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Lecture International accounting: Chapter 7 - Nguyễn Quốc Nhất
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Lecture "International accounting - Chapter 7: Receivables" has content: Receivables - An introduction, accounting for uncollectible, the allowance method, the direct write off method, the direct write off method, notes receivable, using accounting information for decision making.
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Nội dung Text: Lecture International accounting: Chapter 7 - Nguyễn Quốc Nhất
International Financial Accounting<br />
<br />
Chapter 7: RECEIVABLES<br />
<br />
International Financial Accounting<br />
<br />
Chapter 7:<br />
RECEIVABLES<br />
MA. Nguyen Quoc Nhat<br />
<br />
Learning Objectives<br />
<br />
Chapter’s content<br />
<br />
Define and explain common types of receivables and<br />
review internal controls for receivables<br />
Use the allowance method to account for<br />
Uncollectible<br />
Understand the direct write-off method for<br />
Uncollectible<br />
Account for notes receivable<br />
Report receivables on the balance sheet and evaluate a<br />
company using the acid-test ratio, days’ sales in<br />
receivables, and the accounts receivable turnover ratio<br />
<br />
7.1 Receivables: An Introduction<br />
<br />
7.1 Receivables: An Introduction<br />
<br />
You have a receivable when you sell goods or services to<br />
another party on credit.<br />
You also have a receivable when you loan money to<br />
another party. So a receivable is the right to receive cash<br />
in the future from a current transaction. It is something the<br />
business<br />
owns; therefore, it is an asset. Each receivable transaction<br />
involves two parties:<br />
● The creditor, who will collect cash from the customer.<br />
● The debtor, who takes on an obligation/payable (a<br />
liability). The debtor will pay cash later.<br />
RECEIVABLES<br />
<br />
7.1 Receivables: An Introduction<br />
7.2 Accounting for Uncollectible (Bad Debts)<br />
7.3 The Allowance Method<br />
7.4 The Direct Write-Off Method<br />
7.5 Credit-Card and Debit-Card Sales<br />
7.6 Notes Receivable<br />
7.7 Using Accounting Information for Decision<br />
Making<br />
<br />
5<br />
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MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br />
<br />
Types of Receivables<br />
The two major types of receivables are<br />
● accounts receivable, and<br />
● notes receivable.<br />
<br />
RECEIVABLES<br />
<br />
6<br />
<br />
1<br />
<br />
International Financial Accounting<br />
<br />
Chapter 7: RECEIVABLES<br />
7.1 Receivables: An Introduction<br />
7.1 Receivables: An Introduction<br />
<br />
Accounts receivable, also called trade receivables, are<br />
amounts to be collected from customers from sales made<br />
on credit. Accounts receivable serves as a control account<br />
because it summarizes the total of all the individual<br />
customer receivables.<br />
<br />
7<br />
<br />
RECEIVABLES<br />
<br />
7.1 Receivables: An Introduction<br />
<br />
7.2 Accounting for Uncollectibles (Bad Debts)<br />
<br />
Notes receivable are usually longer in term than accounts<br />
receivable. Notes receivable represent the right to receive<br />
a certain amount of cash in the future from a customer or<br />
other party. The debtor of a note promises to pay the<br />
creditor a definite sum at a future date—called the<br />
maturity date. The maturity date is the date the debt<br />
must be completely paid off. A written document known<br />
as a promissory note serves as the evidence of the<br />
indebtedness and is signed by both the creditor and the<br />
debtor.<br />
<br />
As we discussed earlier, selling on credit (on<br />
account) creates an account receivable. The creation of<br />
this account receivable is really the first step in the<br />
process. However,<br />
if the company sells only for cash, it has no accounts<br />
receivable and, therefore, no bad debts from unreceived<br />
customer accounts.<br />
<br />
9<br />
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RECEIVABLES<br />
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10<br />
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RECEIVABLES<br />
<br />
7.2 Accounting for Uncollectibles (Bad Debts)<br />
<br />
7.2 Accounting for Uncollectibles (Bad Debts)<br />
<br />
Greg’s Tunes sells $5,000 in services to customer Brown<br />
on account and also sells $10,000 of inventory to customer Smith<br />
on account on August 8, 2014. The revenue is recorded (ignore<br />
COGS) as follows<br />
<br />
The business collects cash from both customers on August<br />
29—$4,000 from Brown and $8,000 from Smith. Collecting cash<br />
is the second step in the process and Greg’s makes the following<br />
entry:<br />
<br />
2014<br />
1a<br />
<br />
Aug 8<br />
<br />
2014<br />
Accounts Receivable - Brown<br />
<br />
5,000<br />
<br />
Service Revenue<br />
<br />
2a<br />
<br />
Aug 29 Cash<br />
<br />
12,000<br />
<br />
5,000<br />
<br />
Accounts Receivable - Brown<br />
<br />
1b<br />
<br />
Aug 8<br />
<br />
Accounts Receivable - Smith<br />
Sales Revenue<br />
<br />
10,000<br />
<br />
8,000<br />
<br />
Accounts Receivable - Smith<br />
<br />
Performed service on account<br />
<br />
4,000<br />
<br />
Collected cash on account<br />
<br />
10,000<br />
<br />
Sales Inventory on account<br />
<br />
MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br />
<br />
2<br />
<br />
International Financial Accounting<br />
<br />
Chapter 7: RECEIVABLES<br />
7.2 Accounting for Uncollectible (Bad Debts)<br />
<br />
7.2 Accounting for Uncollectible (Bad Debts)<br />
<br />
7.3 The Allowance Method<br />
<br />
7.2 Accounting for Uncollectible (Bad Debts)<br />
<br />
Most companies use the allowance method to<br />
measure bad debts. The allowance method is based on<br />
the matching principle. The offset to the expense is a<br />
contra account called Allowance for uncollectible<br />
accounts or the Allowance for doubtful accounts. The<br />
Allowance account reduces Accounts receivable.<br />
The business does not wait to see which customers will<br />
not pay. Instead, it records a<br />
bad debt expense based on estimates developed from past<br />
experience<br />
<br />
There are two methods of accounting<br />
for uncollectible receivables:<br />
● the allowance method, ● or, in certain<br />
limited cases, the direct write-off<br />
method.<br />
<br />
RECEIVABLES<br />
<br />
7.3 The Allowance Method<br />
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16<br />
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7.3 The Allowance Method<br />
<br />
Estimating Uncollectible<br />
So, how are uncollectible receivables estimated?<br />
Companies use their past experience as well as<br />
considering the economy, the industry they operate in, and<br />
other variables. In short, they make an educated guess,<br />
called an estimate. There are two basic ways to estimate<br />
uncollectibles:<br />
● Percent-of-sales<br />
● Aging-of-accounts-receivable<br />
<br />
RECEIVABLES<br />
<br />
● Percent-of-sales<br />
Based on prior experience, Greg’s<br />
uncollectible account expense is<br />
normally 2% of net credit sales, which<br />
totaled $15,000 for August. The journal<br />
entry records the following at August<br />
31, 2014:<br />
<br />
17<br />
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MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br />
<br />
3<br />
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International Financial Accounting<br />
<br />
Chapter 7: RECEIVABLES<br />
7.3 The Allowance Method<br />
<br />
7.3 The Allowance Method<br />
<br />
2014<br />
1b<br />
<br />
Aug 31 Uncollectible account expense<br />
($15000 X0.02)<br />
<br />
300<br />
<br />
Allowance for Uncollectible accounts<br />
<br />
300<br />
<br />
Recorded Uncollectible expense for<br />
the period<br />
<br />
After posting, the accounts are ready for the<br />
balance sheet.<br />
<br />
Aging-of-Accounts Method<br />
The other approach for estimating uncollectible<br />
receivables is the aging-of-accounts method. This<br />
method is also called the balance-sheet approach<br />
because it focuses on the actual age of the accounts<br />
receivable and determines a target allowance balance<br />
from that age. Assume it is now December 31, 2014, and<br />
Greg’s Tunes has recorded the remainder of the year’s<br />
activity in the accounts such that the accounts now have<br />
the following balances before the year-end adjustments.<br />
<br />
RECEIVABLES<br />
<br />
20<br />
<br />
7.3 The Allowance Method<br />
<br />
MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br />
<br />
4<br />
<br />
International Financial Accounting<br />
<br />
Chapter 7: RECEIVABLES<br />
7.3 The Allowance Method<br />
<br />
7.3 The Allowance Method<br />
<br />
Identifying and Writing Off Uncollectible Accounts<br />
<br />
Recovery of Accounts Previously Written Off—<br />
Allowance Method<br />
Recall that Greg’s Tunes wrote off the $80<br />
receivable from customer Andrews on January 10,<br />
2015. It is now March 4, 2015, and Greg’s<br />
unexpectedly receives $80 cash from Andrews. To<br />
account for this recovery, the company must<br />
reverse the effect of the earlier write-off to the<br />
Allowance account and record the cash collection.<br />
The entries are as follows:<br />
<br />
RECEIVABLES<br />
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25<br />
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RECEIVABLES<br />
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26<br />
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Summary<br />
1a) Make sales on account.<br />
1b) Establish a pool for future potential<br />
uncollectibility (2%).<br />
2) Collect cash on account.<br />
3) Identify a bad debt.<br />
4) Adjust allowance account to reflect<br />
adjustments to the estimate.<br />
5) Recover previously written off<br />
account.<br />
<br />
7.4 The Direct Write-Off Method<br />
<br />
There is another way to account for uncollectible<br />
receivables that is primarily used by small, non-public<br />
companies. It is called the direct write-off method.<br />
Under the direct write-off method, you do not use the<br />
Allowance for uncollectible accounts account to<br />
record the expense based on an estimate.<br />
<br />
RECEIVABLES<br />
<br />
MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br />
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30<br />
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