Receivables

Question 1

Accounts Receivable

Answer 1

relates to all accounts for which a business expects to receive money in the near future

Question 2

Bills Receivable

Answer 2

sometimes credit is granted only on receipt of a formal legal instrument such as a bill of exchange or a promissory note

Question 3

Bill of Exchange

Answer 3

a written order made by a debtor to pay a certain amount of money on a predetermined date in the future

Question 4

Promissory Note

Answer 4

a written promise made by a debtor to pay a certain amount of money on a predetermined date in the future

Question 5

Other Receivables

Answer 5

loans to directors

managers and employees of the business entity

interest and rent receivable

amounts receivable as a result of the sale of non‐current assets

short‐term deposits

Question 6

Recognition of Accounts Receivable

Answer 6

for an entity providing services, accounts receivable are recognised when services are provided and invoices issued to cover amount owing

for entities concerned with wholesaling and retailing goods, accounts receivable are recognised at the time of sale, evidenced by the issue of invoices detailing the amounts owing for the goods

Question 7

Valuation of Accounts Receivable

Answer 7

the valuation of receivables becomes an important issue, since 100% will not normally be collected, known as bad debts

Question 8

Allowance for Bad Debts

Answer 8

an estimate is made of the amount of accounts receivable expected to be uncollectable

an adjusting entry is prepared with a debit to the Bad Debts Expense account and a credit to an account called Allowance for Doubtful Debts

Question 9

Allowance for Doubtful Debts

Answer 9

any debit or credit to the Accounts Receivable Control account requires a like debit or credit to one or more of the subsidiary ledger accounts

Question 10

Estimating Doubtful Debts

Answer 10

based on a combination of past experience and forecasts of future economic and business conditions, with considerable personal judgement involved

the goal is to produce a reasonable estimate of the amount of accounts receivable that will be collected eventually in cash

Question 11

Estimation - Percentage of Net Credit Sales Method

Answer 11

credit sales produce the accounts receivable that may become bad debts in the future

Question 12

Estimation - Ageing of Accounts Receivable Method

Answer 12

the estimate is derived from a schedule that analyses and classifies accounts receivable by age

past accounting records are therefore analysed to determine the approximate percentage of each age group that will become bad debts

Question 13

Writing Off Bad Debts

Answer 13

debit the Allowance for Doubtful Debts account

debit GST Payable

credit Accounts Receivable Control

adjustment note complying with GST legislative requirements must be issued

credit the related account in the accounts receivable subsidiary ledger

Question 14

Recover of an Account Written Off

Answer 14

the account receivable should be re‐established in the accounts in order to maintain a complete history of the customer’s activity

Question 15

Direct Write Off Method

Answer 15

no allowance is made for expected bad debts and only actual bad debts are charged to expense at the time an account is determined to be uncollectable

debit Bad Debts Expense and credit Accounts Receivable Control and the appropriate account in the subsidiary ledger

Question 16

Credit Policies

Answer 16

if the customer is a business entity, the credit department normally requests a set of its audited financial statements for use in judging its ability to pay

if the customer is an individual, the credit department asks for information about current earnings, current expenses, outstanding debts, general financial position and past experiences in handling obligations

Question 17

Monitoring Credit Policies

Answer 17

ageing analysis of receivables
- one method used to gauge the age of individual customers’ balances, and identify those accounts which require the attention of the credit department

calculating appropriate ratios
- management can also make use of ratios to assess credit control performance

Question 18

Ratios

Answer 18

receivables turnover

average collection period

Question 19

Internal Control of Accounts Receivable

Answer 19

people who maintain the accounts receivable records should not have access to cash receipts

recordings should be authorised by a responsible officer and separated from the cash receipts and cash payments functions

slow‐paying accounts should be reviewed periodically by a senior official of the business

Question 20

Disposal of Accounts Receivable

Answer 20

sale

use of credit cards

use of debit cards