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Spiceland | Thomas | Herrmann
Financial Accounting
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Receivablesand Sales
Chapter 5
5-2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
• Recognize accounts receivable• Calculate net revenues using discounts, returns,
and allowances• Record an allowance for future uncollectible
accounts• Use the aging method to estimate future
uncollectible accounts• Apply the procedure to write off accounts
receivable as uncollectible
5-3
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
• Contrast the allowance method and direct write-off method when accounting for uncollectible accounts
• Apply the procedure to account for notes receivable, including interest calculation
• Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables
• Estimate uncollectible accounts using the percentage-of-credit-sales method
Part A
Recognizing Accounts Receivable
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Recognize accounts receivable
5-5
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
5-6
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Credit Sales
• Transfer products and services to a customer today and collecting payment in the future
• Also known as sales on account or services on account
• Common for large business transactions
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounts Receivable
• Cash owed to the company by its customers from sales on account
• Recorded at the time of the credit sale• Also called trade receivables
5-8
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Recording of Credit Sales
• Link’s Dental charges $500 for teeth whitening. Dee Kay decides to have her teeth whitened on March 1 but doesn’t pay cash at the time of service. She promises to pay the $500 whitening fee to Link by March 31.
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Other Types of Receivables
• Nontrade receivables: receivables that originate from sources other than customers
• Notes receivable: formal credit arrangements evidenced by a written debt instrument, or note
Learning Objective 2
Calculate net revenues using discounts, returns, and allowances
5-10
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5-11
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Net Revenues
• Net revenues• A company’s total revenues less any discounts,
returns, and allowances• Also referred to as net sales
NetRevenues
Sales Discounts
Sales Returnsand Allowances−= Sales −
5-12
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Trade Discount
• Reduced from the list price of a product or service• Not recognized directly
5-13
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Recording Trade Discount
• Link’s Dental, which typically charges $500 for teeth whitening. Assume that in order to entice more customers, Dr. Link offers a 20% discount on teeth whitening to any of his regular patients.
5-14
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Sales Returns and Allowances
Sales Return
• Seller issues a full refund
• Customer returns the product
Sales Allowances
• Seller reduces the customer’s balance owed partially
• Customer does not return the product
5-15
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Recording Sales Allowances
• Dee notifies Dr. Link that another dentist is offering the same procedure for $350
• Dr. Link reduces Dee’s account balance by $50
5-16
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Contra Revenue Account
• Opposite balance to that of its related revenue account
• To keep a separate record of the total revenue earned and reduction due to subsequent sales allowances
5-17
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Sales Discount
• Reduced from the amount to be paid by a credit customer• If payment is made within a specified period of time
• Recognized directly• Discount terms
• Eg: 2/10, n/30
5-18
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Recording Sales Discount
• Link’s Dental wants Dee to pay quickly on her teeth-whitening bill and offers her terms of 2/10, n/30. Assume Dee pays within 10 days
Part B
Valuing Accounts Receivable
5-19
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Learning Objective 3
Record an allowance for future uncollectible accounts
5-20
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5-21
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Allowance Method
• Allows for the possibility that some accounts will be uncollectible
• Companies are required to:• Estimate future uncollectible accounts• Record estimates in the current year
• Uncollectible accounts: Customers’ accounts that are no longer considered collectible• Reduces assets (accounts receivable)• Increases expenses (bad debt expense)
5-22
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Illustration 5.3—The Financial Statement Effects of Accounting for Future Uncollectible
Accounts
5-23
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Estimating Uncollectible Accounts
• Percentage-of-receivables method• Based on the percentage of receivables expected
not to be collected • Also called the balance sheet method
• Percentage-of-credit-sales method• Also called the income statement method
5-24
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Estimating Uncollectible Accounts
• Bad Debt Expense: uncollectible accounts expense or provision for doubtful accounts
• Allowance For Uncollectible Accounts: contra asset account representing the amount of accounts receivable that we do not expect to collect
5-25
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Percentage-of-Receivables Method—Recording
• In 2015, Kimzey Medical Clinic bills customers $50 million.• By the end of the year, $20 million remains due from
customers• Estimates that 30% will not be collected
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Illustration 5.5—Accounting for Uncollectible Accounts and the Accounts Receivable Portion of
the Balance Sheet
Learning Objective 4
Use the aging method to estimate future uncollectible accounts
5-27
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5-28
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Aging of Accounts Receivable
• More accurate than using single percentage• Considers the age of receivables
• Using a higher percentage for older accounts
5-29
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Accounts Receivable AgingSchedule
Learning Objective 5
Apply the procedure to write off accounts receivable as uncollectible
5-30
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5-31
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Writing Off Accounts Receivable
• Write-off has no effect on total amounts reported• Negative effects already recorded
5-32
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Writing Off Accounts Receivable—Recording
• Kimzey receives notice that Bruce Easley has filed for bankruptcy
• Kimzey writes off Bruce’s account receivable
5-33
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Collection of Accounts Previously Written Off—Recording
• Bruce later pays 25% of amounts owed
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Estimating Uncollectible Accounts in the Following Year
• At the end of 2016, Kimzey has $30 million in receivables
• Estimates $8 million will not be collected
Learning Objective 6
Contrast the allowance method and direct write-off method when accounting for uncollectible accounts
5-35
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5-36
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Direct Write-Off Method
• Records bad debt expense when uncollectible account is known
• Used:• When uncollectible accounts are not anticipated or
are immaterial• When it’s not possible to reliably estimate
uncollectible accounts • For tax purposes only
5-37
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Illustration 5.12—Comparison of the Allowance Method and the Direct Write-off
Method for Recording Uncollectible Accounts
Part C
Notes Receivable
5-38
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Learning Objective 7
Apply the procedure to account for notes receivable, including interest calculation
5-39
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5-40
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Notes Receivable
• Similar to accounts receivable but are more formal• Evidenced by a written debt instrument, or note• Classified as either current or noncurrent asset
5-41
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Recording Notes Receivable
• Kimzey provided $10,000 of services to Justin Payne, who is not able to pay immediately
5-42
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Recording Notes Receivable
• Kimzey provided $10,000 of services to Justin Payne and recorded it as a typical account receivable
• Justin won’t be able to pay quickly and is required to sign a six-month, 12% promissory note
5-43
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Recording Notes Receivable
• Justin’s books of accounts
5-44
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Interest Calculation
• Kimzey issued a $10,000 six-month, 12% promissory note
5-45
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Collection of Notes Receivable & Accrued Interest
5-46
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Accrued Interest
Learning Objective 8
Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables
5-47
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5-48
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Receivables Turnover Ratio
• Number of times the average accounts receivable balance is collected
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Average Collection Period
• Number of days the average accounts receivable balance is outstanding
Learning Objective 9
Estimate uncollectible accounts using the percentage-of-credit-sales method
5-50
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5-51
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Percentage-of-Credit-SalesMethod
• Estimates uncollectible accounts based on the percentage of credit sales
• Adjusts allowance for doubtful accounts
5-52
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Percentage-of-Credit-SalesMethod—Recording
• Kimzey bills customers $80 million for services, with $30 million in accounts receivable
• Balance of the allowance account, before adjustment, is a $1 million credit
• For the percentage-of-receivables method, estimate for uncollectible accounts is $8 million
• For the percentage-of-credit-sales method, assume 12.5% of credit sales to be uncollectible
5-53
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Adjusting for Estimates of Uncollectible Accounts
5-54
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Financial Statement Effects of Estimating Uncollectible Accounts
End of Chapter 5
5-55
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