ACCOUNTING FOR RECEIVABLES

Chapter 9

© 2009 The McGraw-Hill

Companies, Inc.,
C1

ACCOUNTS RECEIVABLE

 Amounts due from customers

for credit sales.
 Credit sales require:

 Maintaining a separate
account receivable for each
customer.
 Accounting for bad debts that
result from credit sales.

McGraw-Hill/Irwin Slide 2
C1

RECOGNIZING ACCOUNTS RECEIVABLE

Accounts Receivable as a Percent of Total

Assets

Oakley 17.0%

Callaway Gold 14.0%

Pfizer 8.2%

Abercombie & Fitch 1.9%

Sales on Credit
Credit sales are recorded by increasing (debiting) Accounts
Receivable. A company must also maintain a separate account for
each customer that tracks how much that customer purchases, has
already paid, and still owes.
McGraw-Hill/Irwin Slide 3
C1

SALES ON CREDIT
TechCom as two major credit customers (1) CompStore owes the
company $2,000 on account, and (2) RDA Electronics owes $1,000
on account at June 30, 2009. On July 1st, TechCom sells $950 of
merchandise on account to CompStore, and collects $720 cash from
RDA as a payment on account.

DR CR
Jul 1 Accounts Receivable - CompStore 950
Sales 950
To record credit sales to CompStore

Cash 720
Accounts Receivable – RDA Electronics 720
To record credit sales to RDA Electronics

McGraw-Hill/Irwin Slide 4
C1

SALES ON CREDIT
Accounts Receivable Ledger
RDA Electronics
Date PR Debit Credit Balance Schedule of
Jun 30 1,000 1,000 Accounts Receivable
Jul 1 720 280
RDA Electronics $ 280
CompStore 2,950
Total $ 3,230
CompStore
Date PR Debit Credit Balance
Jun 30 2,000 2,000
Jul 1 950 2,950

General Ledger
Accounts Receivable
Date PR Debit Credit Balance
Jul 1 3,230 3,230

McGraw-Hill/Irwin Slide 5
C1

CREDIT CARD SALES

Advantages of allowing customers to use

credit cards:
Customers’
Customers’
credit
credit isis Sales
Sales increase
increase by
by
evaluated
evaluated by by providing
providing purchase
purchase
the
the credit
credit card
card options
options to
to the
the customer.
customer.
issuer.
issuer.

The
The risks
risks of
of extending
extending credit
credit Cash
Cash collections
collections
are
are transferred
transferred to to the
the credit
credit are
are quicker.
quicker.
card
card issuer.
issuer.
McGraw-Hill/Irwin Slide 6
C1

CREDIT CARD SALES

 With bank credit cards, the seller

deposits the credit card sales receipt
in the bank just like it deposits a
customer’s check.

 The bank increases the balance in the

company’s checking account.

 The company usually pays a fee of 1%

to 5% for the service.

McGraw-Hill/Irwin Slide 7
C1

CREDIT CARD SALES

On July 15th, TechCom has $100 of credit card
sales with a 4% fee, and its $96 cash is received
immediately on deposit.

DR CR
Jul 15 Cash 96
Credit Card Expense 4
Sales 100
To record credit card sales and fees

McGraw-Hill/Irwin Slide 8
C1
CREDIT CARD SALES
If instead TechCom must remit electronically the credit
card sales receipts to the credit card company and wait
for the $96 cash payment, we will make the first entry on
July 15th, and the second entry on July 28th, when the
cash is received.
DR CR
Jul. 15 Accounts Receivable - Credit Card Co. 96
Credit Card Expense 4
Sales 100
To record credit card sales and fees.

Jul. 28 Cash 96
Accounts Receivable - Credit Card Co. 96
To record receipt from credit card company
McGraw-Hill/Irwin Slide 9
C1 INSTALLMENT ACCOUNTS
RECEIVABLE

Amounts owed by customers from credit sales for

which payment is required in periodic amounts over
an extended time period. The customer is usually
charged interest.

McGraw-Hill/Irwin Slide 10
P1 VALUING ACCOUNTS
RECEIVABLE

Some customers may not pay

their account. Uncollectible
amounts are referred to as bad
debts. There are two methods of
accounting for bad debts:
Direct Write-Off Method
Allowance Method

McGraw-Hill/Irwin Slide 11
P1
DIRECT WRITE-OFF METHOD

On January 23rd, J. Kent, a customer of

TechCom cannot pay the $520 owed to TechCom.
We must recognize the loss.

DR CR
Jan 23 Bad Debts Expense 520
Accounts Receivable - J. Kent 520
To write-off uncollectible account

McGraw-Hill/Irwin Slide 12
P1
DIRECT WRITE-OFF METHOD

On March 11th, J. Kent was able to make full payment

to TechCom for the amount previously written-off.

DR CR
Mar 11 Accounts Receivable - J. Kent 520
Bad Debts Expense 520
To reinstate account previously written-off

Mar 11 Cash 520

Accounts Receivable - J. Kent 520
To record payment on account

McGraw-Hill/Irwin Slide 13
P2
MATCHING VS. MATERIALITY

Materiality states
Matching requires
that an amount can
expenses to be
be ignored if its
reported in the same
effect on the
accounting period as
financial statements
the sales they help
is unimportant to
produce.
users’ business
decisions.

McGraw-Hill/Irwin Slide 14
P2
ALLOWANCE METHOD

At
At the
the end
end of
of each
each period,
period, estimate
estimate total
total bad
bad debts
debts
expected
expected to to be
be realized
realized from
from that
that period’s
period’s sales.
sales.
There
There are
are two
two advantages
advantages to to the
the allowance
allowance method:
method:
1. It
1. It records
records estimated
estimated bad
bad debts
debts expense
expense in in the
the
period
period when
when thethe related
related sales
sales are
are recorded.
recorded.
2. It
2. It reports
reports accounts
accounts receivable
receivable onon the
the balance
balance
sheet
sheet atat the
the estimated
estimated amount
amount of of cash
cash to
to be
be
collected.
collected.

McGraw-Hill/Irwin Slide 15
P2
RECORDING BAD DEBTS
EXPENSE
At the end of its first year of operations, TechCom estimates
that $1,500 of its accounts receivable will prove
uncollectible. The total accounts receivable balance at
December 31, 2009, is $20,000, and the company had total
credit sales of $300,000 during the year.
DR CR
Dec. 31 Bad Debts Expense 1,500
Allowance for Doubtful Accounts 1,500
To record estimated bad debts
Contra-asset account
Accounts Receivable Allowance for Doubtful Accounts
Bal. 20,000 Dec. 31 1,500

McGraw-Hill/Irwin Slide 16
P2 BALANCE SHEET
PRESENTATION
At the end of its first year of operations, TechCom estimates
that $1,500 of its accounts receivable will prove
uncollectible. The total accounts receivable balance at
December 31, 2009, is $20,000, and the company had total
credit sales of $300,000 during the year.
TechCom
Partial Balance Sheet
December 31, 2009
Cash
Accounts receivable $ 20,000
Less: Allowance for doubtful accounts 1,500 $ 18,500

McGraw-Hill/Irwin Slide 17
P2 ESTIMATING BAD DEBTS
EXPENSE

Two
Two Methods
Methods
1.
1. Percent
Percentof
ofSales
SalesMethod
Method
2.
2. Accounts
AccountsReceivable
ReceivableMethods
Methods
 Percent
Percentof
ofAccounts
AccountsReceivable
Receivable
 Aging
Agingof
ofAccounts
AccountsReceivable
Receivable

McGraw-Hill/Irwin Slide 18
P2
PERCENT OF SALES METHOD

Bad debts expense is computed as follows:

Current Period Sales

× Bad Debt %
= Estimated Bad Debts Expense

Musicland has credit sales of $400,000 in 2009. It is

estimated that 0.6% of credit sales will eventually
prove uncollectible.
Let’s look at recording Bad Debts Expense for 2009.
McGraw-Hill/Irwin Slide 19
P2
PERCENT OF SALES METHOD

$ 400,000
Musicland’s accountant
× 0.6% computes estimated
= $ 2,400
Bad Debts Expense of
$2,400.
DR CR
Dec. 31 Bad Debts Expense 2,400
Allowance for Doubtful Accounts 2,400
To record estimated bad debts

McGraw-Hill/Irwin Slide 20
P2 PERCENT OF RECEIVABLES
METHOD
 Compute the estimate of the Allowance
for Doubtful Accounts.

Year-end Accounts Receivable × Bad Debt %

 Bad Debts Expense is computed as:

Total Estimated Bad Debts Expense

­ Previous Balance in Allowance Account
= Current Bad Debts Expense

McGraw-Hill/Irwin Slide 21
P2
PERCENT OF ACCOUNTS RECEIVABLE

Musicland
Musicland has
has $50,000
$50,000 inin
accounts
accounts receivable
receivable and
and aa $200
$200
credit
credit balance
balance in
in Allowance
Allowance forfor
Doubtful
Doubtful Accounts
Accounts onon December
December
31,
31, 2009.
2009. Past
Past experience
experience
suggests
suggests that
that 5%
5% of
of receivables
receivables
are
are uncollectible.
uncollectible.
Let’s
Let’s record
record Musicland’s
Musicland’s Bad
Bad
Debts
Debts Expense
Expense for
for 2009.
2009.

McGraw-Hill/Irwin Slide 22
P2
PERCENT OF ACCOUNTS RECEIVABLE

Desired balance in Allowance for

Doubtful Accounts. Allowance for
Doubtful Accounts
$ 50,000 200

× 5.00% 2,300
2,500
= $ 2,500

DR CR
Dec. 31 Bad Debts Expense 2,300
Allowance for Doubtful Accounts 2,300
To record estimated bad debts

McGraw-Hill/Irwin Slide 23
P2 AGING OF ACCOUNTS
RECEIVABLE METHOD


Each
Eachreceivable
receivableis
isgrouped
groupedby
by
how
how long
longitit is
ispast
past its
itsdue
duedate.
date.

 Each age group is multiplied

by its estimated bad debts
percentage.

 Estimated
Estimatedbad
baddebts
debtsfor
foreach
each
group
groupare
aretotaled.
totaled.

McGraw-Hill/Irwin Slide 24
 P2
AGING OF ACCOUNTS
RECEIVABLE
Musicland
Schedule of Accounts Receivable by Age
December 31, 2009 
 Accounts  Estimated
Receivable Percent Uncollectible
Days Past Due Balance Uncollectible Amount
Not Yet Due $ 37,000 2% $ 740
1 - 30 Days Past Due 6,500 5% 325
31 - 60 Days Past Due 3,700 10% 370
61 - 90 Days Past Due 1,900 25% 475
Over 90 Days Past Due 900 40% 360
$ 50,000 $ 2,270

McGraw-Hill/Irwin Slide 25
 AGING OF ACCOUNTS
P2
RECEIVABLE
Allowance for Doubtful
Musicland
Musicland has
has anan unadjusted
unadjusted Accounts
200
credit
credit balance
balance in
in the
the allowance
allowance 2,070

account
account is
is $200.
$200.
2,270

We
We estimated
estimated the
the proper
proper
balance
balance to
to be
be $2,270.
$2,270.

DR CR
Dec. 31 Bad Debts Expense 2,070
Allowance for Doubtful Accounts 2,070
To record estimated bad debts

McGraw-Hill/Irwin Slide 26
P2
SUMMARY OF METHODS

Aging of
% of Sales % of Receivables
Receivables

Emphasis on Emphasis on Emphasis on

Matching Realizable Value Realizable Value

Sales Accts. Accts.

Bad Rec. All. for Rec. All. for
Debts Doubtful Doubtful
Exp. Accts. Accts.

Income
Balance
Statement
Sheet Focus
Focus
McGraw-Hill/Irwin Slide 27
C2
NOTES RECEIVABLE

Term
$1,000.00 July 10, 2009
Payee
Ninety days after date I promise to pay to
thePrincipal
order TechCom, Los Angeles, CA
of
One thousand and no/100 --------------------------------- Dollars

Payable First National

InterestBank
Rateof Los Angeles, CA
Maker
at
Value received with interest12% at per
annum
No. 42 Oct. 8, 2009
Due Julia Browne

Due Date
McGraw-Hill/Irwin Slide 28
C2
INTEREST COMPUTATION

Principal Annual Time

of the × interest × expressed = Interest
note rate in years

Even
Even for
for IfIf the
the note
note is
is
maturities
maturities less
less expressed
expressed in in
than
than one
one year,
year, days,
days, base
base aa
the
the rate
rate is
is year
year on
on 360
360
annualized.
annualized. days.
days.
McGraw-Hill/Irwin Slide 29
C2 COMPUTING MATURITY AND
INTEREST
On July 10, 2009, TechCom received a $1,000, 90-day, 12%
promissory note as a result of a sale to Julia Browne.
What is the maturity date of the note?

Days in July 31
Minus the date of the note 10
Days remaining in July 21
Days in August 31
Days in September 30
Days in October to maturity 8
Period of the note in days 90

The note is due and payable on October 8, 2009.

McGraw-Hill/Irwin Slide 30
P3
COMPUTING MATURITY AND INTEREST

Principal Annual Time

of the × interest × expressed = Interest
note rate in years

$ 1,000 × 12% × 90/360 = $ 30

Total interest is due on

October 8, 2009.

McGraw-Hill/Irwin Slide 31
P3 RECOGNIZING NOTES
RECEIVABLE

Here is the entry to record the note on July 10, 2009.

DR CR
Jul 10 Notes Receivable 1,000
Sales 1,000
Sold goods in exchange for note

McGraw-Hill/Irwin Slide 32
P4 HONORING NOTES
RECEIVABLE
Here is the entry to honor the note on October 8, 2009.

DR CR
Oct 8 Cash 1,030
Interest Revenue 30
Notes Receivable 1,000
Collected note and interest due

McGraw-Hill/Irwin Slide 33
P4 RECORDING A DISHONORED
NOTE

TechCom holds an $800, 12%, 60-day note of Greg Hart.

At maturity, October 14th, Hart dishonors the note.

$800 ×12% × 60/360 = $16 interest

DR CR
Accounts Receivable -Greg Hart 816
Interest revenue 16
Notes Receivable 800
To principal and interest on dishonored note

McGraw-Hill/Irwin Slide 34
P4 RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
On December 16th, TechCom accepts a $3,000, 60-
day, 12% note from a customer in granting an
extension on a past-due account. When TechCom’s
accounting period ends on December 31, $15 of
interest has accrued on the note.

$3,000 × 12% × 15/360 = $15 accrued interest

DR CR
Dec. 31 Interest Receivable 15
Interest Revenue 15
To accrue interest on note

McGraw-Hill/Irwin Slide 35
P4 RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
Recording collection on note at maturity.
Days in December 31
Minus the date of the note 16
Day remaining in December 15
Days in January 31
Days in February 14
Period of the note in days 60

DR CR
Feb 14 Cash 3,060
Interest Receivable 15
Interest Revenue 45
Notes Receivable 3,000
To record full payment of note
McGraw-Hill/Irwin Slide 36
 C3
DISPOSING OF RECEIVABLES
Companies sometimes want to
convert receivables to cash before
they are due.
They can sell or factor receivables.
They may pledge receivables as

security for a loan.

McGraw-Hill/Irwin Slide 37
A1
ACCOUNTS RECEIVABLE
TURNOVER

This ratio provides useful information for evaluating how

efficient management has been in granting credit to
produce revenue.

Net sales
Average accounts receivable
$ in millions 2006 2005 2004 2003
Dell
Net sales $ 57,420 $ 55,788 $ 49,121 $ 41,327
Average accounts receivable 4,352 3,826 4,025 3,111
Accounts receivable turnover 13.2 14.6 12.2 13.3
Apple
Net sales $ 19,315 $ 13,931 $ 8,279 $ 6,207
Average accounts receivable 1,074 835 770 666
Accounts receivable turnover 18.0 16.7 10.8 9.3
McGraw-Hill/Irwin Slide 38
 END OF CHAPTER 9

McGraw-Hill/Irwin Slide 39