1、 Unit 2 Unit 2Receivables Receivables Learning ObjectivesLearning ObjectivesAfter studying this unit,you should be able to:Define receivables and specify the types of receivables.Distinguish trade receivables from other receivables.Explain the importance of having and managing accounts receivable.Ex
2、plain the recognition of accounts receivable.Describe the problems involved in valuing accounts receivable.Continued Contrast direct write-off method with allowance method.Describe methods of estimating bad debt expenseDescribe the accounting entries for recording a recovery of bad debt that has bee
3、n written off.Specify the key controls over accounts receivable.Key Terms Credit Policy 信用政策 Contra-asset Account 资产备抵账户，资产抵消账户。Valuation Account 计价对比账户 Credit Memo 贷项通知单。也写作credit Memorandum。Incompatible Duties 不相容职务Defining Receivables The term receivables refer to amounts due from individuals and
4、 companies.Receivables are claims that are expected to be collected in cash.Management of ReceivablesThe management of receivables is a very important activity for any company that sells goods or services on credit.Receivables are important because they represent one of a companys most liquid assets
5、.Types of Receivables To reflect important differences among receivables,they are frequently classified as accounts receivable,notes receivable,and other receivables.Accounts ReceivableAccounts receivable are amounts owed by customers for goods and services sold in the companys normal course of busi
6、ness.Companies generally expect to collect accounts receivable within 30 to 60 days.They are usually the most significant type of claim held by a company.Notes receivableNotes receivable represent claims for which formal instruments of credit are issued as evidence of the debt.The credit instrument
7、normally requires the debtor to pay interest and extends for time periods of 60-90 days or longer.Notes and accounts receivable that result from sales transactions are often called trade receivables.Other ReceivablesOther receivables include non-trade receivables such as interest receivable,loans to
8、 company officers,advances to employees,and income taxes refundable.These do not generally result from the operations of the business.Therefore,they are generally classified and reported as separate items in the balance sheet.Significance of Accounts ReceivableSignificance of Accounts ReceivableAcco
9、unts receivable arise when a business sells goods and services on credit.Sales and profits can be increased by granting customers the privilege of making payment a month or more after the date of sale.Continued However,no business concern wants to sell on credit to a customer who will prove unable o
10、r unwilling to pay his or her account.Consequently,most business organizations have a credit department which investigates the credit worthiness of each prospective customer.Continued Regardless of how thoroughly the credit department investigates prospective customers,some uncollectible accounts wi
11、ll arise as a result of errors in judgement or because of unexpected development.In fact,a limited amount of uncollectible accounts is evidence of a sound credit policy.Accounting for Accounts ReceivableAccounting for Accounts Receivable Two accounting problems associated with accounts receivable ar
12、e:(1)recognizing accounts receivable.(2)Valuing accounts receivable.Recognizing Accounts ReceivableRecognizing Accounts Receivable Initial recognition of accounts receivable is relatively straightforward.A service organization records a receivable when it provides service on account.A merchandiser r
13、ecords accounts receivable at the point of sale of merchandise on account.When a merchandiser sells goods,it increases both the Accounts Receivable and Sales accounts.Sales DiscountsSales discounts reduce receivables.The seller may offer terms that encourage early payment by providing a discount.For
14、 example,terms of 2/10,n/30 provide the buyer with 2%discount if it pays within 10 days.If the buyer chooses to pay within the discount period,the seller reduces its accounts receivable.Sales ReturnsSales returns also reduce receivables.The buyer might find some of the goods unacceptable and choose
15、to return the unwanted goods.The seller reduces Accounts Receivable upon receipt of the returned merchandise.Once companies record receivables in the accounts,the next question is:how should they report receivables in the financial statements?Companies report accounts receivable on the balance sheet
16、 as an asset.Determining the amount to report is sometimes difficult because some receivables will become uncollectible.Valuing Accounts ReceivableValuing Accounts ReceivableBad Debts ExpenseAlthough each customer must satisfy the credit requirements of the seller before the credit sale is approved,
17、inevitably some accounts receivable become uncollectible.The seller debits such credit losses to Bad Debts Expense(or Uncollectible Accounts Expense).Such losses are a normal and necessary risk of doing business on a credit basis.Two Methods for Uncollectible Accounts(1)the direct write-off method(2
18、)the allowance methodDirect Write-Off Method for Uncollectible AccountsUnder the direct write-off method,when a company determines a particular account to be uncollectible,it charges the loss to Bad Debts Expense.Assume for example,that IBM writes off Company As$50 000 balance as uncollectible on De
19、cember 12.IBMs entry is:Dr.Bad Debts Expense 200 Cr.Accounts Receivable 200Effect of the Method Under the direct write-off method,bad debts expense will show only actual losses from uncollectibles.The company will report accounts receivable at its gross amount.Continued Use of the direct write-off m
20、ethod can reduce the usefulness of both the income statement and balance sheet because companies often record bad debts expense in a period different from the period in which they recorded the revenue.Thus,no attempt is made to match bad debts expense to sales revenues in the income statement.Contin
21、ued Nor does the company try to show accounts receivable in the balance sheet at the amount actually expected to be received.Consequently,unless a company expects bad debts losses to be insignificant,the direct write-off method is not acceptable for financial reporting purposes.Allowance Method for
22、Uncollectible Accounts The allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period.This provides better matching of expenses with revenues on the income statement.It also ensures that receivables are stated at their cash realizable value on t
23、he balance sheet.Three Essential Features of Allowance Method(1)companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded.(2)companies record estimated uncollectibles as an increase(a debit)to Bad Debts Expen
24、se and an increase(a credit)to Allowance for Doubtful Accounts(a contra asset account)through an adjusting entry at the end of each period.Continued (3)companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is
25、written off as uncollectible.The Adjusting Entry to Record the Estimated Uncollectibles Dr.Bad Debts Expense Cr.Allowance for Doubtful Accounts Allowance for Doubtful Accounts Allowance for Doubtful Accounts shows the estimated amount of claims on customers that companies expect will become uncollec
26、tible in the future.Companies use a contra account instead of a direct credit to Accounts Receivable because they do not know which customers will not pay.Continued The credit balance in the allowance account will absorb the specific write-offs when they occur.The company deducts the allowance accou
27、nt from Accounts Receivable in the current assets section of the balance sheet.The Entry to Record the Write-offWhen a company has exhausted all means of collecting a past-due account and collection appears unlikely,the company should write off the account.The entry to record the write-off is:Dr.All
28、owance for Doubtful Accounts Cr.Accounts Receivable Name of customer The Write-off of Bad DebtsThe write-off of bad debts affects only balance sheet accounts.The company does not increase Bad Debts Expense when the write-off occurs.Under the allowance method,a company debits every bad debt write-off
29、 to the allowance account and not to Bad Debts Expense.Continued A debit to Bad Debts Expense would be incorrect because the company has already recognized the expense,when it made the adjusting entry for estimated bad debts.Instead,the entry to record the write-off of an uncollectible account reduc
30、es both Accounts Receivable and the Allowance for Doubtful Accounts.Estimating Uncollectible Accounts Estimating Uncollectible Accounts ExpenseExpense There are two methods of estimating uncollectible accounts expense:the balance sheet approach and rests on an aging of the accounts receivablethe oth
31、er is regarded as the income statement approach and compute the uncollectible accounts as a percentage of the years net sales.Aging MethodThe aging method emphasizes the net realizable value of net accounts receivable and uses historical data to estimate the percentage of accounts receivable expecte
32、d to become uncollectible.The question to be answered is“how large a valuation allowance is needed to reduce our receivables to realizable value?”Continued A past-due account receivable is always viewed with some suspicion.The fact that a receivable is past due suggests that the customer is either u
33、nable or unwilling to pay.The longer past due an account receivable becomes,the greater the likelihood that it will not be collected in fullContinued In recognition of this fact,the analysis of receivables by age groups can be used as a stepping-stone in determining a reasonable amount to add to the
34、 Allowance for Doubtful Accounts.Estimating Bad Debts To determine this amount,we estimate the percentage of probable expense for each age group of accounts receivable.This percentage,when applied to the dollar amount in each age group,gives a probable expense for each group.By adding together the p
35、robable expense for all the age groups,the required balance in the Allowance for Doubtful Accounts is determined.Income Statement ApproachAn alternative approach preferred by some companies consists of computing the charge to uncollectible accounts expenses as a percentage of the net sales for the y
36、ear.If a company makes both cash sales and credit sales,it is better to exclude the cash sales from consideration and to compute the percentage relationship of uncollectible accounts expense to credit sales only.Continued The credit sales method emphasizes the matching principle and income statement
37、.The question to be answered is“how much uncollectible accounts expense is associated with this years volume of sales?”Assume the net sales of the current year amount to$1 200 000 and the percentage of bad debt is 1%,the amount of bad debts expense is$12 000.Comparing the Two Methods The approach of
38、 estimating uncollectible accounts receivable as a percentage of credit sales is easier to apply than the method of aging accounts receivable.The aging of receivable,however,tends to give a more reliable estimate of uncollectible accounts because of the consideration given to the age and collectibil
39、ity of the specific accounts receivable at the balance sheet date.Recovery of an Uncollectible AccountRecovery of an Uncollectible AccountThe company must make two entries to record the recovery of a bad debt:(1)Dr.Accounts Receivable Name of customer Cr.Allowance for Doubtful Accounts(2)Dr.Cash Cr.
40、Accounts Receivable Name of customer Internal Control for Accounts Internal Control for Accounts ReceivableReceivableProper segregation of duties is of significance to the management of accounts receivable.To avoid fraud in the handling of receivables,some of the most important rules are that employ
41、ees who maintain the accounts receivable subsidiary ledger must not have access to cash receipts,and employees who handle cash receipts must not have access to the records of receivable.Continued To avoid fraud in the handling of receivables,some of the most important rules are that employees who ma
42、intain the accounts receivable subsidiary ledger must not have access to cash receipts,and employees who handle cash receipts must not have access to the records of receivable.Continued Furthermore,employees who maintain records of receivables must not have authority to issue credit memos or to write off receivables as uncollectible.These are classic examples of incompatible duties.In addition,documents such as sales invoices and credit memos must be serially numbered and every number in the series accounted for.
