Accounts Receivables

Introduction
In this module:

You will be introduced to:

• Special journals, subsidiary ledgers, General ledgers which can assist in streamlining the
accounting process, control, and management of Account Receivables,
• Recognizing Account Receivables,
• Valuing Account Receivables to Net Realize Value and record all related transactions,
• Preparing Journal Entries for all transactions related to Notes Receivables,
• Statement Presentation and Account Receivable Analysis.

As you begin this module, please refer to the timeline and make note of any assessments or important
dates. If you have any questions, ask your instructor.

Learning Outcomes
Upon successful completion of this module, you will be able to:
1. Understand differences between subsidiary and control ledger Accounts for Account
Receivables.
2. Record Sales on Account and related interest receivables.
3. Apply Allowance method to record the amount of bad debt expense, allowance for uncollectible
amounts, and value Account Receivables at the end of the period(s).
4. Record short term note receivables, Interest received, Accrued Interest receivables, and note
receivables at maturity date.
5. Presentation of Receivables and related accounts in Financial Reporting.
6. Analysis of Account Receivables.

Pre-Test
You’re going to test your accounting knowledge before you begin the module content.
1. Subsidiary ledgers eliminate the need for the General Ledger.
a. True
b. False
2. Transactions recorded in special journals do not need to be posted.
a. True
b. False
3. When special journals are used, some transactions posted to the General Ledger must also be
posted to subsidiary ledgers.
a. True
b. False
4. A control account is one used in the General Ledger to accumulate several individual account
balances in one location.
 a. True
b. False
5. The balance of a control account must agree with the total of its subsidiary ledger accounts.
a. True
b. False
6. When subsidiary ledgers are used, there is no need to prepare a trial balance.
a. True
b. False
7. The control account in the General Ledger for a company’s customers is called Accounts
Payable.
a. True
b. False
8. The uncollectible account (bad debt) expense is classified as the cost to the seller of extending
credit.
a. True
b. False
9. Net accounts receivable is equal to Accounts Receivable less the allowance for uncollectible
accounts.
a. True
b. False
10. Allowance for Doubtful Accounts is a contra account to short term investments.
a. True
b. False
11. A customer made full payment to a retailer by the retailer’s store credit card for his purchase.
The Retailer’s bookkeeper recorded the sales as a sale on account.
a. True
b. False
12. A customer made full payment to a retailer by her Visa credit card for her purchase. The
Retailer’s bookkeeper recorded the sales as full payment received from customer.
a. True
b. False
13. A customer did not pay for his purchase on account within the 30 days term of the sales’
invoice but promised to pay it within 90 days with an additional 5% interest at maturity. The
vendor’s bookkeeper would not record anything about it until the maturity date.
a. True
b. False
14. A customer signed a 90 days promissory note with 3% interest payable at maturity. The
vendor’s bookkeeper would not record the interest revenue until the maturity date.
a. True
b. False
15. Presentation and analysis of Account Receivables is very important for the creditors.
a. True
b. False
Answers:

1. A - True
2. B - False
3. A - True
4. A - True
5. A - True
6. B - False
7. B - False
8. A - True
9. A - True
10. B - False
11. A - True
12. A - True
13. B - False
14. B - False
15. A - True

Special Journals and Subsidiary Ledgers

As you have seen in earlier units, the accounting cycle follows a regular cycle of recording, posting, and
reporting financial information.

Sometimes, though, there are hundreds or thousands of transactions to be processed each period. It can
be very difficult to organize the information, and to work with it efficiently, using only a General Journal
and General Ledger.

So, many companies group transactions according to their type and record them in a special journal. (i.e.
all sales on account are recorded in a Sales Journal, all Cash Sales in a Cash Receipts Journal).

Entries from the special journals are posted to the General Ledger and, if necessary, to a subsidiary
ledger (i.e. Accounts Receivable subsidiary ledger or Accounts Payable Subsidiary Ledger).
1. Economic Event
• Analyze Transactions
2. Record
• Enter in General Journal, prepare Adjusting Entries, and Correcting Entries
3. Summarize
• Post Special Journals to subsidiary ledgers, Special Journals to General Ledger, General
Journal to General Ledger, Adjusting Entries & Correcting Entries
4. Prepare Financial Reports
• Prepare Trail Balance, Worksheet, Adjusted Trial Balance & Financial Statements

Why Use a Sales Journal

The sales journal is used to record only the sale of merchandise or services on account. Cash Receipts
journal is used to record sales of merchandise paid on the date of the sales. (Not covered in this
module.)

In the General Journal, the transactions would require three separate journal entries and three separate
postings to the general ledger.

If we use the Sales Journal, though, we can both streamline the recording, and retain the detailed
transaction information.

Example:

Let us look at three sales on account to be recorded by George’s Electronic Store.

Date Account Name Debits Credits

Jan. 2 Sale to Mary Smith Accounts Receivable 100
Revenue 100
Jan. 5 Sales to Louie’s Landscaping Accounts Receivable 200
Revenue 200
 Date Account Name Debits Credits
Jan. Sale to Sally’s Veterinary Clinic Accounts 300
10 Receivable
Revenue 300

As you can see, each transaction is recorder the same way (debit to accounts receivable, credit to
revenue).

In the General Journal, the transactions would require three separate journal entries and three separate
postings to the general ledger.

If we use the Sales Journal though, we can both streamline the recording and retain the detailed
transaction information.

Journalizing the Sales Journal

SALES JOURNAL
Date Account Name Invoice Ref. no DR - Accounts
no. Receivable
CR – Revenue
Amount
Jan. 2 Mary Smith 1 100
Jan. 5 Louie’s Landscaping 2 200
Jan. Sally’s Veterinary Clinic 3 300
10
Total 600

Each of these transactions is a sale on account and is recorded the same way (debit to accounts
receivable and a cred to revenue).

See, we can show the account name and DR/CR in a column Heading, and we only need one column to
record the dollar amount.

Posting from the Sales Journal

Now we could post the column total to only the ledger accounts (one posting, not three). No other
journal entry is required.

Accounts Receivable
Debit Credit
600
 Revenue
Debit Credit
600
There’s one problem though:

The accounts receivable account does not show the detail of the amount owed by each customer. Such
information would be very valuable to management.

Fortunately, this detail can be provided through a Subsidiary Ledger. To understand how entries from
any of the special journals will flow through the accounting records, let us step back and look at
subsidiary ledgers next.

What is a Subsidiary Ledger?

A subsidiary ledger is an additional ledger that provides more detailed account information than the
general ledger does. Companies may also use subsidiary ledgers for payroll data or inventory data.
(Not covered in this module)

Accounts Receivable Subsidiary Ledger

George’s recent entries to the Sales Journal have now been posted to the Accounts Receivable
subsidiary ledger below.

Since each customer has its own account, it’s easy to see the transaction history for each individual
customer.

George’s Electronic Store

Accounts Receivable Subsidiary Ledger
Jan. 31, 2013

Mary Smith Louie’s Landscaping Sally’s Veterinary Clinic

Debit Credit Debit Credit Debit Credit

100 200 300
To recap:

• A special journal shows us transactions grouped by type

• A subsidiary ledger shows us all the transactions grouped by individual account

Posting from Special Journals

If we post from a special journal to a general ledger, and to a subsidiary ledger, we will have the best of
both worlds – less time spent journalizing, and complete sales records for each customer.

To make sure that the correct amount is posted to the general ledger, we use a control account.

In George’s Electronic Store’s general ledger, Accounts Receivables is a control account.

The balance of the control account must equal the total of the individual accounts in their respective
subsidiary ledger.

George’s Electronic Store

General Journal
Jan. 31, 2013

Accounts Receivable
Debit Credit
600

Revenue
Debit Credit
600

Why Offer Services/Goods for Sale on Credit?

Companies offer goods for sale on credit to remain competitive and to reduce concerns regarding cash
control. It creates flexibility and can be more attractive. Sales on credit result in amounts receivable
from customers referred to as Accounts receivable. The main problem with Accounts Receivable, is
the inability to collect payment from the customers, or situations where the customers may not pay
the amount owed according to the terms of payment.

Many of us own credit cards. Each time we use our credit card to purchase an item, the transaction
creates and accounts receivable for the company which sold us the item.

Type of Receivables
Account Receivables or Trade Receivables is the amount to be collected from the customers.

Note: Receivables is more formal than account receivable. The debtor signs a promissory note to pay
certain amount on a future date (maturity date) to the creditor.

Other Receivables such as lending to employees. Usually this is a long-term receivable and therefore a
long-term asset. If the amount is receivable within less than 12 months, it is a current asset.

Recognizing Account Receivables

• A receivable arises when a business or a person (seller/creditor) sells goods or services to another
party (buyer/debtor) on account (credit).
• Account receivable is recorded when service performance obligation is completed or the good is
delivered to the buyer, the revenue is recognized, and customer is given the credit term.
• Account Receivable is a current asset.

Presentation of Receivables in a Balance Sheet

ABC Company
Partial Balance Sheet – Assets
 As of (Date)
Assets
Current Assets
Cash 2000
Account receivables 35000
Less: Allowance for uncollectible amounts (1750) 33250
Short-term Note receivables 3000
Inventory 3500
Prepaids for expenses 1000
Total Current Assets 42750
Non-current Assets 15000
Long-term note receivables 5500
Other long-term receivables 4000
Total Non-current Assets 24500
Fixed Assets
Land 16000
Building – net 9750
Equipment – net 6550
Total Fixed Assets 35300
Total Assets 99550

Recording Receivables
• All short-term receivables are current assets and the nature of them is a debit.
• Account Receivables is debited when a sales transaction on account has been completed.

Example: Recording Account Receivables

1. Record all accounting transactions for the following:

White Fashion is a whole seller of Winterwears and had the following sales in month of
September.
• September 1 - Sold winter jackets to Jessie retailer for $2000 on account with payment
terms of 3/15, n/30.
• September 10 - Jessie retailer returned 2 of the jackets to the whole seller and received
credit for $500.
• September 14 - Jessie paid White Fashion the balance of the account.
2. Did Jessie Retailer entitle for discount?
a. Yes
b. No
3. What is the balance after discounts?

Answers:

1.
 Date Account Name Debit Credit
Sept. 1 Account Receivables - Jessie 2000
Sales Revenue
2000
To record sale of jackets on account.
Sept.
Sales Return and Allowances 500
10
Account Receivables – Jessie
500
To record return of the 2 jackets.
Sept.
Cash 1455
14
Sales Discounts 45
Account Receivables – Jessie
To record collection of account 1500
receivable.

2. Yes
3. The balance after discounts is: $1,455

Account Name Amount

Account Receivable 2000
Less: Sales Return and Allowances 500
Balance before discounts 1500
Less: Sales Discount for term 3/15 45
(1,500 × 0.03 = 45)
Balance after discounts 1455
(1,500 − 45 = 1,455)

Recording Sales Transactions Paid by Credit Cards

Customers may pay for their purchase by their credit cards or debit cards at the time of their purchase.
Recoding the sales as cash received or Account Receivable depends on the type of credit card used
by the customer to pay for the purchase. If a customer pays for the purchase by a:

• Bank Debit Card, the payment is considered cash received from the customer.
• Bank Credit Card such as Visa and MasterCard, the payment is considered cash received from the
customer.
• Store Credit Card such as Canadian Tire credit card, Esso credit card, etc., the payment is considered
Account Receivable from the customer.

Example: Recording Credit Card Payments by Customers

Prepare journal entry to record the following selected debit and credit card payments for purchases
from Line Department Store.

• May 4 - A customer used his debit card to pay for his purchase of $900. Line was charged $3 service
fee for this transaction.
• May 11 - A customer used her Master Card to pay for her purchase of $450. Line was charged $4
service fee for this transaction.
 • May 25 - A customer used his Line Department Store credit card to pay for his purchase of $200.

Answer to Example:
Date Account Name Debit Credit
May 4 Cash 897
Service charges – debit card 3
Sales
900
To record debit card sales.
May 11 Cash 446
Cash charges – MasterCard 4
Sales
450
To record MasterCard.
May 25 Account Receivables 200
Sales
200
To record store credit card sales.

Note Receivables
Credit may be granted in exchange for a formal credit instrument known as a promissory note.

Note: Receivable is an assets and will provide benefit for the company when company collect the cash at
maturity date.

A Promissory Note is a written agreement to pay a specified amount of money on demand or at a

specific date. A promissory note is being used when:

1. Individual and companies borrow or lend monies to others

2. The amount of transaction and period of payment is longer than normal limits
3. In the settlement of accounts receivable

Example: Recording Note Receivables

Prepare journal entries to record all relevant transactions for Aldo Creation. March 31 is the year-end
for Aldo.

• Jan. 16, 20xx – Aldo Creation sold merchandize on account to Daniel Partner for $15,600, n/30.
• Feb. 14, 20xx – Daniel gave Aldo a 90 day 10% promissory note in settlement for Account
Receivable. The promissory was honoured on maturity date.

Answer to Example:

Date Account Name Debit Credit

Jan.
Account receivables – Daniel 15600
16
Sales
15600
To record debit card sales.
Feb.
Note receivable 15600
14
 Date Account Name Debit Credit
Account receivables – David
15600
To record the settlement.
Mar. Interest receivable
192
31 (Accrued interest = 15,600 × 10% × ( 45⁄365 ) = 192
Interest revenue
192
To record accrued interest on note receivables at year end.
May
Cash 15985
15
Interest receivable 192
Interest revenue
(Interest revenue = 15,600 × 10% × ( 45⁄365 ) − 192 = 193
193)
Note receivable
15600
To record note receivable honoured on maturity date.

Valuing Account Receivables

There are two methods for accounting for amounts that are uncollectible:

Allowance Method:
• Income Statement approach (percentage-of-sales)
• Balance Sheet approach (aging-of-receivables)

The Allowance Method is the preferred method because it is supported by ASPE. It estimates the
expense the company incurs for selling goods on credit and matches the expense with related
revenue at the time the revenue is reported (matching principle).

Direct Write-off Method:

The Direct Write-off Method is not supported by ASPE because no effort is made to estimate the costs
of selling goods on credit. The receivable is written off only when it is known to be uncollectible.

Percentage-of-Sales
This method uses sales revenue to determine the bad debt expense (uncollectible account expense) and
is sometimes referred to as the Income Statement Method.

Example:

George’s Electronic Store had Credit Sales Revenue of $500,000. Experience shows that bad debs
represent 1% of credit sales. At May 31, 2013, the balance in Accounts Receivable was $25,000 and
the balance of the Allowance for Doubtful (Uncollectible) accounts was a credit of $825.

The journal entry to record the bad debt expense would be:

Account Name Debits Credits

Uncollectible Account Expense 5000
Allowance for Doubtful Accounts 5000
To record the uncollectible expense ($500,000 x 1%)

The balance in the Allowance for Doubtful accounts after the adjustment is posted will be $5,825
(opening balance $825 + adjustment $5,000).

The Net balance in the Accounts Receivable on George’s balance sheet will be reported as follows:

Net Balance:
Accounts Receivable 25000
Less: Allowance for Doubtful Accounts 5825
Accounts Receivable, net 19175

Aging-of-Receivables
This method analyzes the Accounts Receivable to determine the amount that is uncollectible and is
sometimes called the Balance Sheet Method.

Example:

On May 31, 2013 the balance in George’s Electronic Store Accounts Receivable was $25,000 and the
balance of the Allowance for Doubtful (Uncollectible) accounts was $825. The aging of accounts
receivable indicated that George’s will not collect $7,000.

The journal entry to record the expense will be:

Account Name Debits Credits

Uncollectible Account Expense 6175
Allowance for Doubtful Accounts 6175

To record the uncollectible expense ($7,000 - $825).

The balance in the Allowance for Doubtful accounts after the adjustment is posted will be $7000
(adjustment is $6175 + opening balance $825).

The Net balance in the Accounts Receivable on George’s balance sheet will be reported as follows:

Account Receivable:
Accounts Receivable 25000
Less: Allowance for Doubtful Accounts 7000
Accounts Receivable, net 18000

Comparing Percentage-of-Sales and Aging-of-Receivables

Allowance Method – Income Statement Method
Amount estimated to be uncollectible is $10,000.
 Allowance for Doubtful Accounts
Debit Credit
2500
10000
12500

Uncollectible Account Expense $10,000

Allowance for Doubtful Accounts $10,000

Full estimated amount is added to the balance.

The percentage-of-sales method adjusts the Allowance for Doubtful accounts BY the amount of the
Uncollectible account expense.

Allowance Method – Balance Sheet Approach

Amount estimated to be uncollectible is $10,000.

Allowance for Doubtful Accounts

Debit Credit
2500
7500
10000

Uncollectible Account Expense $7500

Allowance for Doubtful Accounts $7500

Balance in allowance account is amount estimated to be uncollectible.

The aging-of-receivable method adjusts the Allowance for Doubtful account to the amount of the
Uncollectible Receivables.

Direct Write-Off Method

Using this method, an account is written off only when it is decided that a specific customer’s receivable
is uncollectible. This method is not supported by GAAP. There is no matching of expenses with
revenue. It does not use an allowance account.

Example:

The journal entry to record the bad debt expense would be:

Date Account Name Debits Credits

Jan. 2, Uncollectible Account 2000
2013 Expense
Accounts Receivable 2000
Exercise: Part 1
Try this exercise to practice creating adjusting journal entries for the following 4 uncollectible accounts.

To move through this exercise:

• Prepare adjusting journal entries each independent situations

• Calculate the correct amounts, then select the correct accounts, and enter the debits and credits.

Note: each entry will require two lines.

Z-Tekko’s Allowance for Uncollectible Accounts has a $700 credit balance prior to adjustment. Net credit
sales during the year are $425,000 and 4% are estimated to be uncollectible.

1. Mary Smith’s Allowance for Uncollectible Accounts has a $400 debit balance prior to adjustment.
Based on an aging schedule of account receivable prepared on December 31, $11,800 of accounts
receivable are estimated to be uncollectible.
2. Sally’s Veterinary Clinic’s Allowance for Uncollectible Accounts has a $900 credit balance prior to
adjustment. Based on an aging schedule of accounts receivable prepared on December 31, $14,500
of accounts receivable are estimated to be uncollectible.
3. George’s Electronic Store Allowance for Uncollectible Accounts has a $300 debit balance prior to
adjustment. Net credit sales during the year are $550,000 and 3% are estimated to be uncollectible.

Answers to Exercise: Part 1

GENERAL JOURNAL

Company Account Titles and Explanations Debit Credit

Z-Tekko’s Uncollectible Account Expense 1700
Allowance for Uncollectible 1700
Amount
M. Smith’s Uncollectable Account Expense 12200
Allowance for Uncollectible 12200
Amount
Sally’s Uncollectable Account Expense 13600
Allowance for Uncollectible 13600
Amount
George’s Uncollectable Account Expense 16500
Allowance for Uncollectible 16500
Amount

Exercise: Part 2
Try this exercise to practice posting your adjusting journal entries to the general ledger.

How to move through this exercise:

• Post the entries you created earlier into the general ledger, in to the correct place in the T-accounts.

GENERAL JOURNAL

Company Account Titles and Explanations Debit Credit

Z-Tekko’s Uncollectible Account Expense 1700
Allowance for Uncollectible 1700
Amount
M. Smith’s Uncollectable Account Expense 12200
Allowance for Uncollectible 12200
Amount
Sally’s Uncollectable Account Expense 13600
Allowance for Uncollectible 13600
Amount
George’s Uncollectable Account Expense 16500
Allowance for Uncollectible 16500
Amount

T-ACCOUNTS

Answers to Exercise: Part 2

Statement Presentation
You learned about the presentation of Receivables in this module.

Major receivables such as Trade Receivables and Promissory Notes must be identified in the balance
sheet and/or in notes disclosure to the financial statements.
Other receivables such as interest receivables and loan to employees must be classified as current or
long-term assets in the balance sheet, according to their due dates.

In addition to the Net Realizable Value of Account Receivable in the balance sheet, The Gross amount of
Account Receivables and Allowance for Doubtful account must be included in the balance sheet or
the notes to financial statements.

Bad Debt Expense is an operating expense and reported in an Income Statement.

Analysis of Receivables
Accounts Receivable are the most important source of cash for business and expected to be collected
within a short period of time. Therefore, management and collection of Account Receivable within
expected time-period is critical to a business success.

The ability to pay the obligations and liabilities when they become due is measured by a business
liquidity.

In order to analyze a business liquidity, we need to calculate the Receivable Turnover Ratio. This Ratio
measures the number of times (on average), the accounts receivable is collected during the period.
This ratio provides valuable information for management and control of accounts receivable.

Post Test
1. A sales journal can only be used to record sales on account.
a) True
b) False
2. The cash receipt journal can be used to record sales on account as well as sales for cash.
a) True
b) False
3. Under the allowance method, the entry to record the estimated bad debs for the period
includes a credit to Accounts Receivable.
a) True
b) False
4. The allowance method of accounting for bad debts records collection losses on the basis of
estimates rather than waiting to determine which customers will not pay.
a) True
b) False
5. Under the allowance method, the entry to write off an account that has been deemed
uncollectible has no impact on the net income of the firm.
a) True
b) False
6. There are two basic ways to estimate uncollectible receivables: the percentage-of-sales
method and the aging-of-receivables method.
a) True
b) False
 7. When estimating uncollectible receivables based on the percentage-of-sales method, the
adjusting entry will include a credit to Accounts Receivable.
a) True
b) False
8. Net realizable value of account receivable is the difference between account receivable
balance and allowance for uncollectible amount at year end.
a) True
b) False
9. All credit card payments received from customers at the time of sales are consider cash sales.
a) True
b) False
10. Direct Write-off and Allowance method are both consistent with ASPE.
a) True
b) False
11. Account Receivable is credited when replaced with a note receivable.
a) True
b) False
12. Estimating and recording the uncollectible account receivable is one of the year end
adjustments.
a) True
b) False
13. Account receivable analysis is only important for a business managements (internal users).
a) True
b) False
14. Interest revenue on a promissory note is only recoded at its maturity date.
a) True
b) False
15. When estimating uncollectible receivables based on the percentage-of-sales method, the
adjusting entry will include a credit to Accounts Receivable.
a) True
b) False

Answers:

1. A - True
2. B - False
3. B - False
4. A - True
5. A - True
6. A - True
7. B - False
8. A - True
9. B - False
10. B - False
11. A - True
12. A - True
13. B - False
14. B - False
15. B - False

Case Study
Practice what you have learned about Valuing Accounts Receivables based on the following information:

Alfa Company's Trial Balance shows the following balances as of October 31, 20XX.

• Accounts Receivable: $200,000

• Allowance for Doubtful Account (CR): $3,200
• Sales: $1,400,000
• Sales Return and Allowances: $60,000
• Sales Discounts: $40,000

Part 1

Record the adjusting entry at October 31, 20XX.

a. Assuming bad debts expense is estimated to be 10% of Account Receivable.

b. Assuming bad debts expense is estimated to be 2% of the net sales.

Part 2

Calculate the net realizable value of account receivable for each assumption above.

Part 3

If the balance of Allowance for Doubtful Account is a debit of $3,200

a. What is the amount of bad debt expense for each assumption in part 1.
b. Calculate the net realizable value of account receivable for each assumption in part 1.

Answers to Case Study

Part 1a

Date Account Name Debit Credit

Dec. Bad debts expense 16800
31
Allowance for doubtful accounts 16800
($200,000 × 10%) − $3,200

Part 1b

Date Account Name Debit Credit

Dec. Bad debts expense 26000
31
 Date Account Name Debit Credit
Allowance for doubtful accounts 26000
($1,400,000 − $60,000 − $40,000) × 2%

Part 2

Assets Part 1a Part 1b

Accounts receivable 200000 200000
Less: Allowance for doubtful accounts 200001 292002
Net realizable value 180000 170800
1. $20,000 = $3,200 + $16,800) = $200,000 × 10%
2. $29,200 = $3,200 + $26,000

Part 3a

Assumption for part 1a: Bad debt expense = ($200,000 × 10%) + $3,200 = $23,200

Assumption for part 1b: Bad debt expense = $26,000

Part 3b

Assets Part 1a Part 1b

Accounts receivable 200000 200000
Less: Allowance for doubtful 200001 228002
accounts
Net realizable value 180000 177200
1. $20,000 = $200,000 × 10%) = $23,200 − $3,200
2. $22,800 = $26,000 − $3,200

You have completed Accounts Receivables

Remember to check the timeline before you proceed to the next module to ensure you have completed
any assignments as required. Check with your instructor if you have any questions.