Unit 2: Reconcile Accounts

This learning guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:
 Provide accurate responses to customers with any bills
 Carry out bill adjustments accurately to correct customer accounts
 Accept customer complaints
 Respond feedback to customers

Accurate Responses to Customers

To give accurate responses to customers you must proving the ledgers. To “prove” the ledgers;
 The total of the general ledger debit balances must equal the total of the general ledger
credit balances.
 The sum of the subsidiary ledger balances must equal the balance in the control account
(Account receivable GL balance). The proof of the postings from the sales journal to the
general and subsidiary ledger from previous transaction.
 All debit must equal with all credit in journal, all summation of debit in general ledger must
equal with all subsidiary ledgers are presented below:-

Practical 2.1 Proving the ledgers after posting the sales and the cash receipts journals Dr and Cr.

The proof of the equality of Kumarraa’s cash receipts journal is shown.

Practical 2.2. Proving the ledgers after posting the sales and the cash receipts journals

Practical 2.3 Cash payment and proving the ledgers after postings from the sales, cash receipts,
purchases, and cash payments journals

Practical 2.4 Proving the equality of the purchases journal

Billing adjustments

A receivable arises when a business sells goods or services to another party on account (on credit).
The receivable is the seller’s claim against the buyer for the amount of the transaction.

Receivables also occur when a business loans money to another party. A receivable is the right to
receive cash in the future from a current transaction. It is something the business owns; therefore, it is an
asset.

Each receivable transaction involves at least two parties:

1. The creditor sells goods or a service and obtains a receivable (an asset). The creditor will collect
cash from the customer.
2. The debtor is the party to a receivable transaction who takes on an obligation/ payable (a
liability). The debtor will pay cash later. This title focuses on accounting for receivables by the
seller (the creditor).

Types of Receivable
The three main types of receivable are:
 Accounts receivable
 Bills Receivable (Notes Receivable)
 Other receivables.

Accounts Receivable is the most common kind of receivable.

Accounts Receivable is amounts due from customers from the sale of services or merchandise on
credit. They are usually due in 30 – 60 days. They are classified on the Balance Sheet as current
assets.

Notes Receivable.

Notes Receivable can arise when the seller asks for a promissory note to replace an Accounts
Receivable when the customer requests additional time to pay a past-due account.

A promissory note is a written promise to pay a specific amount of money, usually including
interest, at a future date. If the note is due within a year it is classified as a current asset. If the note is
due after one year, it is classified as a long-term asset.

Other Receivables. Examples of other receivables are income tax refunds, interest receivable, or
receivables from employees.

Uncollectible Accounts Receivable

In order to help minimize credit losses, a company needs to be very careful and prudent in extending
credit. References and credit scores should be checked and credit worthiness needs to be established
before credit is granted. Once a receivable becomes past due, companies need to put forth great
efforts to collect it. The older a receivable gets, the less likely the chance of collection.

A business will usually have some customers that will not pay their debts. IFRS/ GAAP require that a
company estimate the amount of uncollectable receivables at the end of the accounting period and
record that amount as Bad Debt Expense.

Aging of Accounts Receivable - Balance Sheet approach - estimates bad debts by analyzing
individual accounts receivables according to the length of time they are past due.
Name of customer Number of days past due
1-30 31-60 61-90 Over 90
Abarra Ittiqa Comp 0 0 0 0
Zinbalew Comp. 0 0 0 0
Lammi comp 0 0 0 0
Daniel Company 0 0 0 0
Total of past due -- -- -- --
Total %Uncollectible 5% 20% 50% 80%
Total estimated percentage - - - -
uncollectible

Example of Aging Accounts Receivable

Total estimated bad debts for Company ($2,228) represent the amount of existing customer claims the
company expects will become uncollectible in the future.

This amount represents the required balance in Allowance for Doubtful Accounts at the balance
sheet date. The amount of the bad debt adjusting entry is the difference between the required balance
and the existing balance in the allowance account.

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the
company will make an adjusting entry for $1,700 ($2,228- $528), as shown here.

Dec. 31 Bad Debts Expense----------------------------------------- 1,700

Allowance for Doubtful Accounts ------------------------------------------1,700
(To adjust allowance account to total estimated uncollectible)

After the adjusting entry is posted, the accounts of the Dart Company will show:

Occasionally the allowance account will have a debit balance prior to adjustment. This occurs when
write-offs during the year have exceeded previous provisions for bad debts. In such a case the
company adds the debit balance to the required balance when it makes the adjusting entry. Thus, if
there had been a $500 debit balance in the allowance account before adjustment, the adjusting entry
would have been for $2,728 ($2,228 + $500) to arrive at a credit balance of $2,228. The percentage
of-receivables basis will normally result in the better approximation of cash realizable value.

Methods of Uncollectible Accounts

The Allowance Method

The amount estimated as uncollectible will be debited to a new operating expense called Bad Debts
Expense. The Bad Debts Expense will be recorded in an adjusting entry that debits Bad Debts
Expense and credits Allowance for Doubtful Accounts. The Allowance for Doubtful Accounts is a
contra asset account with a normal credit balance. It will offset the Accounts Receivable balance. The
presentation of Accounts Receivable and the Allowance for Doubtful Accounts on the balance sheet
is often reported as follows. Accounts Receivable 100,000 Allowance for Doubtful Accounts (1,000)
99,000 The $99,000 shown above is called the “realizable value” and estimates what the company
can realistically expect to collect from their account receivables. IFRS/ GAAP mandate that use the
Allowance Method of estimating uncollectible accounts receivable.

Direct Write off method is used by some smaller companies, because it is needed for tax purposes; it
is not acceptable under GAAP.

Most companies estimate their uncollectible accounts receivable using three approaches:

A. The percent of sales method

B. The percent of receivables method
C. The aging of receivables method

The percent of sales method

Under this method, the amount of the adjustment is calculated by multiplying a historical percent of
bad debts by the current year’s net credit sales. Although acceptable, this method is not as accurate as
the either the percentage of receivables method or the aging of receivables method. Example: A
company had net sales of $1,000,000. It is estimated that one percent of net sales are uncollectible.
The amount of the adjusting entry is $10,000 (1% * $1,000,000).

The adjusting entry recorded at the end of the accounting period is:-
Bad Debts Expense --------------------------------10,000
Allowance for Doubtful Accounts--------------------------------- 10,000

The percent of receivables method

The percent of receivables method assumes a given percent of a company’s receivables is

uncollectible. The desired amount of the Allowance for Doubtful Accounts is calculated by
multiplying Accounts Receivable by this percent. The Allowance for Doubtful Accounts is this
adjusted so that it equals this desired amount. Example: The balance of Accounts Receivable is
$100,000, and it is estimated that 5% of accounts are uncollectible. The balance of the Allowance for
Doubtful Accounts, before adjustment, is $2,000 (credit). The desired balance of the Allowance for
Doubtful Accounts would be $5,000 ($100,000 * 5%). Since the balance of the Allowance for
Doubtful Accounts is now only $2,000, a $3,000 adjustment is required, as follows.

Bad Debts Expense------------------------------- 3,000

Allowance for Doubtful Accounts-------------------------3,000

The Aging of Receivables Method

Most companies have an aging of customers’ accounts receivable. In this aging report, each customer
balance is classified by how long it is past due. Based on this aging, experience is used to estimate the
percent of each aging total. Older past due receivables will be more likely uncollectible. Once the
total uncollectible amount is estimated, an adjusting entry is made to increase the Allowance for
Doubtful Accounts so that its balance equals the uncollectible estimate calculated by using the aging
report.

Example: Based on its aging report, a company estimates its uncollectible accounts receivable to be
$6,000. The current balance in the Allowance for Doubtful Accounts is $1,000 (credit). An adjusting
entry of $5,000 ($6,000 desired less $1,000 balance before adjustment) would be recorded as follows.

Bad Debts Expense --------------------------------------------5,000

Allowance for Doubtful Accounts -----------------------------------------5,000

Writing off a Bad Debt

Strict internal control procedures should be used when writing off an account that is no longer
deemed collectible. We will discuss these in class. For example, the entry to write off the $500
balance owed by Motuma Company is

Allowance for Doubtful Accounts --------------------------500

Accounts Receivable- Motumma Company -------------------------------------500
Collection of a bad debt previously written off

If a company collects an accounts receivable balance previously written off, two entries are required.
The first entry reverses the write off. The second entry records the cash receipt on account. For
example, assume Lellisaa Company pays its $350 account previously written off, the following
entries would be recorded.

Accounts Receivable-Lee Company------------------------------ 350

Allowance for Doubtful Accounts---------------------------------- 350
Cash --------------------------------------------350
Accounts Receivable-Lellisa Company--------------------------------- 350
Notes Receivable
Notes Receivable can arise when the seller asks for a promissory note to replace an Accounts
Receivable when the customer requests additional time to pay a past-due account. A promissory note
is a written promise to pay a specific amount of money, usually including interest, at a future date.

The journal entries required are:

 Converting an accounts receivable to a note receivable

 Recording an adjusting entry for interest receivable at the end of the accounting period
 Recording receipt of note payment and interest when due
 Recording a dishonored note

Managing Receivables
Managing accounts receivable involves five steps:
1. Determine to whom to extend credit.
2. Establish a payment period.
3. Monitor collections.
4. Evaluate the liquidity of receivables.
5. Accelerate cash receipts from receivables when necessary.

Notes Receivable

A promissory note is a written promise to pay a specified amount of money on demand or at a

definite time. A promissory note (note receivable) is a written promise to pay specified
amount money either on demand or at a definite future date. Promissory notes are used
in many transactions, including
 Paying for products and services
 In the lending and borrowing of money and
 To pay for account receivables
Note contains the following parts:
1. Date – the date of the note
2. Time – the length of time between the date the note is issued and the (period) date
it is due for payment (note’s life span)
3. Payee – the party to whom payment will be made
4. Principal (Face value) - the stated amount of the note
5. Maker – the party promising to make payment,
6. Interest – the charge imposed on the borrower of funds for the use of money
7. Due date – the day the note will be due
The note that is paid in full at its maturity date is called honored note.
A Dishonored Note: When a note’s maker is unable or refuses to pay at maturity, the note
is dishonored.
Computing Maturity Date and Interest

The maturity date is the date repayment of the note is due. The interest charged to the issuer of the
note is a cost of borrowing money for the borrower. We should learn to calculate both. For example,
assume a $1,000, 6%, 90-day note was issued on July 15. The maturity date would be October 13, as
follows:

July (31 days in July minus 15, the date of the note) ------------------- 16
August ------------------------------------------------------------------------- 31
September -------------------------------------------------------------------- 30
October ------------------------------------------------------------------------ 13
Period of the note, in days ------------------------------------------------ 90

To compute interest, multiply the principal of the note by its interest rate and the time factor. For
example, the interest due on the note receivable above is $15, calculated as follows:

$1,000 * 6% * 90/ 360 = $15

To remind that in notes receivable there are two parties involved. The one to whose order the note is
payable (the holder or the receiver of the note) is called the payee (the seller); and the one making the
promise/ issuer of the note or the buyer is called the maker.
Due Date: is the date at which the note is retired or paid. It is also called the maturity date.
Issuance date: is the date at which the note is written or issued.
Maturity value: is the amount that is due at the maturity or due date.
Maturity value = Principal + interest
Types: There are two types of notes. Interest bearing (Interest = Principal * Rate of interest *
Time) the time period can be expressed in terms of days, months or weeks; and non-interest bearing
which has no interest on it but other indirect charges may be there.

To illustrate the above characteristics consider the following examples:

a. Br. 10,000, 10% interest, 120 days note dated March 16.
b. Br. 12,000, 10% interest, 4 months note dated June 5.
Required: Calculate the interest, the maturity value and determine the due date of each note.

Solution:

a) Interest = Principal * Rate * Time

= Br.10, 000 *10% * 120/ 360 days

= Br.333.30

Maturity value = Principal + Interest

= Br.10, 000 + 333.33 = Br.10, 333.33
Due date: Term of the note................................................................. 120 days
Days in March ........................ ............... 31
Less: Term date (issuance date) 16 15
105 days
Days in April ......................... 30
Days in May ........................... 31
Days in June ........................... 30
Total 91 days
The due date is July 14
Br. 12,000, 10% interest, 4 months note dated June 5.
I =P*R*T
= 12,000 * 12% * 4/12 months
= Br. 480
Maturity value = P + I
= Br. 12,000 + Br. 480 = Br. 12,480
Due date: Therefore, the due date is October 5.
Journal entry

Example:
Assume that the account of XXX Enterprise, which has a balance of Br.9,200, is past due
(delinquent). A 90 -day non-interest bearing note for that amount dated May 16,1990, is accepted in
settlement of the account. The notes receivable is recorded at its face value and the entry to record the
transaction is as follows.
May 16. Notes Receivable ................................ 9200
Accounts Receivable ....................... 9200
When the amount is collected on the due date (August 14)
Cash ........................................ 9200
Notes Receivable .............. 9200

Responding Customer Complaints

A complaint is an expression of dissatisfaction made to an organization, related to its product or

service, or the complaints-handling process itself, where a response or resolution is explicitly or
implicitly expected. Complaints can be made in relation to other processes where the organization
interacts with the customer. Managing complaints is more than simply making individual customers
happy by addressing their problems.
Complaints resolution is based on:
 Customer complaints are recognized as a tool to address shortcomings, if any.
 Customers are treated fairly and to the highest professional standards at all times.
 Complaints raised by customers are dealt efficiently and with utmost courtesy.
 Customers are fully informed of avenues to escalate their complaints/grievances within the
organization and their rights to alternative remedy, if they are not fully satisfied with the
response of the business to their complaints.
 The organization employees must work in good faith and without prejudice to the interests of
the customer to minimize complaints.

Responding to complaints

Responsiveness: Complaints are acknowledged in a timely manner, addressed promptly and

according to order of urgency, and the complainant is kept informed throughout the process.

Objectivity and fairness: Complaints are dealt with in an equitable, objective and unbiased manner.
This will help to ensure that the complaint handling process is fair and reasonable. Unreasonable
complainant conduct is not allowed to become a burden.
Confidentiality: The personal information of the complainant and any people who are the subject of
a complaint should be kept confidential and only used for the purposes of addressing the complaint
and any follow up actions.

Review: There should be an independent internal review or appeal process. Details of external rights
of review or appeal for unresolved complaints should be made available to complainants.

Feedback to Customers

Procedure for handling customer complaints:

 Provide customers with the opportunity to complain.

 Give customers your full and undivided attention.
 .Listen respectfully.
 Agree that a problem exists; never disagree or argue.
 Apologize.
 Resolve the complaint. These are very important for customer complaint.

Thank the customer for bringing the complaint to your attention. Determine how well your
organization does in handling complaints effectively. Use your answers to determine where you
need to improve your customer complaint procedure.