Receivables

1
Classification of Receivables
 Accounts Receivable—used for selling
merchandise or services on credit, and
normally expected to be collected in a
relatively short period.
 Notes Receivable—used to grant credit on the
basis of a formal instrument of credit, called a
promissory note.
 Other Receivables—include interest
receivable, taxes receivable, and receivables
from officers and employees.

2
 Uncollectible Receivables

When Companies need cash, they sell their

receivables to other companies. This
transaction is called factoring the receivables,
and the buyer of the receivables is called a
factor.

3
 Uncollectible Receivables
The Allowance Method
 This method is consistent with the matching
principle.
 Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
 Bad debt Expense is debited and Allowance for bad
debt is credited.
 When any customer does not pay due amount then
entry will be Allowance for bad debt debited and
credited to Accounts Receivable.

4
 The Allowance Method
On December 31, Amir estimates that a total of
Rs.4,000 of the Rs.105,000 balance in his
company’s Accounts Receivable will eventually
be uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 4 000 00
Allowance for Doubtful Accounts 4 000 00

5
 The Allowance Method

Jan. 21 Allowance for Doubtful Accounts 610 00

Accounts Receivable—John Parker 610 00
To write off the uncollectible
account.

On January 21, John

Parker’s account totaling
Rs.610 is considered to be
uncollectible.
6
 The Allowance Method

Jun. 10 Accounts Receivable—John Parker 610 00

Allowance for Doubtful Accounts 610 00
To reinstate the account
written off on Jan. 21.

An
Onentry
June is
10,made to reinstate
the written-off
John Parker’s
account account.
is collected.

7
 The Allowance Method

Jun. 10 Cash 610 00

Accounts Receivable—John Parker 610 00
To record collection on
account.

A second entry is made to

record receipt of the cash.

8
 The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are Rs.300,000
and it is estimated that 1% will be
uncollectible, the Uncollectible Accounts
Expense is Rs.3,000.
9
 The Allowance Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 3 000 00
Allowance for Doubtful Accounts 3 000 00

Based on a Percentage of Sales

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 The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
2. Estimate based on analysis of receivables.
If it is estimated that Rs.3,390 of the receivables
will be uncollectible and the Allowance for
Uncollectible Accounts currently has a balance of
Rs.510, the Uncollectible Accounts Expense must
be debited for Rs.2,880 (Rs.3,390 – Rs.510).
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 The Allowance Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00

Based on an Analysis of Receivables

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 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300

Total accounts receivable

shown by age.

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 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co. 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

Uncollectible percentages based on

experience and industry averages.
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 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co. 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

AMOUNT Rs.3,390 =Rs.1,500 Rs.200 Rs.310 Rs.380 Rs.360 Rs.400 Rs.240

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 Year-End Adjustment for Uncollectibles
General Ledger Balance Sheet
Accounts Receivable
Accounts receivable Rs.86,300
A 86,300 Less allowance for
doubtful accounts 3,390
Allowance for Doubtful Accts.
Net realizable value Rs.82,910
510 A
2,880 B
A Balances before adjustment
3,390 C

B Year-end adjustment:
Uncollectible Accts. Expense
B 2,880 Rs.3,390 – Rs.510 = Rs.2,880

C Balance after adjustment

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Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
 Accounts that prove to be uncollectible are
written off in the year they become
worthless.
 Uncollectible Accounts Expense is debited
and Accounts Receivable is credited for
each such transaction.

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 The Direct Write-Off Method
May 10 Uncollectible Accounts Expense 420 00
Accounts Receivable—Abid 420 00
To write off an uncollectible
account.

On May 10, Abid account was

decided to write off by Rs.420.

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 The Direct Write-Off Method
Nov. 1 Accounts Receivable—Abid 420 00
Uncollectible Accounts Expense 420 00
To reinstate account written
off on May 10.

1st Entry

In November, Abid remits a check for

Rs.420 in payment of his account.
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 The Direct Write-Off Method

Nov. 1 Cash 420 00

Accounts Receivable—Abid 420 00
To record collection on
account.

2nd Entry
A second entry is needed to record
receipt of the cash.
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 Notes Receivable

Payee
2,500.00
Rs.____________
_ Fresno, California______________20___
March 16 10
Ninety days
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Engro Company
THE ORDER OF ____________________________________________
Two thousand five hundred 00/100---------------------------
_________________________________________________Rupees
National Bank
PAYABLE AT ______________________________________________
VALUE RECEIVED WITH INTEREST AT ____10% Maker
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NO. _______ June 14, 2010
DUE___________________
H. B. Lane
TREASURER, HABIB COMPANY

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 Notes Receivable
A promissory note is a written
document containing a promise to pay:
 a specific amount of money (principal)
 to a specific person or company (payee)
 at a specific place
 on a specific date or upon demand
 plus interest at a specific percentage of
the principal (face) amount per year
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 Notes Receivable

Received a Rs.6,000, 12%, 30-day note

dated November 21, 2010 in settlement
of the account of A Co.

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 Notes Receivable

Interest Calculation
Principal x Rate x Time = Interest
Rs.6,000 x 12% x 30/360 = Rs.60.00

Maturity Value Calculation

Principal + Interest = Maturity Value
Rs.6,000 + Rs.60.00 = Rs.6,060.00

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 Accounting for Notes Receivable
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12% note
dated November 21, 2006.

A Rs.6,000 30-day, 12% note dated

November 21 is received from A CO.
Company in exchange for merchandise.
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 Accounting for Notes Receivable
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
Received principal and interest
on matured note.

On December 21, when the note matures,

the firm receives Rs.6060 from A Co.
Company (Rs.6,000 plus Rs.60 interest).
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 Accounting for Notes Receivable
Dec. 21 Accounts Receivable—A Co. 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
To record dishonored note and
interest.

If A Co. Company fails to pay the note on the

due date, it is considered a dishonored note
receivable. The note and interest are transferred
to the customer’s account.
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 Accounting for Notes Receivable
Dec. 1 Notes Receivable 4 000 00
Accounts Receivable—A Co. 4 000 00

Received note in settlement of

account.

A 90-day, 12% note dated December 1, 2010,

is received from Ford Company to settle its
account, which has a balance of Rs.4,000.
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 Accounting for Notes Receivable
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Adjusting entry for accrued
interest.

Assuming that the accounting period

ends on December 31, an adjusting entry
is required to record the accrued interest
of Rs.40 (Rs.4,000 x 0.12 x 30/360).
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 Accounting for Notes Receivable
Mar. 1 Cash 4 120 00
Notes Receivable 4 000 00
Interest Receivable 40 00
Interest Revenue 80 00
Received payment on note and
interest.

On March 1, 2004, Rs.4,120 is received for

the note (Rs.4,000) and interest (Rs.120).
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