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Accounts Receivable

1) Key Things To Know 5) Medium Test
2) Self Test 6) On Your Test
3) Practice as You Learn 7) Quick Study Sheet
4) Easy Test  

 

 

Key Things To Know


Revenue is “recognized” when:  1) the good or service has been provided, and
                                                              2) you expect that you will be paid
 
 
Sell on “credit” – provide them the good/service now and they pay you later.
 
             When payment is due is based on the “terms” agreed upon
 
                        Example:  2/10, net30    means – 2% discount / if pay in 10 days,
                                                                               or, full payment is due in 30 days
 
                                          net60          – no discount offered, payment due in 60 days
 
 
            Companies offer a discount in order to collect cash quicker when they need cash
              It is very costly to offer a discount, but necessary if the company is not able to
                borrow money at a lower interest rate
 
 
When a payment (cash) discount is taken it is called a sales discount
     Sales discounts are reported on the income statement as:
             
                                         Sales
                                     -   Sales Discount
                                     =  Net Sales
 
 

Journal entries for sales on credit and payment received when a discount is offered:

     (this method is referred to as the gross method of accounting for receivables)
 
                                    Payment                                           Payment
Sales                          received -take discount                   received –no discount taken
 
A/R                             Sales Discount                                 Cash
        Sales                Cash                                                              A/R
                                           A/R
 
The sales and the accounts receivable is always for the full amount of the sale.
The cash is the amount actually received (sales x 1 – discount %   if discount is taken)
The sales discount amount is:  sales $ x discount % offered
 
 
 
The balance sheet for accounts receivable will show:
 
       On the Balance Sheet:                                                      It means:
           
   Accounts Receivable                                           Total amount customers owe you
-  Allowance for Uncollectible Accounts             -  Amount you don’t think you will collect

= Net Accounts Receivable                    = Amount you do think you will collect

 
        The asset reported on the balance sheet, net accounts receivable, must be the amount you
           expect to be a future benefit.  There is no benefit to an uncollectible accounts receivable.
 
 
The accounts that are used to record accounts receivable transactions are:
    
     Sales – represents the amount of goods or services provided
 
     Accounts receivable – represents the amount the customer owes
 
     Allowance for uncollectible accounts – represents the total amount you do not
          expect to collect – it is an estimate, you don’t know who won’t pay or how much
 
     Bad debt expense – the current period estimate of what you won’t collect
 
 
 
There are 4 key transactions that must be recorded for accounts receivables:
 
1) The sale on credit, which creates the accounts receivable
 
2) The collection of the accounts receivable when a customer pays
 
3) The estimate of bad debt expense:  you don’t know exactly how much won’t be  
       collected from customers, but you know you won’t collect it all from past history.
        You must estimate the expense at the end of the period to match with sales.
 
4) The write off of an accounts receivable when you know who won’t pay you
       and exactly how much won’t be collected.   This occurs much later after the sale.
 
 
 
Journal entries for the 4 transactions are:
 
Sales on credit                                                         Collect accounts receivable
 
Accounts Receivable                                              Cash
            Sales                                                                          Accounts Receivable
 
 
Estimate bad debt expense:                                   Write – off accounts receivable:   
 
Bad debt expense                                                   Allowance for uncollectible accounts
            Allowance for uncollectible accounts                      Accounts Receivable
 
    (Bad debt expense can be a credit
       when using the % of A/R method)
 
 
 
 
The accounts are changed by the following transactions:
 
Accounts Receivable:
 
            Increases when a sale is made on credit
            Decreases when the customer pays
            Decreases when an account is written off – you know who won’t pay and amount
 
 
Allowance for Uncollectible Accounts:
 
            Increases when estimating bad debt expense using % sales method
            Increases or decreases when estimating bad debt expense using % of accounts
             receivable (the up or down depends on how much is already in the account)
            Decreases when an account is written off
 
         The allowance account represents the total estimate of what won’t be collected.
            The company is not sure who won’t pay or exactly how much.  When they know
             who and how much won’t pay, they take it out of this account and take it off the
             accounts receivable list and out of the accounts receivable account.
 
 
Bad Debt Expense:
 
            Changes ONLY when you estimate bad debt at the end of the period
 
            If you overestimated in prior periods you can take some expense away when
 
                         you are using the % of accounts receivable (aging) method.
 
 
 
 
 
 
 

The 4 transactions change the accounts:

 
Accounts Receivable
Beg. Bal    
    Write-offs
Sales    
    Collections
     
___________________   ___________________
Amount    
customers    
owe    

 

Allowance for Uncollectible Accounts
    Beginning balance
Write-offs    
    Estimate of bad
    debt expense
     
___________________   ___________________
    Amount you do not
    expect to collect

 

Sales
    Provide Goods
     
     

 

Bad Debt Expense
Estimate of    
bad debt expense    
this period    

              Bad debt expense can be a credit
              when using % of A/R (aging) method
 
 
Bad Debt Expense:  Occurs when you do not get paid for a receivable.
 
   The bad debt expense must be recorded in the same period the sale is made.
     (This follows the matching principle: match revenues with all expenses)
 
    Problem:   You don’t know how much you won’t collect in the period of the sale.
                        You won’t know until much later when the customer doesn’t pay.
 
    Solution:   You must estimate, (based on past history) the amount you won’t collect
                            and record this expense in the same period as the sale
 
 
There are two ways to estimate the amount of bad debt expense for the current   
   period:   % of sales   &    % of accounts receivable
 
 
% of Sales Method:
 
                        Sales
                  X   %  of sales the company historically doesn’t collect (given)
                  =    Bad debt expense
 
 
            Record the bad debt expense amount you calculated
 
                        Bad Debt Expense                                                  $XXXX
                                    Allowance for uncollectible accounts                              $XXXX
 
                You are doing a direct match of the bad debt expense to sales.  This amount
                 is also added to the account that accumulates the total amount of accounts
                 receivable you do not expect to collect (the allowance account).
 
 
 
% of Accounts Receivable (aging method):
 
                        Accounts Receivable
                 X    % of accounts receivable the company historically does not collect (given)
                 =    The total amount of accounts receivable the company does not
                          expect to collect
 
                        This amount must be the ending balance in the
                          “allowance for uncollectible accounts account
 
                       
            Make your journal entry for the amount (plug) it takes to get the balance in the
             allowance account to be the amount you calculated above.
           
 
Allowance for Uncollectible Accounts
    Beginning balance
Write-offs    
___________________   ___________________
    Balance before estimate
     
Plug? or   Plug?
___________________   ___________________
    Ending Balance**

                        ** The ending balance must be the number you calculated above
 
 
                        The journal entry for the amount of the “plug” will either be:
 
Allowance for uncollectible accounts         Bad debt expense
            Bad debt expense                       or              Allowance for uncollectible accounts
    
 
 
When you have an aging report which shows how old the accounts are and the % that is
estimated to be uncollectible for each category, you must multiply the balance x the
% given for each category and add them all up to get the total amount you do not
expect to collect.  (See Practice As You Learn for an example).  When you have the
total, follow the same procedures described above.
 
 
 
The difference between the two methods:  % of Sales   &    % of  A/R (aging)
 
            % of Sales:    You are calculating the total bad debt expense for the period
                                    You are estimating using this periods sales only
 
 
            % of A/R:       You are calculating a cumulative amount that you do not expect
                                   to collect using the total amount that customers owe you from
                                   this period and all prior periods.
                                    The expense for this period is the change in the cumulative amount
                                       you don’t expect to collect

 

 


 

 

 

 
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