Study Smarter.....Study The Answers!
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Accounts
Receivable
Key
Things To Know
Revenue is “recognized” when: 1) the good or service has been provided, and
2) you expect that you will be paid
Sell on “credit” – provide them the good/service now and they pay you later.
When payment is due is based on the “terms” agreed upon
Example: 2/10, net30 means – 2% discount / if pay in 10 days,
or, full payment is due in 30 days
net60 – no discount offered, payment due in 60 days
Companies offer a discount in order to collect cash quicker when they need cash
It is very costly to offer a discount, but necessary if the company is not able to
borrow money at a lower interest rate
When a payment (cash) discount is taken it is called a sales discount
Sales discounts are reported on the income statement as:
Sales
- Sales Discount
= Net Sales
Journal entries for sales on credit and payment received when a discount is offered:
(this method is referred to as the gross method of accounting for receivables)
Payment Payment
Sales received -take discount received –no discount taken
A/R Sales Discount Cash
Sales Cash A/R
A/R
The sales and the accounts receivable is always for the full amount of the sale.
The cash is the amount actually received (sales x 1 – discount % if discount is taken)
The sales discount amount is: sales $ x discount % offered
The balance sheet for accounts receivable will show:
On the Balance Sheet: It means:
Accounts Receivable Total amount customers owe you
- Allowance for Uncollectible Accounts - Amount you don’t think you will collect
= Net Accounts Receivable = Amount you do think you will collect
The asset reported on the balance sheet, net accounts receivable, must be the amount you
expect to be a future benefit. There is no benefit to an uncollectible accounts receivable.
The accounts that are used to record accounts receivable transactions are:
Sales – represents the amount of goods or services provided
Accounts receivable – represents the amount the customer owes
Allowance for uncollectible accounts – represents the total amount you do not
expect to collect – it is an estimate, you don’t know who won’t pay or how much
Bad debt expense – the current period estimate of what you won’t collect
There are 4 key transactions that must be recorded for accounts receivables:
1) The sale on credit, which creates the accounts receivable
2) The collection of the accounts receivable when a customer pays
3) The estimate of bad debt expense: you don’t know exactly how much won’t be
collected from customers, but you know you won’t collect it all from past history.
You must estimate the expense at the end of the period to match with sales.
4) The write off of an accounts receivable when you know who won’t pay you
and exactly how much won’t be collected. This occurs much later after the sale.
Journal entries for the 4 transactions are:
Sales on credit Collect accounts receivable
Accounts Receivable Cash
Sales Accounts Receivable
Estimate bad debt expense: Write – off accounts receivable:
Bad debt expense Allowance for uncollectible accounts
Allowance for uncollectible accounts Accounts Receivable
(Bad debt expense can be a credit
when using the % of A/R method)
The accounts are changed by the following transactions:
Accounts Receivable:
Increases when a sale is made on credit
Decreases when the customer pays
Decreases when an account is written off – you know who won’t pay and amount
Allowance for Uncollectible Accounts:
Increases when estimating bad debt expense using % sales method
Increases or decreases when estimating bad debt expense using % of accounts
receivable (the up or down depends on how much is already in the account)
Decreases when an account is written off
The allowance account represents the total estimate of what won’t be collected.
The company is not sure who won’t pay or exactly how much. When they know
who and how much won’t pay, they take it out of this account and take it off the
accounts receivable list and out of the accounts receivable account.
Bad Debt Expense:
Changes ONLY when you estimate bad debt at the end of the period
If you overestimated in prior periods you can take some expense away when
you are using the % of accounts receivable (aging) method.
The 4 transactions change the accounts:
Accounts Receivable |
| Beg. Bal |
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Write-offs |
| Sales |
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Collections |
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| ___________________ |
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___________________ |
| Amount |
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| customers |
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| owe |
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Allowance for Uncollectible Accounts |
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Beginning balance |
| Write-offs |
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Estimate of bad |
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debt expense |
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___________________ |
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Amount you do not |
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expect to collect |
Bad Debt Expense |
| Estimate of |
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| bad debt expense |
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| this period |
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Bad debt expense can be a credit
when using % of A/R (aging) method
Bad Debt Expense: Occurs when you do not get paid for a receivable.
The bad debt expense must be recorded in the same period the sale is made.
(This follows the matching principle: match revenues with all expenses)
Problem: You don’t know how much you won’t collect in the period of the sale.
You won’t know until much later when the customer doesn’t pay.
Solution: You must estimate, (based on past history) the amount you won’t collect
and record this expense in the same period as the sale
There are two ways to estimate the amount of bad debt expense for the current
period: % of sales & % of accounts receivable
% of Sales Method:
Sales
X % of sales the company historically doesn’t collect (given)
= Bad debt expense
Record the bad debt expense amount you calculated
Bad Debt Expense $XXXX
Allowance for uncollectible accounts $XXXX
You are doing a direct match of the bad debt expense to sales. This amount
is also added to the account that accumulates the total amount of accounts
receivable you do not expect to collect (the allowance account).
% of Accounts Receivable (aging method):
Accounts Receivable
X % of accounts receivable the company historically does not collect (given)
= The total amount of accounts receivable the company does not
expect to collect
This amount must be the ending balance in the
“allowance for uncollectible accounts account
Make your journal entry for the amount (plug) it takes to get the balance in the
allowance account to be the amount you calculated above.
Allowance for Uncollectible Accounts |
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Beginning balance |
| Write-offs |
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___________________ |
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Balance before estimate |
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Plug? |
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___________________ |
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Ending Balance** |
** The ending balance must be the number you calculated above
The journal entry for the amount of the “plug” will either be:
Allowance for uncollectible accounts Bad debt expense
Bad debt expense or Allowance for uncollectible accounts
When you have an aging report which shows how old the accounts are and the % that is
estimated to be uncollectible for each category, you must multiply the balance x the
% given for each category and add them all up to get the total amount you do not
expect to collect. (See Practice As You Learn for an example). When you have the
total, follow the same procedures described above.
The difference between the two methods: % of Sales & % of A/R (aging)
% of Sales: You are calculating the total bad debt expense for the period
You are estimating using this periods sales only
% of A/R: You are calculating a cumulative amount that you do not expect
to collect using the total amount that customers owe you from
this period and all prior periods.
The expense for this period is the change in the cumulative amount
you don’t expect to collect
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