1. Types of Receivables
1.1Receivables refer to amounts due from individuals and other companies that are
expected to be collected in cash.
1.2Receivables are classified as either:
1.2.1 Accounts receivable, are amounts owed by customers on account. These
receivables are expected to be collected within 30 days or so.
1.2.2 Notes receivable represent claims for which formal instruments of credit are
issued as evidence of the debt. The debtor normally is required to pay interest
and the time period may extend for 30 to 90 days or longer. Notes and accounts
receivable that result from sales transactions are often called trade
1.2.3 Other receivables include nontrade receivables such as GST recoverable,
interest receivable, loans to company officers, advances to employees, and
recoverable income taxes.
2. Recognizing Accounts Receivable
2.1Accounts receivable are recognized when merchandise is sold on account, as explained in
2.2Recognizing accounts receivable also occurs when a company sells merchandise and a
customer uses the company’s own credit card.
2.2.1 Credit card sales result in a debit to Accounts Receivable and a credit to Sales.
2.2.2 Receivables are created by services or sales on account and reduced when cash is
collected or when the customer takes advantage of a sale discount or returns the
product. If customers fail to pay within a specified period (usually 30 days), the
seller adds interest. The interest is debited to Accounts Receivable and credited to
Accounts receivable subsidiary ledger:
A subsidiary ledger is the group of accounts that share a common characteristic.
The subsidiary ledger has a reasonable account for each customer and the total of all
balances in the customer’s account in the subsidiary ledger should equal to the total
balance in the general ledger receivable accounts.
This equality occurs because when receivables transactions are recorded in the
subsidiary and lectures on a customer buy customer bases, some rays of these
transactions are recorded in the general ledger
The general ledger contains only one receivables account--accounts receivable—which
acts as a control account to the subsidiary ledger.
Control account is the general ledger account that summarizes the subsidiary
inventory that and at all times the control account balance must equal to the total up
to all individual customers receivables balances in the subsidiary ledger
Under this system of control and subsidiary accounts, each journal entry that affects
accounts receivables must therefore be posted twice: wants to the subsidiary ledger
account and wants to the general ledger control account
* see the illustration in page 414*
1 Interest revenue
If the customer doesn’t pay in full within a specified period of time, and interest
(financing) charge may be added to the balance due. When financing charges are added,
the Sellers to recognize interest revenue and increases the accounts receivable amounts
old to buy the customer
3. Valuing Accounts Receivable
• Some accounts receivable become uncollectible
• Losses from these uncollectible accounts are debited to an account called Bad Debts
• Bad debts expense is recognized in the same period that the related sales revenue is
3.1Valuing receivables involves reporting them at their net realizable value. Net realizable
value is the net amount expected to be received in cash.
Net realizable value
Net amount expected to be collected in cash
Excludes amounts the company estimates it will not collect
Keeps receivables from being overstated on the balance sheet
3.2.2 The Allowance Method
184.108.40.206 The allowance method is required for financial reporting purposes when bad
debts are material in amount.
The allowance method of accounting for bad debts estimates the uncollectible
accounts at the end of each period and shows this estimate in allowance for doubtful
accounts, which is a Contra asset account with a credit balance that is shown below
accounts receivable. This allows it is an estimate of the amount of receivable that
are expected to become uncollectible in the future
A Contra account is used instead of a direct credit to accounts receivable for two
1. We do not know which individual customer will not pay. If the company uses a
subsidiary ledger, we are unable to credits specific a strike comes to show they are
uncollectible also we are unable to credit the control account itself as this would
mean that the balance would not equal to the sum of all the customer’s account in
the subsidiary ledger.
2. The balance in allowance for doubtful accounts is just an estimate. A Contra
account helps to separate estimates from actual amount such as those found in
The laws method is required for financial reporting. It has 3 essential features:
220.127.116.11 Recoding Estimated Uncollectible accounts: and the amount of
uncollectible accounts receivable is estimated by ensuring that the balance in
allowance for doubtful accounts is equal to the estimate of uncollectible
accounts. Any increase to the amounts balance is also recorded in bad debt
expense so that it can be recorded in the same period that the related
revenue was earned. * see the illustration 8-2 in page 417*
Estimating the amounts: Under the percentage of receivables basis,
management establishes a percentage relationship between the amount of
receivables and expected losses from uncollectible accounts. This percentage can be
applied to total receivables or to groupings of receivables by age. Because of its
emphasis on time, using stratification is called aging the accounts receivable
2 -This basis produces a better estimate of net realizable value (balance sheet
-An aging schedule is often used to determine the required balance in the
allowance account at each balance sheet date.
- When the adjusting entry is made, the amount of bad debt expense is the
difference between the required balance and the existing balance in the
- the amount of the bat that adjusting entry is the difference between
the required balance and the existing balance of the allowance
* see the illustration 8-3 in page 417 and 418*
18.104.22.168 Recording the write-off of an uncollectible account: actual uncollectible
are written off at that time the specific amount is determined to be
uncollectible. This will cause a reduction in accounts receivable because the
amount is not collectible. It will also cause a reduction in the allowance for
doubtful accounts, because the amount is no longer doubtful.
To prevent premature or unauthorized write-offs, of each write-off should be formally
approved in writing by authorized management personnel.
Under the allowance market, every accounts receivable by the entry is
debited to the amount account and not too bad debts expense.
It debit to back debt expense would be incorrect because the expense was already
recognized when the adjusting entry the estimated the laws balance was reported last
The allowance account can sometimes and up with a debit balance after a write-off of
uncollectible account. This occurs if the write-offs during the period to exceed the
opening balance which is a temporary situation because it will be corrected when the
adjusting entry for estimated uncollectible accounts is made at the end of the period.
* see the illustration in page 418*
22.214.171.124Recording the recovery of uncollectible accounts: when an account that was
previously written off is later collected, the original write-off is reversed and the collection is
recorded. Note that neither the write-off the more the subsequent recovery extracts the income
2 entries are required to record the recovery of a bad debt: 1. the entry made in writing off
the account is reversed to reinstate the customer’s account and 2. The collection is recorded in
the usual way. *see the illustration in page 419)*
Summary of allowance method
1. Estimate Uncollectible accounts receivable:
Bad debts expense XX
Allowance for doubtful accounts XX
-the amount to record can be determined by using a percentage of total receivables or an aging
schedule. This entry is an adjusting entry that is made at the end of the period
2. Actual uncollectible or write-off:
Allowance for doubtful accounts XX
Accounts receivable XX
- This entry is not an adjusting entry and is recorded as sold as it can be determined that
the collection of an account is unlikely.
2. Later recoveries, are recorded in two separate entries:
Accounts receivable XX
Amounts for doubtful accounts XX
3 Cash XX