Receivables

Chapter 7
Objectives

Summarise and provide examples of internal control

procedures that apply to receivables

Describe the nature of and the accounting for bad debts and
doubtful debts
Contents

Classification of Receivables

Internal Control of Receivables

Uncollectible Receivables

Allowance Method

Direct Write-off Method

Classification of
Receivables

Receivables = money owing to the business by

other entities

➢Account Receivable
➢Notes Receivable
➢Other Receivable
 • Result from selling goods or providing
Account services on credit

Receivables • Normally collected within a short period

such as 30 or 60 days
Notes Receivable
• Amounts that customers owe, for which a
formal written agreement has been issued
• Interest is required

• Note Receivable and Accounts Receivable are

sometimes called Trade Receivables
Other Receivables

• Shown separately on the balance sheet

• Include interest receivable and receivables
from employees
Explain how companies recognize accounts receivable.

Amounts due from individuals and other companies that are

expected to be collected in cash.

Amounts owed by Written promise for Nontrade receivables

customers on amounts to be such as interest,
account that result received. Normally loans to officers,
from the sale of requires the advances to
goods and collection of employees, and
services. interest. income taxes.

Accounts Notes Other

Receivable Receivable Receivables
 Internal Control of Receivables

Customer
P
O Payment
Credit
Approval
Goods
or Collecting
Service Invoice
s

Sales Receipt
Notes

Accounting

Information flow in a business for sale activities

 Segregation of duties (employee
responsible for sales and employee doing
the accounting for the receivables)

Approving credit
Internal
Control of
Receivables Reconciliation frequently (Receivables
outstanding and receipt notes)

Collecting policy
 Sometimes, receivables will not
be (or cannot be) collected

Uncollectible These amounts can be limited by

the credit-granting function
Receivables
When receivables become
uncollectible, outstanding
receivables balances will be
converted into expense
 ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
 Bad debt: confirmed uncollectible receivables

Doubtful debt: potential bad debts

Uncollectible
Receivables Under prudence principle, expected losses to be
recognised in the accounting books as soon as
possible.

These losses will be recorded through:

allowance method or direct write-off method
 Allowance method
• Estimates the expense for uncollectible receivables even before the account is
confirmed to be worthless.
• Company need to open an Allowance for Doubtful Debt account because:
• This amount is an estimation
• This amount cannot be credited (decrease) to specific customer

• This account is a contra asset account

Dr Doubtful Debts Expense :

Cr Allowance for Doubtful Debts:
 Example 1
• Example 1: At the year 20x0, company A’s receivable balance is $10,000 (made of from
some customers and this amount is past due). Company estimates that 5% of this balance
will become worthless. What is the accounting treatment for this estimation?

• Example 2: At the year 20x1, company A’s receivable balance is $15,000 (made of from
some customers and this amount is past due).

Case 1: Company estimates that 5% of this balance will become worthless. What is
the accounting treatment for this estimation?

Case 2: Company estimates that 2% of this balance will become worthless. What is
the accounting treatment for this estimation?
Ex: At the year 20x0, company A’s receivable balance is $10,000 (made of from some customers
and this amount is past due). Company estimates that 5% of this balance will become
worthless. What is the accounting treatment for this estimation?
Dr Doubtful Debts Expense : $500
Cr Allowance for Doubtful Debts: $500
20x1:
Case1: 5%x15,000 = $750 > $500(20x0)
Dr Doubtful Debts Expense : $250
Cr Allowance for Doubtful Debts: $250
Case2: 2x15,000 = $300 < $500 (20x0)
Dr Allowance for Doubtful Debts : $200
Cr Doubtful Debts Expense : $200
 What happen when bad debts arise after the
allowance for doubtful debts was set up?
Allowance
method What happen when a company collects
from a customer after it has written off the account
as uncollectible
Estimates the expense for uncollectible receivables even before the account is
confirmed to be worthless.
Dr Doubtful Debts Expense :
Cr Allowance for Doubtful Debts:
When bad debts arise:
Case 1: after the allowance for doubtful debts was set up (<100%)
Dr Allowance for Doubtful Debts: (allowance was set up)
Dr bad debts expense (% AR was not set sup allowance)
Cr Account Receivable:
Case 2: after the allowance for doubtful debts was set up (100%)
Dr Allowance for Doubtful Debts:
Cr Account Receivable:
Case 3: when the allowance for doubtful debts was not set up
Dr bad debts expense:
Cr Account Receivable:
Ex: At the year 20x0, company A’s receivable balance is $10,000 (made of from some customers
and this amount is past due). Company estimates that 5% of this balance will become worthless.
What is the accounting treatment for this estimation?
Dr Doubtful Debts Expense : $500
Cr Allowance for Doubtful Debts: $500
At the year 20x1, company A decides to write off this past due receivable. What is the accounting
treatment for this estimation?
Dr Allowance for Doubtful Debts: $500
Dr Bad debts expenses: $9,500 (phần chưa lập allowance)
Cr Account receivables: $10,000

Ex2: At the year 20x1, company A decides to write off the past due receivable ($10,000 which
is not set up for doubtful debts) . What is the accounting treatment for this estimation?

Dr Bad debts expense 10,000

Cr AR 10,000
1. At the year end 20x0, company A’s receivable balance is $9,000 (made of from some customers and
this amount is past due). Company estimates that 10% of this balance will become worthless.
2. At the year end 20x1, company A’s receivable balance is $10,000 (made of from some customers and
this amount is past due). Company estimates that 10% of this balance will become worthless. Given that
the beginning balance of allowance for doubtful debts is $800.
3. At the year end 20x1, company A’s receivable balance is $20,000 (made of from some customers and
this amount is past due). Company estimates that 10% of this balance will become worthless. Given that
the beginning balance of allowance for doubtful debts is $2,300.
4. On 5th July 20x1, company A wrote off the past due receivable ($5,000 which is set up 100% for doubtful
debts).
5. On 5th July 20x1, company A wrote off the past due receivable ($5,000 which is not set up for doubtful
debts).
6. On 5th June 20x1, company A wrote off the past due receivable ($5,000 which is set up 60% for doubtful
debts).
 Direct write-off method
• Recognises the expense only when accounts are confirmed to
be worthless

• An allowance account is not needed. Company will directly

write-off the bad debts to an expense account

• This method is used when uncollectible amount is impossible

to estimate and small
Dr Bad debts expense
Cr Account Receivables
 NOTES RECEIVABLE

Companies may grant credit in exchange for a promissory note. A promissory note is a
written promise to pay a specified amount of money on demand or at a definite time.

Promissory notes may be used

1. when individuals and companies lend or borrow money,

2. when amount of transaction and credit period exceed normal limits, or

3. in settlement of accounts receivable.

 Notes Receivable

To the Payee, the promissory note is a note receivable.

To the Maker, the promissory note is a note payable.

LO 3
Notes Receivable

Determining the Maturity Date

Note expressed in terms of
◆ Months
◆ Days

Computing Interest Illustration 8-14

Formula for
computing interest
Notes Receivable

Computing Interest
When counting days, omit the date the note is issued,
but include the due date.
Illustration 8-15

Helpful Hint
The interest rate specified
is the annual rate.
Recognizing Notes Receivable

Illustration: Calhoun Company wrote a $1,000, two-month, 12%

promissory note dated May 1, to settle an open account. Prepare
entry would Wilma Company makes for the receipt of the note.

May 1 Notes Receivable 1,000

Accounts Receivable 1,000
Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 6% note
dated May 10 in settlement of Leonard’s overdue account. (a) What
is the maturity date of the note? (b) What is the interest payable at
the maturity date?
THANK YOU