Revision

Reporting 1
 Receivables

What Is a Receivable?
A receivable is a right to receive cash in the future from a current transaction.

Types of Receivables
1. Accounts/ Trade receivable: amount owed by customers as a result of sales on
credit.
 Results from sales of goods or performance of services on account.
 Collection period normally = 30 to 60 days.

2. Notes receivable: Formal written promises for future payments.

 Also called a promissory note.
 Written promise that a customer will pay principal and interest
 Collection period longer than A/R

3. Other receivables: Non-trade amount owed to the company, such as loans to

employees or tax refunds.
 Category includes dividends, taxes, and interest receivables
 Can be current or long-term

Recording Sales on Credit

 Selling on account will create an A/R.
Ex. Suppose that, on August 8, Smart Touch Learning performs $5,000 in services
to Brown on account, and sells $10,000 of inventory on account to Smith.

CR DR Accounts and Explanation Date

5,000 Accounts receivable – Brown
5,000 Service revenue
Aug 8
10,000 Accounts receivable – Smith
10,000 Service revenue

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 Using an A/R Subsidiary Ledger

Control Account Subsidiary Ledger

Accounts Receivable A/R - Brown

Bal. 15,000 Bal. 5,000

Subsidiary Ledger
A/R - Smith
Bal. 10,000

Recording Credit Card and Debit Card Sales

1. Recorded the same as Cash sales.
2. A fee is usually charged by the card company
3. The net cash received is reduced by the fee.
4. (2) Methods are allowed:
a) Net Method:
 Record the card company fee at the time of the sale.
 Only the net amount of cash is recorded.

Ex. August 15—Smart Touch Learning sells merchandise inventory to a customer

for $3,000. The customer pays with “plastic.” The card company assesses a 4%
fee. Ignore COGS.
CR DR Accounts and Explanation Date
2,880 Cash
120 Credit Card Expense
Aug 15
3,000 Sales Revenue
To record credit card sales, net of fee.

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Ex. June 30 Phoenix had $12,000 of credit card sales. The processor fee is 2%, and
Phoenix uses the Net Method. Ignore COGS.
CR DR Accounts and Explanation Date
11,760 Cash
240 Credit Card Expense
June 30
12,000 Sales Revenue
To record credit card sales, net of fee.

__________________________

b) Gross Method:
 Record the full sale on the sale date.
 Record the credit card fee as a separate entry when the cash is deposited
by the third party.
Ex. August 15—Smart Touch Learning sells merchandise inventory to a customer
for $3,000. The customer pays with “plastic.” The card company assesses a 4%
fee. Ignore COGS.
CR DR Accounts and Explanation Date
3,000 Cash
3,000 Sales Revenue Aug 15
To record credit card sales at gross.

The card company assesses a 4% fee

CR DR Accounts and Explanation Date
120 Cash
120 Sales Revenue Aug 15
To record credit card fee.

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Ex. June 30 Phoenix had $12,000 of credit card sales. The processor fee is 2%, and
Phoenix uses the Gross Method. Ignore COGS.
CR DR Accounts and Explanation Date
12,000 Cash
12,000 Sales Revenue Aug 15
To record gross credit card sales.

The processor fee is 2%,

CR DR Accounts and Explanation Date
240 Cash
240 Sales Revenue Aug 15
To record credit card fee.

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 The record of Uncollectible Accounts Using the Direct Method (1)
 Fact: Not all customers will pay what they owe.
 Accounting Reality: We have to take these receivables off the books and
record a corresponding Bad Debt Expense.
Ex. August 9—Smart Touch Learning determines that it will not be able to collect
$200 from Dan King for a May 5 sale.
CR DR Accounts and Explanation Date
200 Bad Debts Expense
200 Accounts Receivable - King Aug 9
To write off uncollectible account.

Recovery of Previously Written Off A/R

 Reverse the earlier write-off.
 Record the receipt of the payment
September 10—King pays the $200 previously written off as uncollectible.
CR DR Accounts and Explanation Date
200 Accounts Receivable - King
200 Bad Debts Expense
To reinstate previously written off A/R.
Aug 9
200 Cash
200 Accounts Receivable - King
To record cash collection.

The record of Uncollectible Accounts Using the Allowance Method (2)

 Based on the Matching Principle.
 Estimate future uncollectible accounts now, instead of waiting until they
actually go bad.
 Exploit knowledge that the older A/R accounts are, the less likely that they
will be collected.
 At the end of each period, record the Bad Debts Expense and put the credit
in Allowance for Bad Debts. (The Allowance for Bad Debts account is a
Contra-Asset
 As actual accounts become uncollectible, charge them against the Allowance
account.

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Ex. December 31—Smart Touch Learning estimates that $80 of its $4,400 A/R are
uncollectible.
CR DR Accounts and Explanation Date
80 Bad Debts Expense
80 Allowance for Bad Debts Dec 31
Recorded bad debts expense.

The Contra-Asset account will be shown as reduction of Accounts Receivable.

Smart Touch Learning
Balance Sheet
December 31, 2015
Assets
Current Assets
$4,400 Accounts Receivable
(80) Less: Allowance for Bad Debts
$4,320

Writing Off an Uncollectible Account

 When an account become uncollectible, it is written off.
 The bad account is charged against the Allowance Account.

Ex. January 10, 2016—Smart Touch Learning determines that it will not collect
$25 from customer Shawn Callahan.
CR DR Accounts and Explanation Date
25 Allowance for Bad Debts
25 Accounts Receivable - Callahan Jan 10
Recorded bad debts expense.

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 Recovery of Previously Written Off A/R
 Reverse the earlier write-off.
 Record the receipt of the payment.
Ex. March 4—Smart Touch Learning receives $25 from Callahan to cover the
written off account.
CR DR Accounts and Explanation Date
25 Accounts Receivable - Callahan
25 Allowance for Bad Debts
To reinstate previously written off A/R.
Mar 4
25 Cash
25 Accounts Receivable - Callahan
To record collection of cash.

Allowance Account Estimation

 Two methods are available
a) Percent-of-Sales Method:
Estimate Bad Debts as a percent of outstanding credit sales at year-end
Bad Debt Expense = Net Credit Sales x Bad Debt %

b) Percent-of-Receivables Method:
Step 1: Determine the target balance for Allowance for Bad Debts
Target Balance = Ending A/R x Bad Debt %
Step 2: Determine Bad Debts Expense by evaluating the Allowance
account
Bad Debts Expense = Target Balance - Existing credit balance of
Allowance for Bad Debts

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 Exercises
At January 1, 2014, Silver Line Inc. had Accounts Receivable of $50,000 and
Allowance for Bad Debts had a credit balance of $5,000. During the year, Silver
Line recorded the following:
a) Sales of $200,000 ($170,000 on account; $30,000 for cash).
b) Collections on account, $130,000.
c) Write-offs of uncollectible receivables, $4,000
Requirements
1. Journalize Silver Line's transactions that occurred during 2014. The company
uses the allowance method.
2. Post Silver Line's transactions to the Accounts Receivable and Allowance for
Bad Debts T-accounts.
3. Journalize Silver Line's adjustment to record bad debts expense assuming Silver
Line estimates bad debts as 1% of credit sales. Post the adjustment to the
appropriate.
4. Show how Silver Line will report net accounts receivable on its December 31,
2014 balance sheet.
Solution:
a) Sales of $200,000 ($170,000 on account; $30,000 for cash).
CR DR Accounts and Explanation Date
170,000 Accounts Receivable
2014
30,000 Cash
a.
200,000 Sales Revenue

b) Collections on account, $130,000.

CR DR Accounts and Explanation Date
130,000 Cash 2014
130,000 Accounts Receivables b.

c) Write-offs of uncollectible receivables, $4,000

CR DR Accounts and Explanation Date
4,000 Allowance for Bad Debts 2014
4,000 Accounts Receivables b.

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 Accounts Receivable
130,000 Collections (Cash) Jan. 1, 2014, Bal. 15,000
4,000 Write-offs Net credit sales 170,000

Unadj. Bal. 86,000

Dec. 31, 2014, Bal. 86,000

Allowance for Bad Debts

5,000 Jan. 1, 2014, Bal. Write-offs (A\R) 4,000
1000 Dec. 31, 2014, Bal.

To record bad debts expense assuming Silver Line estimates bad debts as 1% of
credit sales.
CR DR Accounts and Explanation Date
1,700 Bad Debts Expense
2014
Allowance for Bad Debts Dec.31
1,700
170,000 × 1% = 1,700

Allowance for Bad Debts

5,000 Jan. 1, 2014, Bal.
Write-offs 4,000

1,000 Unadj. Bal.

1,700 Adj.
2,700 Jan. 1, 2014, Bal.

Allowance for Bad Debts

Jan. 1, 2014, Bal. 0
Adj. 1,700
Dec. 31, 2014, Bal. 1,700

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 Accounts Receivables $86,000
 Allowance for Bad Debts 2,700
SILVER LINE INC.
Balance Sheet−Partial
December 31, 2014
Assets
Current Assets
$86,000 Accounts Receivable
(2,700) Less: Allowance for Bad Debts
$83,300

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