Receivables Flashcards
Receivables are recorded at what
Net realizable value
Accounts Receivable
The amount of cash the company expects to actually collect.
Items that reduce AR
Sales Discounts
Sales Returns
Non-collectible amounts
Gross Method
When AR is recorded, the gross amount is shown along with a journal entry for the discount.
Net Method
AR is recorded with the discount already factored in.
Uncollectible AR
There has to be some estimate of AR that won’t be collected, because realistically not all AR will be collected.
Direct Write-off method
Doesn’t conform to GAAP and is rarely used
When the account becomes uncollectible, it is written off to bad debt expense and AR is reduced by the same amount.
Example:
Bad debt Expense
Accounts Receivable
Allowance method
The allowance is a contra account to AR, so it has a credit balance. The idea is that an allowance amount is set for the year, (it’s an estimate), and when bad debt is actually written off, the allowance is debuted (lowered). Then, to get the allowance back where management wants it, it is credited, and that credit’s debit side is bad debt expense.
Journal Entries for Allowance method
To write-off uncollectible debt:
Allowance for doubtful accounts
Accounts Receivable
To bring the allowance account back to where it needs to be:
Bad debt expense
Allowance for doubtful accounts
Income Statement approach
This approach estimates bad debt as a % of sales and it directly calculates the amount of bad debt expense.
Balance Sheet approach
This approach estimates bad debt allowance as a % of AR instead of sales, and it directly calculates the ending balance of the allowance account.
Factoring Receivables
The company is selling their receivables at a discount in exchange for cash but depending on the specifics of the transaction, it will either be considered a loan or a sale of the receivables.
3 criteria for determining if a transfer of receivables is considered a loan or a sale
- The transferred receivables are not accessible by the company or its creditors (control is given up)
- The transferee has the right to sell or pledge the receivables
- There’s no agreement that lets the company keep control of the receivables
Secured Borrowing
If the receivables are transferred but the transferree doesn’t have the right to sell the receivables and the transferor keeps control, then the transaction is “secured borrowing”. They are just using their receivables as collateral and receiving a loan.
Journal Entry for a secured borrowing transaction
Cash
Note Payable
Factoring Receivables
Company assigns their receivables to a factor (usually a bank) for a fee and receives cash in return.
Factoring Receivables without recourse
Considered a sale of the receivables, because once transferred the receivables are up to the factor to deal with and collect on.
Journal entry for factoring receivables without recourse
Cash
Loss on Sale of receivables
Accounts Receivable
Factoring receivables with recourse
If it is with recourse, it depends on the specifics whether it’s treated as a sale or borrowing. The company might be required to make payments to the factor or possibly buy back receivables. If the transaction meets the requirements of a sale but there is recourse, then a “recourse liability” must be reflected in the books
Journal entry for factoring receivables with recourse
Cash
Loss on sale of receivables
Accounts receivable
Recourse liability
Pledging (or assigning) Receivables
Another form of using receivables as collateral for a loan but is less formal than secured borrowing. There is nothing reflected in the accounts with a pledge - the agreement is basically that the company will use collections from receivables to pay back the loan, and if the company defaults the transferee can assume the remaining receivables as collateral.
