Chapter 9 ndash; Accounting for Receivables.ppt

* * * * * * Chapter 9 – Accounting for Receivables Objectives: Identify types of receivables Valuing receivables A. Direct Write-off Method B. Allowance Method There are 2 “bases” to estimate the allowance for doubtful (uncollectible) accounts include: 1. Percentage of Sales 2. Percentage of Receivables Notes Receivable: A. Maturity Dates B. Computing interest Types of Receivables “Receivables” refers to amounts due from individuals or companies. 3 Main Classifications /Types of Receivables: 1. Accounts Receivable 2. Notes Receivable 3. Miscellaneous or “Other” receivables A/R – amounts owed by customers on account N/R – claims for which formal instruments (i.e. written promissory agreement) of credit are issued as proof of debt. Other – interest receivable (interest earned but uncollected), advances or loans to employees, tax refund receivable. Valuing Accounts Receivable When a company sells to customers “on account” there is an exchange made between parties – a product or service is provided IN EXCHANGE FOR a promise to pay a specified amount in the future. (A/R) When a company makes a loan (either to a company or individual) there is an exchange – cash provided FOR a promise to pay back the amount borrowed plus interest. (N/R) Discussion Point: Imagine you have a $10,000 accounts receivable balance, how much of this would you expect to collect?? A/R must be reported at its net realizable value ~ the amount reasonably expected to be collected Valuing Accounts Receivable The amount of receivables determined to be uncollectible are called “bad debt”. Bad Debt is a cost or expense to the company. 2 “Methods” Used to Determine Bad Debt Expense: 1. Direct Write off Method – actual amount of bad debt 2. Allowance Method – estimated amount of bad debt Direct Write off Method This method is NOT GAAP when receivables are considered to be a material (significant) amount, and therefore is not commonly used by companies that sell on account. The Direct