Chapter 8: Accounting for Receivables Flashcards
Name the three Accounting Issues with Account Receivables
- RECOGNIZING accounts receivables
- VALUING accounts receivables
- DISPOSING
Valuing Account Receivable
- Current Asset
- Valuation at NET REALIZABLE VALUE
Name the two Methods of Accounting for Uncollectible Accounts
- Direct Write Off
- Allowance Method
Accounting for Uncollectible Accounts
- Direct Write-Off Method for Uncollectible Accounts
- A company determines A PARTICULAR ACCOUNT (of a customer) to be uncollectible and writes it off
Problem:
- No Matching: Does NOT MATCH BED DEBT EXPENSE TO SALES REVENUE
- Companys often record BAD DEBT EXPENSE in a Period DIFFRENT FROM THE PERIOD IN WHICH THEY RECORDED REVENUE
- Receivalbes NOT stated at cash realizable value
- In the Statement of Financial Position it does NOT show the amount of Acc. Receivables the company actually expects to receive
- NOT acceptable for significant amounts for financial reporting
What is the Problem/Issue with the Direct Write-Off Method
Problem:
No Matching: Does NOT MATCH BED DEBT EXPENSE TO SALES REVENUE
- Companys often record BAD DEBT EXPENSE in a Period DIFFRENT FROM THE PERIOD IN WHICH THEY RECORDED REVENUE
- Receivalbes NOT stated at cash realizable value
- In the Statement of Financial Position it does NOT show the amount of Acc. Receivables the company actually expects to receive
- NOT acceptable for significant amounts for financial reporting
Allowance Method for Uncollectible Accounts
- Companies ESTIMATE uncollectible account receivables at the END OF EACH PERIOD
- Matches the Bad Debt Expense to Period in which the Revenues are recognized
Buchungslogik:
Name the two Methods of
Estimating the Allowance
Method 1: Percentage of Sales
Method 2: Percentage of Receivables
- Both Methods are acceptable
- The choice is a managment decision
Estimating the Allowance
Method 1: Percentage of Sales
- Estimate what percentage of CREDIT SALES will be uncollectible
- Emphazises matching of Expenses with Revenues
- Adjusting entry to record bad debt DISREGARDS the existing balance in Allowance for Doubtful Accounts
- This percentage is base on past experience and anticipated credit policy
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Estimating the Allowance Method
Method 2: Percentage of Receivables
- Managment establises a percentage relationship between the amount of receivables and expected losses from uncollectible accounts
- Using the Aging Schedule
- The calculated amount represents the REQUIRED BALANCE in the Allowance for Doubtfull Accounts at the period End
- Hence, the amount of bad debt adjusting entry is the diffrence between required balance and the existing balance in the account
Method 2: Percentage of Receivalbes
Adjusting Entry of Bad Debt
- Diffrence between the calcualted required balance and the existing balance in the allowance for doubtful accounts
Sonderfall: Allowance for doubful account DEBIT BALANCE
- Occurs when the write off during the year have exceeded previous provisions for bad debt
- Must ADD Debit Balance to the required Balance
Disposing of Account Receivalbes
Why ?
Companies sell receivables
- Shortens the Operating Cycle
- Billing and collection are often time-consuming and costly
- Receivables may be the only reasonable source of cash
- when money is thight, might not be able to borrow money the credit market
What is a “Factor”
- a Finance company or Bank
- Buys receivables from buisnesses and then collects the payment directly from the consumers
- Charges a commission to the company that is selling the receivables
- Fee 1-3% of the receivables purchased
Journalize the Sales of Receivables
Credit Card Sales
und Buchungssatz
- Record the same as a CASH SALES
- Retailer pays card issuer a fee of 2-6% for processing the transaction
Why do people analysis the Account Receivables of a Comapany ?
Inorder to Asses the liquidity of a companys account receivables
Account Receivable Turnover
- The ration measures the number of times on average, the company collect account receivables during the period
- The higher the turnover, the more liquid the companys receivables are
Average Collection Period in Days
- Measures how many Days it takes on average it takes to collect the account receivables
