Accounts Receivable & Notes receivable Flashcards
Accounts receivable: Definition
Accounts Receivable represents amounts that are owed to a company by customers for goods or services that have been delivered or used but not yet paid for.
Discount on sales
-Trade Discounts
* Trade discounts are not recorded in books
* Sales and Accounts Receivable are recorded net of trade discounts
Cash discounts
* Cash discounts are recorded in books
* Sales and Accounts receivable can be recorded as gross or net of cash discounts.
Gross method= Assumption: Customers will not take the cash discount
Net Method= Assumption: Customers will take the cash discount.
Bad Debts (Allowance for uncollectible) (GAAP)
- Bad debts refer to Accounts receivable that a company has determined to be uncollectible.
- as per accounting principle of conservatism or prudence, bad debts or uncollectible are recorded under the allowance method.
Calculation of Bad Debt Expense: Percentage of Accounts Receivables Method
- The allowance is calculated based on a specific percentage of the total accounts receivables.
- This percentage is often determined by analyzing historical data on uncollected accounts and the current economic conditions.
- Allowance for Uncollectible Receivables is recorded using the percentage of accounts receivable method as follows:
Step #1- estimate Uncollectible percentage
Step #2- Calculate the ending balance of allowance for uncollectible
Ending Balance of allowance= Estimated uncollectible percentage * ending balance of AR
Step 3- Calculate Bad Debt Expense
Bad Debt Expense = ending balance of allowance- opening balance of allowance
Calculation of bad debt expense: Accounts Receivable Aging method
Accounts receivable (AR) aging method is a more detailed approach to estimating the allowance for uncollectible receivables.
Step 1- Classify receivables by Age
Step 2- Apply Different Percentages
Step 3- Calculate the ending balance of allowance for uncollectible
Step #4
Calculate Bad debt expense
* Bad Debt Expense= ending balance of allowance- opening balance of allowance.
Accounts Receivable: Accounting: journal Entry
Journal Entry
Accounts Receivable Debit
Sales Credit
Journal Entry: Estimated Bad Debt Expense
Bad Debt Expense (IS) Debit
Allowance for uncollectible (BS) Credit
Journal Entry: Cash Collection
Cash Debit
Accounts Receivable Credit
Journal Entry: Bad Debt Write-off
Allowance for Uncollectible Debit
Accounts Receivable Credit
Bad Debt Recovery
Accounts Receivable Debit
Allowance for Uncollectible Credit
Cash Debit
Accounts Receivable Credit
Accounts Receivable: Accounting: Ledger Accounts
Accounts Receivable T Accounts
Look at the ninja cards
Accounts Receivable: Accounting: Income Statement Presentation
Sales
Less: Cost of Good Sold
=Gross Profit
Less Operating Expense
Bad Debt Expense (xx)
=Operating Profit
less: Interest Expense
Less: Income Taxes
= Net Income
Accounts Receivable: Accounting: Balance Sheet Presentation
Under Asset section
Current Assets
A/R
less: Allowance for Uncollectible
= Accounts Receivable, NET
Bad Debts (Direct write-off Method) ( non GAAP) (TAX)
- Under the Direct-Write off method, A/R that is deemed to be uncollectible are directly written off as an expense as the time when they are determined to be uncollectible.
- This method is used primarily tor Tax purposes and is not in accordance with GAAP
Write-off: Reported as business expense in Schedule C of 1040 or form 1120.
Recovery: Recorded as business income in schedule C or 1040 or form 1120
Nots Receivable
- Notes receivable refers to a written promise to receive a specific amount of money at a future date or on demand.
- Notes Receivable is considered an asset and is recorded on the Balance Sheet of the entity that is to receive the payment.
- Classification of Notes: Current Vs. Non-Current
- Current Assets
- Notes Receivable that are due to be collected within one year or operating cycle whichever is longer from the balance sheet date are classified as current assets.
- Non Current Assets
- Notes Receivable that are due to be collected after one year or operating cycle whichever is longer from the balance sheet date are classified as non-current assets.
- Interest- bearing notes vs. Non-interest bearing notes.
- Interest bearing notes
Interest rate= Market rate
Present Value= Face value
Non-interest bearing notes
Interest rate < Market Rate
Present Value< Face Value
Discount on Notes Receivable
Journal Entry: Non-interest bearing notes
-Issue of Notes Receivable
Note Receivable Debit
Discount on Notes Receivable Credit
Sales Credit
-Amortization of discount on Notes Receivable
Interest Income= Carrying Value * Interest rate
Interest Received
Amortization
Carrying Value (opening Carrying Value + amortization)
Journal Entry: Interest Income (non-interest bearing)
Discount no Notes Receivable Debit
Interest Income Credit
-Redemption of Notes
Cash Debit
Notes Receivable Credit
Journal Entries: Interest bearing notes
Issue of Notes Receivable
Notes Receivable Debit
Sales Credit
Interest on Notes Receiavble
Cash or Interest Receivable Debit
Interest income Credit
Redemption of Notes
Cash Debit
Notes Receivable Credit
Interest Receivable Credit
Pledging
- Pledging Accounts Receivable as collateral is a financing arrangement where a company uses its receivables as security for a loan.
Loan
Cash Debit
Loans Payable Credit
- Pledging
- No Journal entry to record the pledging on disclosure
- Disclosure
Assignment
-Assigning Accounts Receivable is a financing arrangement where a company borrows cash by agreeing to use the proceeds from the receivables to pay off the loan.
Cash Debit
Loans Payable Credit
Assignment
Accounts Receivable- Assigned Debit
Accounts Receivable Credit
Disclosure
