Receivables Flashcards
When are receivables factored?
In the process of improving a company’s cashflow, AR can be factored for a fee. This is when the buyer protects the factor against losses(eg sales returns, disputed accounts). During this process an amount is withheld from the proceeds. When the receivables are factored without recourse, the factor assumes the risk of uncollectible accounts. To solve for this he net proceeds equals the factored receivables less the fee and factor’s holdback.
Under current expected credit loss CECL, how do record a credit loss?
Debit Allowance for credit losses (ie. contra-asset account) and credit A/R which is an asset.
Note since both of these accounts are asset accounts they would both offset, resulting in no change to total assets, since both accounts would decrease.
How do you solve for allowance for credit losses on a balance sheet?
On the T account you start with accounts write off & reversal of credit loss expense on your left then on the right start with BEGINNING BALANCE, ACCOUNTS RECOVERED, SOLVE FOR CREDIT LOSS EXPENSE which would give you your ending balance.
What is an increase in allowance means?
This indicates an additional credit losses and is reported as an expense.
What does a decrease in allowances for credit losses mean?
This indicates a decline in credit losses and is reported as a reversal of the credit loss expense.
How do you record a reinstated written off account?
Debit A/R which is an asset account then Credit allowance for credit losses.
This simply means both asset accounts would increase.
How do you record the collection of a previously written off account?
Debit Cash and credit A/R. By doing so this would increase cash and decrease A/R.
What are the two methods for recognizing credit loss(bad debt) expense?
Direct write off & Allowance method.
What is the direct write-off method?
This is required for tax reporting with credit loss expense only recognized when the account is deemed uncollectible, it does not use allowance for credit losses account and it’s reported value of receivables is reported at gross amount.
What is the allowance credit loss method?
It is required for financial reporting only, with credit loss expense recognized is estimated at the end of each period, it also uses allowance for credit losses account and it’s reported value of receivables is a net carrying value(simply receivables minus allowance).
How do you write off A/R?
A/R is written off as a debit(decrease) to allowance for credit losses & a credit (decrease) to A/R. By doing so this has no effect on the credit loss expense because only balance sheet accounts are used & it also has no effect on total current assets because the debit & credit to asset and contra-asset account are offsetting.
What is one important takeaway in Receivables?
A/R are increased for credit sales and reinstatement of accounts written-off, and decreased for collections (including cash from recoveries) and the write-off of uncollectible accounts. Credit losses are recorded in the allowance for credit losses, a contra-asset account.
What another key takeaway in receivables?
The allowance for credit losses is used to accumulate the estimate of expected credit losses. On each reporting date, the allowance is adjusted so the net carrying value of A/R equals what is expected to be collected. If an increase in the allowance is required, a credit loss expense is recognized in the income statement; if a decrease is required, a reversal of credit loss expense is reported.
