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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 /> <br /> 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 /> <br /> RECEIVABLES<br /> <br /> 10<br /> <br /> 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 /> <br /> 16<br /> <br /> 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 /> <br /> MA. NguyenQuocNhat –nhatnq.faa@gmail.com<br /> <br /> 3<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 /> 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 /> <br /> 25<br /> <br /> RECEIVABLES<br /> <br /> 26<br /> <br /> 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 /> <br /> 30<br /> <br /> 5<br /> <br />
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