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Chapter 8

ACCT 1220 Chapter Notes - Chapter 8: Accounts Receivable, Book Value, Promissory Note

Course Code
ACCT 1220
Philippe Lassou

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Types of Receivables
•Amounts due to a business from its customers or other entities expected to be collected in cash
•Frequently classified as
•Accounts receivable – amounts owed by customers due to the sale of goods and services
•Notes receivable formal credit instrument (written promise to pay)
•Other receivables – interest receivable, loans and advances to employees, recoverable sales tax,
income tax receivable
Accounts Receivable
•A receivable is recorded when service is provided on account or at point of sale of merchandise
on account
•A receivable is reduced when cash is collected, a sales discount is taken, or the merchandise is
returned by the customer
Interest Revenue
•If a customer does not pay in full within the credit term period (usually 30 days), an interest
(financing) charge may be added to the balance due
•Seller recognizes interest revenue and increases the account receivable balance owed by the
Account for Bad Debts
•Some accounts receivable become uncollectible
•Losses from these uncollectible accounts are debited to an account called Bad Debts Expense
•Bad debts expense is recognized in the same period that the related sales revenue is generated
Allowance Method
•This method estimates the uncollectible accounts at the end of each period
•The amount estimated is shown in the Allowance for Doubtful Accounts
•A contra asset account that is shown below Accounts Receivable and netted with Accounts
Receivable to determine carrying amount
•Note that the allowance is an estimate it does not show specific customer accounts
Estimating the Allowance
•Most companies use the percentage of receivables basis to determine the allowance
•Estimate what percentage of receivables are likely to be uncollectible
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•Apply this percentage to total receivables, or
•Apply this percentage to receivables classified according to the length of time they have been
outstanding (called aging of accounts receivable method)
•Once the appropriate estimate for uncollectible accounts is determined, an adjusting entry can
be recorded
•The amount of the adjusting entry is the difference between the required balance and the
existing balance in the allowance account
Measuring and Recording Estimated Uncollectible Accounts
The balance in the Allowance for Doubtful Accounts is deducted from Accounts Receivable in
the current assets section of the statement of financial position:
Recording the Write-Off of an Uncollectible Account
•The vice president of finance authorizes a write-off of $2,500 owed by T. Ebbet:
Recording the Recovery of an Uncollectible Account
Record in two separate entries:
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