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Chapter 13 Accounts Receivable

Chapter 13 Accounts Receivable. Main Points 1. Uncollectible accounts / Bad debts 2. Allowance for Uncollectible Accounts 3. The three generally accepted method used to estimated the allowance: 1) Percentage of Credit Sales Method 2) Accounts Receivable Aging Method

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Chapter 13 Accounts Receivable

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  1. Chapter 13 Accounts Receivable Main Points 1. Uncollectible accounts / Bad debts 2. Allowance for Uncollectible Accounts 3. The three generally accepted method used to estimated the allowance: 1) Percentage of Credit Sales Method 2) Accounts Receivable Aging Method 3) Percentage of Receivables Method

  2. Learning Objectives In this chapterthe students will learn: • what uncollectible accounts or bad debts are. • how to record an estimate of uncollectible accounts expense and the allowance for uncollectible accounts. • how to estimate the allowance for uncollectible accounts . Time Allocated: 4 Periods

  3. Revision (1) Questions for Work Sheet: 1. What is Work Sheet? 2. What columns does a work sheet include? 3. Why do large companies prepare the financial statements from a work sheet?

  4. Revision (1.1) Questions & Answers: 1. What is Work Sheet? Work Sheet is neither a journal nor a ledger but merely a convenient device for completing the accounting cycle. 2. What columns does a work sheet include? A work sheet includes columns of Account Title, Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement and Balance Sheet, which each column has debit and credit side except Account Title.

  5. Revision (1.2) 3. Why do large companies prepare the financial statements from a work sheet? A work sheet provides a data for the financial statements & the closing entries. If the financial statements are prepared directly from the adjusted trial balance, errors are very difficult to avoid. As a result, a work sheet is essential.

  6. Revision (2) Questions for Financial Statements : 1. What does financial statements report? 2. Who are financial statements drawn up for? 3. Who are the users of financial statements? 4. Why is it to prepare financial statements after completion of the work sheet? 5. What are the major financial statements of a business?

  7. Revision (2.1) Questions & Answers: 1. What does financial statements report? Financial statements report on the financial performance and condition of an organization. 2. Who are financial statements drawn up for? Financial statements are drawn for private individuals, non-profit organizations, retailers, wholesalers and service industries. 3. Who are the users of financial statements? They are management, investors, creditors and government regulatory agencies.

  8. Revision (2.2) 4. Why is it to prepare financial statements after completion of the work sheet? Because the appropriate account balances have been sorted into the Income Statement column and Balance Sheet column. 5. What are the major financial statements of a business? The major financial statements are Income Statement, Balance Sheet, Statement of Owner’s Equity and Statement of Cash Flows.

  9. Revision (3) Questions for Income Statement: 1. What is Income Statement known as? 2. What does Income Statement show?

  10. Revision (3.1) Questions & Answers: 1. What is Income Statement also known as? Income Statement is also known as the profit and loss statement. 2. What does Income Statement show? Income Statement shows all income and expense accounts over a period of time. It shows how much revenues are earned and how much expense have been paid for these revenues.

  11. Revision (4) Questions Statement of Owner’s Equity : 1. What does the statement of the owner’s equity tell? 2. Does Statement of Owner’s Equity show the investment the owner has made and how much the owner has withdraw from the company?

  12. Revision (4.1) Questions & Answers: 1. What does the statement of the owner’s equity tell the readers ? The statement of the owner’s equity tells the readers the total capital the company owns for a period of time. 2. Does Statement of Owner’s Equity show the investment the owner has made and how much the owner has withdraw from the company? Yes, it does.

  13. Revision (5) Questions for Balance Sheet: 1. What is a balance sheet? 2. What important uses does the balance sheet have?

  14. Revision (5.1) Questions & Answers: 1. What is a balance sheet? A balance sheet is a statement of the financial condition at a given point in time. It shows the company’s financial position. 2. What important uses does the balance sheet have? The balance sheet has the following important uses: 1) The balance sheet indicates the business net worth. 2) The balance sheet can help determine if too much or too little capital is tied up in permanent investments by comparing total current assets to total non-current assets. 3) The balance sheet gives information on how best to meet liabilities.

  15. What? Warm-up Discussion: 1. Companies often sell goods and services to customers on the basis of the customers’ promise to pay in the future. What are these sales called? These sales are called credit sales, or sales on account. 2. What are the promises to pay in the future known as in accounting? The promises to pay in the future are known as accounts receivable.

  16. Presentation In Chapter 4, we learn that accounts receivable arise from sales on credit to customers. Accounts receivable are accounts owed to the company, as a result of the ordinary extension of credit. The credit sales increase the balance of Accounts Receivable account and the collection decreases the balance of Accounts Receivable account.

  17. 1. Illustrations 1. Suppose that a sale is made for cash, the entry is shown as follows: Dr. Cash $1,000 Cr. Revenues from Sales $1,000 2. If the sale of merchandise is made on credit, the entry is as follows: Dr. Accounts Receivable $1,000 Cr. Revenues from Sales $1,000

  18. 1.1 Illustrations 3. When the debt is collected, the entry is as follows: Dr. Cash $1,000 Cr. Accounts Receivable $1,000

  19. 2. Uncollectible accounts Questions: 1. Will all the customers be able to keep their promises to pay in the future when companies sell goods on credit? 2. What are the accounts that can’t be collected called? 3. What will be recorded against the revenues if the accounts can’t be collected? 4. What is a contra account to accounts receivable?

  20. 2.1 Uncollectible accounts Questions & Answers: 1. Will all the customers be able to keep their promises to pay in the future when companies sell goods on credit? Not really. Some customers will not be able to keep their promises to pay because of various circumstances. 2. What are the accounts that can’t be collected called? The accounts that can’t be collected are called uncollectible accounts or bad debts. 3. What will be recorded against the revenues if the accounts can’t be collected? If the accounts can’t be collected, the uncollectible accounts expense will be recorded against the revenues. 4. What is a contra account to accounts receivable? The allowance for uncollectible accounts is a contra account to accounts receivable.

  21. 2.2 Illustrations 1. Suppose that George Ross Company has $6,000 of accounts receivable for the whole year. At the end of the year, accountants estimate that about $200 of the $6,000 of accounts to be uncollectible. Dec. 31 Dr. Uncollectible Accounts Expense $200 Cr. Allowance for Uncollectible Accounts $200 2. In the next year, the bad debts actually occurred. Dr. Allowance for Uncollectible Accounts $200 Cr. Accounts Receivable $200

  22. 3. Percentage of Credit Sales Method Questions: 1. What is percentage of credit sales method’s focus? 2. What is estimated percentage based on? 3. What’s the formula to estimate the uncollectible accounts?

  23. 3.1 Percentage of Credit Sales Method Questions & Answers: 1. What is percentage of credit sales method’s focus? The method’s focus is on determining the amount to record on the income statement as uncollectible accounts expense. 2. What is estimated percentage based on? Estimated percentage is based on actual uncollectible accounts from prior years’ credit sales. 3. What’s the formula to estimate the uncollectible accounts? Estimated percentage of uncollectible accounts= ( estimated uncollectible accounts/ estimated credit sales)×100%

  24. 3.2 Illustrations 1. Orient Construction Materials Company had total credit sales of $6,000,000 during 20×6. In the past, the percentage of bad debts is 2.5%. The journal entry is made on December 31 as follows: December 31 Dr. Uncollectible Accounts Expense $150,000 Cr. Allowance for Accounts Expense $150,000

  25. 4. Accounts Receivable Aging Method Questions: 1. Does the method consider that the longer a receivable is outstanding, the less likely it is to be collected? 2. How are individual customer account balance categorized when using an aging of accounts receivable?

  26. 4.1 Accounts Receivable Aging Method Questions & Answers: 1. Does the method consider that the longer a receivable is outstanding, the less likely it is to be collected? Yes, it does. 2. How are individual customer account balance categorized when using an aging of accounts receivable? When using an aging of accounts receivable, individual customer account balance are categorized according to the length of time they have been outstanding.

  27. 4.2 Illustration • Suppose that Orient Company had $600,00 of accounts receivable during 20×6: A--$100,000; B--$150,000; C--$200,000; D—$150,000. The calculation is as the following table.

  28. 4.2 Illustration

  29. 4.2 Illustration December 31 Dr. Uncollectible Accounts Expense $32,000 Cr. Allowance for Uncollectible Accounts $32,000

  30. 5. Percentage of Receivable Method Questions: 1. What is percentage of receivable method’s focus? 2. How does this method estimate the allowance for uncollectible accounts?

  31. 5.1 Percentage of Receivable Method Questions & Answers: 1. What is percentage of receivable method’s focus? Percentage of receivable method’s focus is on determining the desired balance in the Allowance for Uncollectible Accounts on the Balance Sheet. 2. How does this method estimate the allowance for uncollectible accounts? This method uses a percentage of the ending accounts receivable balance to estimate the allowance for uncollectible accounts.

  32. 5.2 Illustration • At the end of 20×6, Orient Co.’s accounts receivable are $600,000 and the allowance account had a credit balance of $2,000. In the past, Orient’s percentage of uncollectible accounts is 2%. Entries are made as follows: December 31 Dr. Uncollectible Accounts Expense $10,000 Cr. Allowance for Uncollectible Accounts $10,000 (600,000*2% - $2,000 = $10,000)

  33. 6. In-class Activities 1. Do further reading on Page 92-94 and get more information aboutAccounts Receivable. 2. Do Exercise One and Exercise Two in Class. 3. Further discuss the question in Exercise Four on Page 96 with your partners.

  34. 6.1 In-class Activities Answers for Exercises: 1. Exercise one: December 31 Dr. Uncollectible Accounts Expense $1,100 Cr. Allowance for Uncollectible Accounts $1,100 $20,000*3% + $500 = $1,100 2. Exercise Two: December 31 Dr. Uncollectible Accounts Expense $100 Cr. Allowance for Uncollectible Accounts $100 $20,000*3% - $500 = $100

  35. 6.2 In-class Activities 3. Exercise Four: Under the matching rule, expenses should be matched against with sales. The uncollectible account are incurred in the process of making sales revenues, and they should be recorded as the expenses of the same period of sales. Although the losses are identified during the next period, they are still the expenses of this period when sales are realized.

  36. 7. Homework 1. Review Chapter 13 to get further understanding. 2. Do Exercise Three on Page 96 and write assignment. 3. Preview Chapter 14.

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