I.

Accounts Receivables
a. When you sell services/goods on credit
b. Largest financial asset of many merchandising companies
i. i.e. SM
c. relatively liquid assets = current assets
d. current = usually 1 yr or operating cycle, whichever is longer
e. operating cycle
i. normal period to covert inventory into cash
ii. Inventory >A/R > Cash > Repeat
f. All A/R from normal sales activity = Current assets
II. Uncollectible accounts
a. A/R in the SFP = estimated collectible amount (cost less impairment)
b. Dealing in credit is a normal part of business (to induce customers to buy) and
uncollectible accounts are a normal part of dealing in credit
i. Part of the costs of doing business
c. If you are overly cautious and are not willing to sell in credit due to
uncollectibility risk = miss out on potential customers
i. You miss 100% of the shots you dont take
d. In financial statements
i. Bad debts expense
1. Represents the loss of the asset (customers not paying their bills)
2. expense in the income statement
ii. revenue should be matched with expenses so recognize BDE in the period
the related credit sale was made, and not in the period you write-off the
A/R (exhibit 7-6)
1. you wouldnt have BDE if you didnt sell on credit in the first
place
iii. Dr. BDE Cr. ADA
1. BDE closed to income summary
2. ADA a deduction to the face amount of the A/R(contra-asset).
Reduces it to the estimated collectible amount
III. Allowance for Doubtful Accounts
a. Contra-asset/valuation account
b. Normal balance is credit which offsets the A/R account to present the amount
realistically collectible
c. Requires professional judgement
d. Adjust monthly or yearly
IV. Writing-off A/R
a. Writing-off means reducing the balance of the A/R to zero (although you can
write-off only a portion of that specific A/R)
b. Dr. ADA (not BDE) Cr. A/R
c. Writing-off A/R does not affect expense accounts. It merely confirms our estimate
i. You already recognized the expense relating to it when you made your
estimate
d. Reduces both asset and contra-assets so quits lang (doesnt change Book
value/estimated collectible amount of A/R in SFP)
 e. REMEMBER: credit losses are recognized as an expense in the period in which
the sale occurs, not the period in which the account is determined to be
uncollectible. MATCHING PRINCIPLE
f. If estimate > actual = credit balance
g. If estimate < actual = debit balance
i. Just temporary. Will be eliminated by end of period adjustments
V. How to estimate credit losses (ADA)?
a. SFP approach
i. Emphasizes proper SFP valuation of A/R
ii. Based on Aging the accounts receivable
1. Aging means classifying each receivable according to its age
2. Aging schedule (exhibit 7-8 p. 309)
a. Useful to management in reviewing status of individual
A/R
b. Useful in evaluating the overall effectiveness of credit and
collection policies
3. The longer an account is past due, the greater the likelihood that it
will not be collected in full
4. Past experiences will help determine percentages that correspond
with different age groups
5. That percent x A/R in that age group = estimated ADA for that
group
6. Add all the estimated ADA of the different age groups = required
balance of ADA in the SFP
7. Use p. 309 as an example. To adjust Dr. BDE Cr. ADA
b. I/S approach
i. Focuses on estimating BDE to be reported in I/S
ii. Estimated BDE = net CREDIT sales x a percentage determined by past
experiences
iii. Adjusting entry is made in full amount of estimated BDE (disregard
current balance of ADA)
iv. Existing ADA balance + I/S method adjusting entry = ending ADA
balance
v. Fast and simple but SFP method provides more reliable estimate of ADA
VI. Recovery of previous write-offs
a. A/R previously written off but collected in part or in full
b. Write-off
i. Dr. ADA Cr. A/R
c. Receivable should first be reinstated as an asset
i. Dr. A/R Cr. ADA
d. Collect
i. Dr. Cash Cr. A/R
e. Notice net effect is NE on A/R, increase in ADA, increase in Cash
VII. Direct write-off method
a. Recognize no BDE until accounts are determined actually uncollectible
b. Violates matching principle
 c. A/R presented at gross amount (no valuation account). A/R wont be stated at
estimated uncollectible amount
d. Direct write-off is acceptable if using it wont have a material effect on the F/S or
the profit (in audit material and pervasive)
i. i.e. company sells mostly in cash
VIII. Factoring A/R
a. First discuss quickly different methods of Receivable financing
i. Pledge of A/R
1. Pledge A/R as collateral security for acquiring a loan
ii. Assignment of A/R
1. Transferring of rights in specific A/R to a lender for a loan
2. Difference between pledge
a. Pledge = general (all A/R). also just disclose
b. Assignment = (specific A/R). make journal entry to transfer
A/R to A/R assigned
iii. Discounting (but it is for notes receivable so do not discuss)
b. When businesses sell A/R to a financial institution (factor)
i. Sale is without recourse, with notification
ii. Dr. cash Dr. ADA Dr. Loss Cr. A/R Cr. Gain
c. Used to obtain cash immediately instead of waiting for the A/R to be collected
d. Popular practice among small business organizations that do not have well-
established credit (so you dont have to borrow to get cash)
IX. Credit card sales
a. Credit card company buys a merchants receivables and then they bear the burden
of them (i.e. when you shop with credit card, you are paying the credit card
company and the credit card company is paying the merchant)
b. More convenient for merchants because they receive cash more quickly, avoids
impairment loss (credit card company bears the burden of collecting them),
doesnt have to maintain A/R ledger, and wont have to collect (extra manpower
and resources pa yan)
c. Bank Credit cards
i. Immediately increases your bank account
ii. 1.25-3.5% commission/SC
iii. No A/R
d. Other credit cards
i. Yes A/R
ii. You have to record an A/R sale first
1. Dr. A/R Cr. Sale
iii. Then you sell the A/R
1. Dr. Cash Dr. Credit card discount expense Cr. A/R
2. Credit card disc. expense is a selling expense in the I/S