(7) Reporting and analysing Cash & Receivables Flashcards
What are the 2 methods used to account for uncolletable amounts?
- Direct write-off method
2. Allowance method
Prepare a journal entry using the direct-write off method to write-off an uncollectable amount of $450.
DR Bad debts expense 450
CR Accounts receivable 450
Prepare a journal entry using the allowance method to write-off an uncollectable amount of $450.
DR Allowance for doubtful debts 450
CR Accounts receivable 450
What methods are used for estimating the doubtful debts allowance?
- Percentage of Net Sales method
2. Ageing of Total Receivables method
What kind of account is the Allowance for Doubtful Debts?
Contra-asset account
Equation for calculating Allowance for Doubtful Debts closing balance.
AFDD closing balance = AFDD opening balance + bad debts recovered + bad debts expense - bad debts written off
How do you calculate bad debts expense using the Ageing of Total Receivables method?
- Calculate the Allowance for Doubtful Debts closing balance
- Use the following equation to calculate bad debts expense:
AFDD closing balance = AFDD opening balance + bad debts recovered + bad debts expense - bad debts written off
How do you calculate bad debts expense using the Percentage of Net Sales method?
Bad debts expense = % of net credit sales
On April 11, 2019, $800 was received from J.Holloway; whose account of $800 had been written off as uncollectible in 2018.
Prepare a journal entry for the above transaction.
DR Accounts receivable - J. Holloway 800
CR Allowance for doubtful debts 800
(to record write-off for J. Holloway)
DR Cash at bank 800
CR Accounts receivable - J. Holloway 800
(to record cash receipts)
On Sept 8, 2019, Accounts Receivable-D. Draper $9,900 was written off as uncollectible.
Prepare a journal entry for the above transaction.
DR Allowance for doubtful debts 9,900
CR Accounts receivable - D. Draper 9,900
What is a dishonoured cheque?
A dishonoured cheque is a cheque is not paid by the bank because of insufficient funds in the payer’s bank account or because it has been cancelled by the payer.
What does the receivables turnover measure?
Liquidity of receivables
What is the receivables turnover formula?
Receivables turnover
= net credit sales / average net receivable
Unit: times per year
What is a dishonoured cheque?
A dishonoured cheque occurs when the bank on which the cheque is drawn refuses to pay the cheque, because it has been cancelled or because the balance of the account on which
it is drawn is less than the amount of the cheque.
What does the receivables turnover measure?
Liquidity of receivables
What is the receivables turnover formula?
Receivables turnover
= net credit sales / average net receivable
What is the average collection period formula?
Average collection period
= 365 / receivables turnover
Unit: days
What is the credit risk ratio formula?
Credit risk ratio
= allowance for doubtful debts / accounts receivable
(Expressed in percentage)
Journal entries for dishonoured cheque
Hint: journalise the original transaction then ‘reverse’ the original transaction
DR Cash
CR Accounts receivable
(original transaction)
DR Accounts receivable
CR Cash
(to record when a cheque is bounced)
How is accounts receivable reported under the allowance method?
Accounts receivable is reported at the NET amount on the statement of financial position
Reported like:
Accounts receivable X
Less: Allowance for doubtful debts X (net amount)
What is the difference between the direct write-off method and the allowance method?
Hint: net realisable value
Direct write-off method:
- net realisable value = accounts receivable amount
Allowance method:
- net realisable value = accounts receivable amount less allowance for doubtful debts
——————————————————————————–
Another difference is that the allowance method uses the allowance for doubtful debts
Journal entries for dishonoured cheque
Hint: journalise the original transaction then ‘reverse’ the original transaction
DR Cash
CR Accounts receivable
DR Accounts receivable
CR Cash
(to record when a cheque is bounced)
3 differences between a/c receivable and notes receivable
Accounts receivable:
- to be collected within 30-60 days (more liquid)
- less formal
- not interest bearing
Notes receivable:
- to be collected within 60-90 days or longer (less liquid)
- more formal
- interest bearing
What are the 3 accounting problems associated with a/c receivable?
- recognising accounts receivable
- valuing accounts receivable
- accelerating cash receipts from receivables
Where are amounts owed by customers recognised in?
- a/c receivable control account (general ledger)
- a/c receivable subsidiary ledger
- initially recognised when the sale occurs (or service is provided) at invoice amount (less sales R&A)
At initial recognition, an entity shall measure trade receivables at….
…. at their transaction price
this means that expectations of collectability are NOT considered at this point
What is a financial instrument?
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
An entity shall always measure the loss allowance at … ?
… at an amount equal to lifetime expected credit losses for trade receivables or contract assets that result from transactions that are within the scope of AASB
How are receivables reported?
- receivables due within 12 months or entity’s operating cycle are included in the current asset section
- notes to the financial statements shows accounting policy and breakdown of receivables including face value and allowance write-down
How do we manage receivables?
- Extending credit
- a firm needs to be careful that it does not end up with risky customers as a result of extending its credit policy who cannot, or will not, pay their debt - Establishing a payment period
- the payment period should be consistent with that of the firm’s competitors - Monitoring collections
- credit risk ratio: measure of the risk that customers may not pay their accounts
- the lower the ratio, the better - Evaluating the receivables balance
- receivables turnover and average collection period: number of times on average receivables are collected and times converted to days - Accelerating cash receipts
- offer incentives for prompt payment (settlement discounts)
- on-sale of receivables (factoring): fast source of cash, to reduce cost of invoicing and collection
- use of credit card sales: increase sales without bad debts
Credit risk ratio formula
Credit risk ratio = allowance for doubtful debts / accounts receivable
Receivables turnover formula
Receivables turnover = net credit sales / average net receivables
Average collection period formula
Average collection period = 365 / receivables turnover
What is a note receivable?
- A note receivable is a formal credit instrument and gives the holder a more expedient legal claim to assets than accounts receivable.
- It does not always arise from transactions with customers.
- It may be accepted from customers who need to extend payment of outstanding account receivable or are considered high risk
- Mainly originate from lending transactions
- Included as an asset in the financial statements
Journal entry for notes receivable recognition.
Hint: Notes receivable - an account receivable requests more time to pay
DR Notes Receivable
CR A/c Receivable
Journal entry for honouring notes receivable (paid in full at maturity).
DR Cash
CR Interest Income
CR Notes Receivable
How is a dishonoured cheque treated in the bank reconciliation?
It reduces the balance of the bank account reported on the bank statement. The
dishonoured cheque should be recorded in the Cash at Bank account. It does not appear in the bank reconciliation statement.
Will a dishonoured cheque require an adjusting entry in the business’s records?
A dishonoured cheque should be entered into the cash receipts as a reduction in cash
receipts. The adjusting entry in the company’s ledger accounts is a debit to Accounts
Receivable and a credit to Cash.
Adjusting entry:
DR A/c Receivable
CR Cash
