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Canada (158,218)
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ADM1340 (150)
Chapter 8

ADM1340 Chapter 8: The Purpose and Use of Financial Statements - Lamia Chorou

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University of Ottawa
Lamia Chourou

Chapter 8 - Reporting and Analysing Receivables Reporting and Analysing Receivables • Accounts receivable o Recording accounts receivable o Subsidiary ledgers o Interest revenue • Uncollectible account receivable o Measuring and recording estimated uncollectible accou nts o Writing off uncollectible accounts o Collecting uncollectible accounts • Notes receivable o Recording notes receivable o Derecognizing notes receivable • Statement presentation of receivables o Statement of financial position o Income statement • Managing receivable s o Extending credit o Establishing a payment period o Monitoring collections o Evaluating liquidity of receivables Accounts Receivable • Receivables refers to the amount that is due to a business from its customers or other companies o They are claims that are to be collected in cash o They are usually classified as • Accounts receivable § This is the amount owed by customers on account § Usually its expected to pay this within 30 days • Notes receivable § This is a written promise that will be r epaid § This can have a time period of 30 days or longer § Accounts and notes receivable that result from sales transactions are often called trade receivables • Other receivables § This includes nontrade receivables that do not result from the operations of th e business § These are loans to company officers, advances to employees, sales tax recoverable… • Recording accounts receivable o The first step is • A service company records a receivable when a service is provided on account • A merchandising company records a rec eivable at the point of sale of merchandise on account • Depending on what type of business is being run, the accounts will be recorded at different times § Time of sale, or time of service o Revenue should be recognized when the performance or sales effort is completed o Nonbank Credit Card Receivables • When a customer uses a credit, we record the transaction as a cash sale, since the bank honours the credit card receipt as cash • However, if the company has its own credit ca rd, then its considered a credit sale § With debit being recorded to Account Receivable rather than cash • Subsidiary ledgers o A company may have all the Accounts Receivable recorded in the same way • This is a group of accounts that share a common characteristi c o This can also be used to include inventory, accounts payable, and payroll o A subsidiary ledger, is a group of accounts that share a common characteristic § Like all are receivable accounts • The general ledger only contains accounts receivable • A control account is a general ledger account that summarizes the subsidiary ledger data § This must equal the total of all individual customer receivables balances • Interest revenue o By the end of the month, subsidiary ledger may be used to determine the transactions f or each customer o If by the end of the 30 days the customer doesn’t pay, then the company can add a charge to the balance o The seller will recognize the interest revenue in the books, and add to the amount that the customer owes them • This would add assets and shareholders' equity to the company Uncollectible accounts receivable • Even though the customers should always pay the accounts receivable, sometimes the accounts receivable becomes uncollectible o A customer may not be able to pay because of a decline in sales o Or a person is laid off and now has a these bills they cannot pay • Bad debts expense is used for debiting contra sales accounts o This new account is created after credit losses • The allowance method o This is for bad debts estimates the uncollectible accounts at the end of each period • To record bad debts bad debt expense is debited and the allowance for doubtful accounts is credited o This is a contra assets accounts with a normal credit balance that is deducted from account s receivable • This account is used instead instead of a direct credit to accounts receivable • Effects on mismatching bad debts o Year 2014 • Huge sales promotion • Accounts receivable and sales increase dramatically o Year 2015 • Customers default on amounts owed • Accounts receivable plummet • Bad debt expense increases dramatically • Measuring and recording estimated uncollectible accounts o Under the percentage of receivable basis, management estimates what percentage of receivables is likely to be uncollectible • This is the most common way to use a percentage of outstanding receivables • This can be assigned to receivables in total or stratified by the ages of receivables § Stratifying classifies customer balances by the length of time unpaid § Because of the time empha sis this is called aging the accounts receivable o If the number of outstanding is longer, the estimated percentage of uncollectible receivable increases o The amount of the bad debts adjusting entry is determined by calculating the difference between the required balance and the existing unadjusted balance in the allowance account o Bad debts expense is reported in the income statement as an operating expense • Writing off uncollectible accounts o There are many different ways for each company to collecting past -due accounts o The accounts should be written off and removed from the allowance since if it won't be collected • Many companies have million per year of bad debt o To prevent unauthorized write offs, each one should be formally approved in writing o Under the allowance method, every accounts receivable write off entry is debited to the allowance account and not to bad debts expense o The entry to record the write off of an uncollectible account reduces both accounts receivable and allowance for doubtful accounts • Collecting uncollectibl
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