Lecture International accounting: Chapter 7 - Nguyễn Quốc Nhất

Chia sẻ: Bình Yên | Ngày: | Loại File: PDF | Số trang:11

Thêm vào BST

Báo xấu

36
lượt xem 3
download

Download Vui lòng tải xuống để xem tài liệu đầy đủ

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.

Chủ đề:

Bình luận(0) Đăng nhập để gửi bình luận!

Lưu

Nội dung Text: Lecture International accounting: Chapter 7 - Nguyễn Quốc Nhất

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