13-1 ACCOUNTS RECEIVABLE CHAPTER 13. 13-2 Account receivable Sales on credit to customers Account...

13-1

ACCOUNTS RECEIVABLE

CHAPTER 13CHAPTER 13

13-2

Account receivableAccount receivable

Sales on credit to customers

Account receivable

Accounts owned to the company

13-3


Cred

it sales

Collection

The balance of Accounts receivable account

Increase

Decrease

13-4


Suppose the sale is made for cash…

The entry?

Cash 1,000

Revenues from Sales 1,000

13-5


Suppose the sale is made on credit…

The entry?

Accounts Receivable 1,000

Revenues from Sales 1,000

13-6


When the debt is

collected …

The entry?

Cash 1,000

Account receivable 1,000

13-7

Uncollectible accounts Uncollectible accounts oror bad debts bad debts

The accounts that can’t be collected are called uncollectible accounts or bad debts.

13-8

Uncollectible accounts Uncollectible accounts

Under the matching rule, expenses should be matched against with the sales.

The uncollectible accounts are incurred in the process of making sales revenues, and they should be recorded as the expenses of the same period of sales.

13-9

Uncollectible accountsUncollectible accounts

Now, let’s look at an example for George Ross Company

13-10

Uncollectible accountsUncollectible accounts Example Example

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.

In the next year, the bad debt actually occurs.Thus the uncollectible accounts expense for this year will be $6,000.

13-11

Uncollectible accountsUncollectible accounts Example Example

Dec. 31 Uncollectible Accounts Expense $200

Allowance for Uncollectible Accounts $200

When bad debts actually occurred

Allowance for Uncollectible Accounts $200

Accounts Receivable $200

13-12

Methods used in Methods used in estimating the allowanceestimating the allowance

1. Percentage of credit sales method

2. Accounts receivable aging method

3. Percentage of receivables method

13-13

Percentage of credit sales method

Meth

od 1

Percentage of credit sales Percentage of credit sales methodmethod

13-14


Percentage is estimated based on actual uncollectible accounts from prior years’ credit sales.

A percentage of credit sales for the year are assumed to be uncollectible.

13-15


Company's experience

Ultimate uncollectible accounts average:2% of credit sales

Indicate

Expensed 2%

of the receivables

with an offsetting

credit to the reserve

for bad-debt

At year-end: Adjusting entry

13-16


What is the effect of this adjusting entry?

Decrease inNet Income

Decrease in netAccounts Receivable

13-17


Formula

Estimated percentage of uncollectible accounts

= (estimated uncollectible accounts/estimated credit sales) * 100%

13-18

Percentage of credit sales Percentage of credit sales method method ExampleExample

Now, let’s look at an example …

Orient Construction Materials Company had total credit sales of $6,000,000 during 2006. In the past, the percentage of bad debts is 2.5%.

13-19

Percentage of credit sales Percentage of credit sales method method ExampleExample

The journal entry on December 31 ?

December 31 Uncollectible Accounts Expense $150,000

Allowance for Uncollectible Accounts $150,000

13-20

Meth

od 2

AAccounts receivable aging ccounts receivable aging methomethodd

The Aging of Receivables method

13-21


The longer a receivable is outstanding, the less likely it is to be collected.

The Aging of Receivables method considers the age and amount of the ending Accounts Receivable balance.

13-22


The estimated uncollectible Amounts in each category are totaled to determine the total allowance.

Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.

13-23

AAccounts receivable aging ccounts receivable aging methomethod d ExampleExample

Now, let’s look at an example for Orient Company …

Suppose that Orient Company had $600,000 of accounts receivable during 2006: A--$100,000; B-- $150,000; C--$200,000; D-- $150,000.

13-24


Orient Company Analysis of Accounts Receivable by Age December 31, 2006

Item Account

Balance

Not yet due

Past due

0-30days 31-60days 61-120days

Over 120days

A $100,000 $50,000

B $150,000 $100,000 $50,000

C $200,000 $50,000 $50,000 $50,000 $50,000

D $150,000 $50,000 $100,000

Total $600,000 $200,000 $150,000 $50,000 $50,000 $100,000

Uncollectibility percentage 1% 3% 5% 6% 20%

Estimated $32,000 $2,000 $4,500 $2,500 $3,000 $20,000

13-25





13-26

PPercentage of receivables ercentage of receivables methodmethod

Meth

od

Percentage of receivables method

3

13-27


Focus: determining the desired balance in the Allowance for Uncollectible Accounts on theBalance Sheet

This method uses a percentage of the ending accounts receivable balance to estimate the allowance for uncollectible accounts.

13-28


Year-End Accounts Receivable x Bad Debt %

Compute the estimate of the Allowance for Doubtful Accounts

13-29

Compute the estimate of the Allowance for doubtful Accounts


13-30

PPercentage of receivables ercentage of receivables method method ExampleExample

Now, let’s look at an example for Orient Co.

13-31


At the end of 2006, 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%.

13-32





13-33

WE ARE SAILING RIGHT ALONG!!

13-1 ACCOUNTS RECEIVABLE CHAPTER 13. 13-2 Account receivable Sales on credit to customers Account...

Documents

Transcript of 13-1 ACCOUNTS RECEIVABLE CHAPTER 13. 13-2 Account receivable Sales on credit to customers Account...