal Entries – Direct Write-Off Method
Date Description Debit Credit
Uncollectible Accts,Expense 420
Accts,Receivable - D,L,Ross 420
Accts,Receivable - D,L,Ross 420
Uncollectible Accts,Expense 420
Cash 420
Accts,Receivable - D,L,Ross 420
Write off uncollectible account of $420
Reinstate and collect prior account written off.
May,10
Nov,21
C7 - 6
Accounting for Uncollectible Accounts Receivable
This method is consistent with the matching
principle.
Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
The Allowance Method
C7 - 7
Journal Entries – Allowance Method
Date Description Debit Credit
Uncollectible Accts,Expense 4,000
Allowance for Doubtful Acct,4,000
Allowance for Doubtful Accts,610
Accts,Receivable - J,Parker 610
Accts,Receivable - J,Parker 610
Allowance for Doubtful Accts,610
Cash 610
Accts,Receivable - J,Parker 610
Estimated a total of $4,000 will be uncollectible.
Write off uncollectible account of $610.
Reinstate and collect prior account written off.
Dec,31
Jan,21
Jun,10
C7 - 8
Estimating Uncollectible Accounts Expense
1,Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it
is estimated that 1% will be uncollectible,the
Uncollectible Accounts Expense is $3,000.
2,Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables
will be uncollectible and the Allowance for
Uncollectible Accounts is $510,the Uncollectible
Accounts Expense is $2,880 ($3,390 – $510).
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
C7 - 9
Accounts Receivable Aging and Uncollectibles
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
Not
C7 - 10
Accounts Receivable Aging and Uncollectibles
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectible percentages based on
experience and industry averages.
Not
C7 - 11
Accounts Receivable Aging and Uncollectibles
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
AMOUNT
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
$3,390 = $1,500 $200 $310 $380 $360 $400 $240
Not
C7 - 12
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
A
A
C7 - 13
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
2,880
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
2,880
A
B
B
Year-end adjustment
$3,390 - $510 = $2,880
A
B
C7 - 14
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
2,880
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
2,880
A
B
B
3,390 C
Year-end adjustment
$3,390 - $510 = $2,880
Balance after adjustment
A
B
C
C
C7 - 15
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of
the principal (face) amount per year
Characteristics of Notes Receivable
A promissory note is a written document
containing a promise to pay:
C7 - 16
Calculating Interest and Maturity Value
Interest Calculation
We received a $2,500,10%,90-day note dated March 16,2000.
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
Maturity Value Calculation
C7 - 17
Accounting for Notes Receivable
Date Description Debit Credit
Collected amount due on note dated November 21.
Nov,21
Dec,21
Notes Receivable 6,000
Accts,Receivable - Bunn Co,6,000
Cash 6,060
Notes Receivable 6,000
Interest Revenue 60
Principal + Interest = Maturity Value
$6,000 + ($6,000 x 12% x 30 / 360) = $6,060
Received a $6,000,30-day,12% note.
C7 - 18
In commercial transactions it is traditional
to use a 360-day year.
The historic rationale for this procedure
was ease of calculation which made sense
before the computer and calculator age.
Why does this practice continue when
most small calculators and desktop
computers can present complex interest
calculations in a few seconds?
Understanding the 360-Day Year
C7 - 19
Another Look at the 360-Day Year
1,Assume a $100,000 note dated June 1 for 90 days
at an interest rate of 12 percent,The textbook
calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00
2,A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90
3,When large sums are involved the 360-day method
(known as ordinary interest or banker’s rule) yields
significantly more interest to the lender,It is used
by banks and commercial organizations.
4,The second method (known as exact interest) is
used by the federal government and the Federal
Reserve System.
C7 - 20
Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000 430,000
Interest receivable 14,500
Crabtree Co.
Balance Sheet
December 31,20--
C7 - 21
Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Use,To assess the efficiency in collecting
receivables and in the management of credit.
2000 1999
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts,receivable turnover 12.7 times 9.2 times
C7 - 22
Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Use,To assess the efficiency in collecting
receivables and in the management of credit.
2000 1999
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Average collection period 28 days 36 days
C7 - 23
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F7,
Power Notes
Receivables
Chapter F7
Learning Objectives
Power Notes
1,Classification of Receivables
2,Internal Control of Receivables
3,Uncollectible Receivables
4,Uncollectibles – Allowance Method
5,Uncollectibles – Direct Write-Off Method
6,Characteristics of Notes Receivable
7,Accounting for Notes Receivable
8,Balance Sheet Presentation
9,Financial Analysis and Interpretation
Chapter F7
C7
Receivables
C7 - 2
Receivables – Classification and Control
Uncollectibles – Direct Write-Off Method
Uncollectibles –Allowance Method
Accounting for Notes Receivable
Balance Sheet Presentation
Accounts Receivable Turnover
Number of Days’ Sales in Receivables
Slide # Power Note Topics
2
4
6
15
20
21
22
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F7
Receivables
C7 - 3
Classification of Receivables
Accounts Receivable – used for selling
merchandise or services on credit,and normally
expected to be collected in a relatively short
period.
Notes Receivable – used to grant credit on the
basis of a formal instrument of credit,called a
promissory note.
Other Receivables – interest receivable,taxes
receivable,and receivables from officers or
employees.
C7 - 4
Accounting for Uncollectible Accounts Receivable
This method is not consistent with the
matching principle.
Accounts that prove to be uncollectible are
written off in the year they become worthless,
Uncollectible Accounts Expense is debited and
Accounts Receivable is credited for each such
transaction.
The Direct Write-Off Method
C7 - 5
Journal Entries – Direct Write-Off Method
Date Description Debit Credit
Uncollectible Accts,Expense 420
Accts,Receivable - D,L,Ross 420
Accts,Receivable - D,L,Ross 420
Uncollectible Accts,Expense 420
Cash 420
Accts,Receivable - D,L,Ross 420
Write off uncollectible account of $420
Reinstate and collect prior account written off.
May,10
Nov,21
C7 - 6
Accounting for Uncollectible Accounts Receivable
This method is consistent with the matching
principle.
Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
The Allowance Method
C7 - 7
Journal Entries – Allowance Method
Date Description Debit Credit
Uncollectible Accts,Expense 4,000
Allowance for Doubtful Acct,4,000
Allowance for Doubtful Accts,610
Accts,Receivable - J,Parker 610
Accts,Receivable - J,Parker 610
Allowance for Doubtful Accts,610
Cash 610
Accts,Receivable - J,Parker 610
Estimated a total of $4,000 will be uncollectible.
Write off uncollectible account of $610.
Reinstate and collect prior account written off.
Dec,31
Jan,21
Jun,10
C7 - 8
Estimating Uncollectible Accounts Expense
1,Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it
is estimated that 1% will be uncollectible,the
Uncollectible Accounts Expense is $3,000.
2,Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables
will be uncollectible and the Allowance for
Uncollectible Accounts is $510,the Uncollectible
Accounts Expense is $2,880 ($3,390 – $510).
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
C7 - 9
Accounts Receivable Aging and Uncollectibles
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
Not
C7 - 10
Accounts Receivable Aging and Uncollectibles
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectible percentages based on
experience and industry averages.
Not
C7 - 11
Accounts Receivable Aging and Uncollectibles
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
AMOUNT
Days Past Due
over
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365
365
Ashby & Co,$ 150 $ 150
B,T,Barr 610 $ 350 $260
Brock Co,470 $ 470
J,Zimmer Co,160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
$3,390 = $1,500 $200 $310 $380 $360 $400 $240
Not
C7 - 12
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
A
A
C7 - 13
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
2,880
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
2,880
A
B
B
Year-end adjustment
$3,390 - $510 = $2,880
A
B
C7 - 14
Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300A
Allowance for Doubtful Accts.
510
Uncollectible Accts,Expense
2,880
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
2,880
A
B
B
3,390 C
Year-end adjustment
$3,390 - $510 = $2,880
Balance after adjustment
A
B
C
C
C7 - 15
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of
the principal (face) amount per year
Characteristics of Notes Receivable
A promissory note is a written document
containing a promise to pay:
C7 - 16
Calculating Interest and Maturity Value
Interest Calculation
We received a $2,500,10%,90-day note dated March 16,2000.
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
Maturity Value Calculation
C7 - 17
Accounting for Notes Receivable
Date Description Debit Credit
Collected amount due on note dated November 21.
Nov,21
Dec,21
Notes Receivable 6,000
Accts,Receivable - Bunn Co,6,000
Cash 6,060
Notes Receivable 6,000
Interest Revenue 60
Principal + Interest = Maturity Value
$6,000 + ($6,000 x 12% x 30 / 360) = $6,060
Received a $6,000,30-day,12% note.
C7 - 18
In commercial transactions it is traditional
to use a 360-day year.
The historic rationale for this procedure
was ease of calculation which made sense
before the computer and calculator age.
Why does this practice continue when
most small calculators and desktop
computers can present complex interest
calculations in a few seconds?
Understanding the 360-Day Year
C7 - 19
Another Look at the 360-Day Year
1,Assume a $100,000 note dated June 1 for 90 days
at an interest rate of 12 percent,The textbook
calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00
2,A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90
3,When large sums are involved the 360-day method
(known as ordinary interest or banker’s rule) yields
significantly more interest to the lender,It is used
by banks and commercial organizations.
4,The second method (known as exact interest) is
used by the federal government and the Federal
Reserve System.
C7 - 20
Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000 430,000
Interest receivable 14,500
Crabtree Co.
Balance Sheet
December 31,20--
C7 - 21
Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Use,To assess the efficiency in collecting
receivables and in the management of credit.
2000 1999
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts,receivable turnover 12.7 times 9.2 times
C7 - 22
Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Use,To assess the efficiency in collecting
receivables and in the management of credit.
2000 1999
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Average collection period 28 days 36 days
C7 - 23
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F7,
Power Notes
Receivables
Chapter F7
