3. accting for receivables

Question 1

what are the different types of receivables?

Answer 1

• acct receivable
• notes receivable
• other receivable

Question 2

what is acct receivable?

Answer 2

are amounts owed to the business

by customers on account

Question 3

what is notes receivable?

Answer 3

are amounts owed to the business for which formal instruments of credit are issued evidencing the debt.

Question 4

what is other receivables?

Answer 4

include non-trade receivables such as interest receivable, loans, advances, etc.

Question 5

how are receivables reported in financial statements?

Answer 5

Classified as current and non-current.

Receivables due within 12 months or entity’s operating cycle included in current asset section of statement of financial position.

Notes to the financial statements shows accounting policy and breakdown of receivables including face value and allowance/impairment write-down.

Question 6

what are acct receivables in most firms?

Answer 6

most significant receivables

Question 7

Three accounting issues associated with accounts receivable are:

Answer 7

• recognising accounts receivable
• valuing accounts receivable
• accelerating cash receipts from receivables

Question 8

Valuing accounts receivable:

bad debts occur when?

Answer 8

customer fails to pay an account

when customers default on loans and AR plummets

Question 9

Valuing accounts receivable

2 methods:

Answer 9

1. direct write-off method

2. allowance method for uncollected accounts

Question 10

what is direct write-off method?

Answer 10

• Bad debts expense is recognised when the uncollectable account is specifically identified and written off.
• Receivables are reported at gross amount.
• This method reduces the usefulness of financial statements if bad debts
are material.
[dr bad debts expense; cr AR]

Question 11

what is allowance method for uncollectable accounts?

Answer 11

• Receivables reported at their NRV.(Net realizable value)
• Receivables reduced by estimated uncollectable receivables.
• This method provides a more accurate picture as to the amount of accounts receivable expected to be collectable at the end of the reporting period.

Question 12

journal entries:

estimated uncollectables:

Answer 12

dr Bad debts expense

cr Allowance for DD

Question 13

journal entries:

actual uncollectables

Answer 13

dr Allowance for DD

cr AR

Question 14

how to manage receivables?

Answer 14

• determine to whom to extend credit
• establish a payment period
• monitor collections
• evaluate the receivables balance (uncollected receivables vs cash)
• accelerate cash receipts from receivables.

Question 15

What is the weakness of the direct write-off method of reporting bad debts expense?

Answer 15

Under the direct write-off method, accounts receivable are overstated because future estimated write-offs are not anticipated—write-offs are journalised as they occur. In contrast, under the allowance method, anticipated write-offs are estimated and reduce the ending accounts receivable balance. The resulting estimated balance of accounts receivable then represents the best estimate of the cash flows expected to be derived from the receivable.

Question 16

the direct write-off method or the allowance method? How can you tell?

Answer 16

allowance method if balance of allowance of doubtful debt given (would not exist in direct-write off method.)