UNIT 1- ACCOUNTING FOR RECEIVABLES AND PAYABLES Flashcards
Credit
RIGHTS, not debts
Promissory note
bill of exchange- written promise
(431) sell
(401) buy
(430)
Sales, right- main activity
(440)
Sales, right- secondary activity
Liabilities:
- (400) Primary activity
- (410) Secondary activity
- (523) Short-term fixed assets bought on account
- (173) Long-term fixed assets bought on account
Assets:
- (430) Primary activity
- (440) Secondary activity
- (543) Long term (Current loans for disposal of fixed assets)
- (253) Short term (non-current loans for disposal of fixed assets)
Extending credit
- When credit is given, a receivable is set up on the books of the seller (oral promise called “Account receivable” or “Trade receivables”)
- A receivable represents claims against individuals, business organizations, or other debtors that will eventually be settled by the receipt of cash, checks, bank transfers or any other asset accepted by the creditor
- When the creditworthiness of reliability of a customer is in doubt, the seller may decide to sell to the customer on credit (on account) with certain additional requirements: a promissory note as evidence of the buyer´s obligation to the seller
Doubtful trade receivables
STILL AN ASSET
- Accounts receivable, whether customers or debtors, represent those collection rights that we can consider a normal collection situation
- When the collection expectations foresee risks or doubts, as a consequence of insolvency situations, we are facing credits in a situation of uncertainty
Doubtful trade receivables- ACCOUNTS
436) Doubtful trade receivables
(446) Doubtful receivables
(650) Losses on irrecoverable trade receivables
(430) -right, (440)-right
(436) -right, (446)-right
(650) -loss, (650)-loss- losses on irrecoverable trade receivables
Promissory notes
- It is an unconditional written promise to pay a stated sum of money upon demand or a future determinable date
- Usually prepared by the debtor as a result of a request made by the creditor
- Upon receipt of the invoice by the buyer, it is the buyer´s obligation to prepare and deliver to the seller the promissory note within a reasonable time
Accounts receivable/suppliers (400)
- (410) Payables for the rendering of services
- (430) Accounts receivable
- (440) Receivables
Notes receivable/suppliers, trade bills payable (401)
- (411) Trade bills payable
- (431) Notes receivable
- (441) Receivables, trade bills
Interest-bearing promissory notes
- A written payment to pay a certain sum at a fixed and determinable future date along with an additional sum known as interest
- This interest is calculated based on the holding period of the note, which is usually expressed in days, and the payment of a specific stated rate in interest, which is calculated on the face amount of the note
Determining interest
The interest assigned to the promissory note is usually calculated based on three factors:
- The face value of the note, known as the principal
- The amount of time the note is in the hands of the creditor before payment is made, known as the time
- The rate of interest being charged on the note, which commonly referred to as the rate
The basic formula for calculating interest is:
Principal x rate x time = interest
Transferring and discounting notes receivable
When you receive a promissory note, you can:
- To hold it until maturity: (431) or (441)
- To endorse it to other creditors
- To discount it: sell it to a bank or finance company
Receivables, trade bills (43)
(431) Trade receivable, trade bills receivable
- (4310) Trade bills in portfolio wait till maturity
- (4311) Discounted trade bills discounts
- (4312) Trade bills in debt collection management
- (4315) Past trade bills
Receivables, trade bills (44)
(441) Receivables, trade bills
- (4410) Receivables, trade bills in portfolio
- (4411) Receivables, discounted trade bills
- (4412) Receivables, trade bills in debt collection management
- (4415) Receivables, past due trade bills
Trade bills in debt collection management:
430–> 4310, 4311, 4312–> 4315 (not sure they will pay)–> 650(loss)
440–> 4410, 4411, 4412–> 4415–> 650 (?)
Discounting the note
It is a process of selling the promissory note to a bank or finance company
- The note is endorsed and delivered to the bank
- The bank deducts from the maturity value of the note (face value of the note plus interest) their discounting charges and provides the seller with the net proceeds’ maturity (665)
- When the note becomes due, the lending institution expects to receive the maturity value from its maker
- The fact that the note has been discounted and turned over to the lending institution does not eliminate the seller´s involvement with the note: if the maker fails to pay the bank, the seller will do it
- A contingent liability has developed until the due date of the note: the commitment of the endorser to pay the discounter the maturity value of the note if the maker of the note defaults (5208)
Discounting the note- the entries
- The receipt of the promissory note
- The discounting of the note
- The entry made on the due date of the note
Discounting a company´s own note
- When a company wishes to borrow money from a bank, it may issue a promissory note payable to that bank
- The bank in accepting the note will frequently discount the note
- Discounting a notes payable will result in the company receiving less cash than the face value of the note, because of the interest charged by the bank for the privilege of borrowing the money
Initial measurement:
Transactions in foreign currency must be recorded in Euros, at the exchange rate corresponding to the date of transaction.
Subsequent measurement:
- At the balance sheet date, monetary items shall be measured at the closing rate, considered to be the average spot exchange rate at the date
- Exchange gains and losses arising on this process and on settlement of these assets and liabilities shall be recognized in the income statement for the reporting period in which they occur
(4004)
Suppliers- foreign currency
(4034)
Suppliers, group companies- foreign currency
(4104)
Payables for the rendering of services- foreign currency
(4304)
Trade receivables- foreign currency
(4334)
Trade receivables, group companies- foreign currency
(4404)
Receivables- foreign currency
(668)
Exchange losses
(768)
Exchange gains
Intra-community transactions
- Intra-community acquisitions purchases
- Intra-community supplies
Personnel
Subgroup 46- personnel
Subgroup 64- personnel expenses
(465) Liability
(460) Asset
(64) Expenses
Public entities
Subgroup 47
It includes the accounts used for the company´s relationships (receivables and payables) with public institutions, when these relationships are not commercial in nature
- Accounts for the relationship between the company and re tax authorities
(VAT, income tax, grants)
- Accounts for the relationship between the company and Social Security institutions
Income tax
Anually
VAT
Monthly
(476)
Debt social security
(471)
Receivables social security, a right
(473)
Withholdings and payments on account, a right
–> Withdraw- do not lose, use it for the VAT liquidation- we have a right
(4751)
Debt tax authority- income tax
Confers
Not a payment
(4708)
A right, a revenue–> no collection
Grants receivable
Prepaid expenses and accruals
The effects of transactions and other economic events shall be recognized when they occur. Expenses and revenues shall be recognized in the accounting cycle they belong to, irrespective of the payment or collection date.
- (480) Prepaid expense- asset
- (485) Deferred income- liability
Accrual: earned, not received –> a right
Deferral: unearned, received–> an obligation
