1、8 - 1 Accounting, 5/E GUOWEI HUST Accounts and Notes Receivable Chapter 8 1 8 - 2 Accounting, 5/E GUOWEI HUST Accounts receivable Receivables Notes receivable 2 8 - 3 Accounting, 5/E GUOWEI HUST Design internal controls for receivables. Objective 1 3 8 - 4 Accounting, 5/E GUOWEI HUST Establishing In
2、ternal Control What are some controls over accounts receivable? Separation of duties Approval for write-off Control over mail receipts 4 8 - 5 Accounting, 5/E GUOWEI HUST The Credit Department Companies grant credit to customers in order to increase sales. The credit department evaluates customers w
3、ho apply for credit cards. 5 8 - 6 Accounting, 5/E GUOWEI HUST Uncollectible Accounts Expense Allowance method Direct write-off method 6 8 - 7 Accounting, 5/E GUOWEI HUST Use the allowance method to account for uncollectibles and estimate uncollectibles by the percent of sales and aging approaches.
4、Objective 2 7 8 - 8 Accounting, 5/E GUOWEI HUST Methods for Estimating Uncollectible Expense Percentage of Sales Aging of Receivables 8 8 - 9 Accounting, 5/E GUOWEI HUST Percentage of Sales This is also called the income statement approach. It is based on prior experience of the business. It is comp
5、uted as a percentage of credit sales. It ignores the current balance of the allowance account. The percentage used is adjusted as needed to reflect collection experience. 9 8 - 10 Accounting, 5/E GUOWEI HUST Percentage of Sales Example The credit department of Anas Boutique estimates (based on prior
6、 experience) that 1% of net credit sales are uncollectible. Net credit sales for the year just ended were $500,000. What is the adjusting entry? $500,000 1% = $5,000 10 8 - 11 Accounting, 5/E GUOWEI HUST Percentage of Sales Example Dec 31, 200x Uncollectible Account Expense 5,000 Allowance for Uncol
7、lectible Accounts 5,000 Recorded expense for the year 11 8 - 12 Accounting, 5/E GUOWEI HUST Decrease in Net Income Decrease in net Accounts Receivable What is the effect of this adjusting entry? Percentage of Sales Example 12 8 - 13 Accounting, 5/E GUOWEI HUST Aging of Accounts Receivable This appro
8、ach is also called the balance sheet approach because it focuses on accounts receivable. Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding. 13 8 - 14 Accounting, 5/E GUOWEI HUST Aging of Receivables Example Assume that Interna
9、tional Hospitals past collection experience indicates the following: Length of time % uncollectible 1-30 days 2.0 31-60 days 3.0 61-90 days 5.0 90 + days 8.0 14 8 - 15 Accounting, 5/E GUOWEI HUST Accounts Receivable Allowance for Uncollectible Accounts Length Amount % 1-30 $1,900,000 2 $ 38,000 31-6
10、0 1,000,000 3 30,000 61-90 700,000 5 35,000 90 + 500,000 8 40,000 Total $4,100,000 $143,000 Aging of Receivables Example 15 8 - 16 Accounting, 5/E GUOWEI HUST Aging of Receivables Example The allowance account is adjusted to this $143,000 balance: Assume that the account currently has a credit balan
11、ce of $100,000. What is the adjustment? 16 8 - 17 Accounting, 5/E GUOWEI HUST Uncollectible Account Expense 43,000 Allowance for Uncollectible Accounts 43,000 To record allowance for uncollectibles What if the account had a debit balance of $1,000? Aging of Receivables 17 8 - 18 Accounting, 5/E GUOW
12、EI HUST Allowance for Uncollectible Adjustment 1,000 144,000 Adjusted balance 143,000 Aging of Receivables 18 8 - 19 Accounting, 5/E GUOWEI HUST Comparing the Percentage of Sales and Aging Methods Allowance Method Percent of Sales Method Aging of Accounts Receivable Method Adjusts Allowance for Unco
13、llectible Accounts Adjusts Allowance for Uncollectible Accounts BY TO UNCOLLECTIBLE ACCOUNT EXPENSE UNCOLLECTIBLE ACCOUNTS RECEIV ABLE Amount of Amount of 19 8 - 20 Accounting, 5/E GUOWEI HUST Writing Off Uncollectible Accounts What happens when it becomes apparent that an account will not be collec
14、ted? It must be written off. How? Debit Allowance for Uncollectible Accounts. Credit Accounts Receivable. 20 8 - 21 Accounting, 5/E GUOWEI HUST Recoveries How is the collection of a previously written- off account recorded? Debit Accounts Receivable (to reinstate the account). Credit Allowance for U
15、ncollectible Accounts. Debit Cash. Credit Accounts Receivable (to record the collection). 21 8 - 22 Accounting, 5/E GUOWEI HUST Use the direct write-off method to account for uncollectibles. Objective 3 22 8 - 23 Accounting, 5/E GUOWEI HUST Direct Write-Off Method Using this method, an account is wr
16、itten off only when it becomes uncollectible. No allowance account is created. This method is simple to use. The balance sheet is overstated. The income statement is understated. 23 8 - 24 Accounting, 5/E GUOWEI HUST Credit Card and Bankcard Sales These save retailers the cost of a credit department
17、. The retailer is required to pay a fee (called a discount) for usage. 24 8 - 25 Accounting, 5/E GUOWEI HUST Credit Card and Bankcard Sales How would Anas Boutique record a $100 credit card sale with a 2% service charge? Accounts Receivable (credit card) 98 Credit Card Discount 2 Sales Revenue 100 T
18、o record a credit card sale of $100 less a 2% service charge fee 25 8 - 26 Accounting, 5/E GUOWEI HUST Debit Card Sales Using a debit card is like paying with cash. 26 8 - 27 Accounting, 5/E GUOWEI HUST Notes Receivable: an Overview A note receivable may arise from a sale or may be given in settleme
19、nt of an account receivable. The maker pays the payee the maturity value. The maturity value includes principal plus interest. 27 8 - 28 Accounting, 5/E GUOWEI HUST Promissory Note $10,000.00 Nov. 30, 2001 For value received, I promise to pay to the order of POPULAR BANK HOUSTON, TEXAS TEN THOUSAND
20、AND NO/100DOLLARS ON FEBRUARY 28, 2002 Plus interest at the annual rate of 10 percent. _ Maker Payee Notes Receivable: an Overview 28 8 - 29 Accounting, 5/E GUOWEI HUST Promissory Note $10,000.00 Nov. 30, 2001 For value received, I promise to pay to the order of POPULAR BANK HOUSTON, TEXAS TEN THOUS
21、AND AND NO/100DOLLARS ON FEBRUARY 28, 2002 Plus interest at the annual rate of 10 percent. _ Principal Notes Receivable: an Overview 29 8 - 30 Accounting, 5/E GUOWEI HUST Promissory Note $10,000.00 Nov. 30, 2001 For value received, I promise to pay to the order of POPULAR BANK HOUSTON, TEXAS TEN THO
22、USAND AND NO/100DOLLARS ON FEBRUARY 28, 2002 Plus interest at the annual rate of 10 percent. _ Date of issue Notes Receivable: an Overview Interest rate 30 8 - 31 Accounting, 5/E GUOWEI HUST Promissory Note $10,000.00 Nov. 30, 2001 For value received, I promise to pay to the order of POPULAR BANK HO
23、USTON, TEXAS TEN THOUSAND AND NO/100DOLLARS ON FEBRUARY 28, 2002 Plus interest at the annual rate of 10 percent. _ Notes Receivable: an Overview Maturity date 31 8 - 32 Accounting, 5/E GUOWEI HUST Identifying a Notes Maturity Date When the period is given in days the maturity date is determined by c
24、ounting the days from the date of issue. The date the note was issued is omitted. The maturity date is counted. 32 8 - 33 Accounting, 5/E GUOWEI HUST Principal Rate Time = Interest $10,000 10% 90 360 = $250 Computing Interest on a Note Compute interest on the note due to Popular Bank. Principal: $10
25、,000 Interest: 10% Time: December 1, 2001, to February 28, 2002 33 8 - 34 Accounting, 5/E GUOWEI HUST Account for notes receivable. Objective 4 34 8 - 35 Accounting, 5/E GUOWEI HUST Recording Notes Receivable Assume the accounting period ended December 31. How much interest was earned by the bank as
26、 of December 31? $10,000 10% (31 360) = $86.11 35 8 - 36 Accounting, 5/E GUOWEI HUST Recording Notes Receivable December 31 Interest Receivable 86.11 Interest Revenue 86.11 To accrue interest on the note 36 8 - 37 Accounting, 5/E GUOWEI HUST Recording Notes Receivable How does the bank record the co
27、llection at maturity? February 28 Cash 10,250.00 Note Receivable 10,000.00 Interest Receivable 86.11 Interest Revenue 163.89 Record interest on note 37 8 - 38 Accounting, 5/E GUOWEI HUST Dishonored Notes Receivable If the maker of the note fails to pay the maturity value to the new payee, then the o
28、riginal payee legally must pay the bank the amount due. 38 8 - 39 Accounting, 5/E GUOWEI HUST Report receivables on the balance sheet. Objective 5 39 8 - 40 Accounting, 5/E GUOWEI HUST Reporting Receivables Some companies report a single amount for its current receivables in the body of the balance
29、sheet. They use a note to the financial statements to give more details. 40 8 - 41 Accounting, 5/E GUOWEI HUST Use the acid-test ratio and days sales in receivables to evaluate a companys financial position. Objective 6 41 8 - 42 Accounting, 5/E GUOWEI HUST Acid-test ratio = (Cash + Short-term inves
30、tments + Net current receivables) Total current liabilities Acid-Test Ratio This is a stringent test of liquidity. It measures the entitys ability to pay its current liabilities immediately. 42 8 - 43 Accounting, 5/E GUOWEI HUST Days Sales in Receivables It is a measure of the time it takes to colle
31、ct receivables. A smaller number indicates a quick conversion to cash. 43 8 - 44 Accounting, 5/E GUOWEI HUST One days sales = Net sales 365 days Days sales in average accounts receivable = Average net accounts receivable One days sales Days Sales in Receivables 44 8 - 45 Accounting, 5/E GUOWEI HUST End of Chapter 8 45
