Accounts and Bills Receivable Chapter 8 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦...
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Transcript of Accounts and Bills Receivable Chapter 8 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦...
8 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objectives
1.Design internal controls for receivables
2.Use the provision method to account for bad debts by the percentage of sales and aging of accounts method
3.Use the direct write off method to account for bad debts
4.Accounts for bills receivable
5.Report receivables on the financial statements
6.Use the acid-test ratio and days’ sales in receivables to evaluate a firms financial position
8 - 3Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Accounts receivable(Trade receivables)
Receivables
Bills receivable(Notes receivable)
8 - 4Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Design internal controls
for receivables.
Objective 1
8 - 5Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Establishing Internal Control
What are some controls over accounts receivable?
Separationof dutiesSeparationof duties
Approval for write-off
Approval for write-off
Control overmail receiptsControl overmail receipts
8 - 6Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
The Credit Department
Companies grant credit to customers in order to increase sales.
The credit department evaluates customers who apply for credit cards.
8 - 7Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Accounting for Bad Debts
Provision method
Direct write-off method
8 - 8Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Use the provision methodto account for bad debts
by the percent of sales and aging of accounts method.
Objective 2
8 - 9Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Methods for Estimating Bad Debts
Percentage of Sales
Aging of Accounts Receivable
8 - 10Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Percentage of Sales
This is also called the statement of financial performance approach.
It is based on prior experience of the business.
It is calculated as a percentage of credit sales.
It ignores the current balance of the provision account.
The percentage used is adjusted as needed to reflect collection experience.
8 - 11Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Percentage of Sales Example
The credit department of Anna’s Boutique estimates (based on prior experience) that 1% of net credit sales are uncollectible.
Net credit sales for the year just ended were $500,000.
What is the adjusting entry? $500,000 × 1% = $5,000
8 - 12Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Percentage of Sales Example
June 30, 2004
Bad Debts Expense 5,000Provision for Bad debts 5,000
Recorded bad debts expense for the year
June 30, 2004
Bad Debts Expense 5,000Provision for Bad debts 5,000
Recorded bad debts expense for the year
8 - 13Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Decrease inNet ProfitsDecrease inNet Profits
Decrease in netAccounts Receivable
Decrease in netAccounts Receivable
What is the effect of this adjusting entry?What is the effect of this adjusting entry?
Percentage of Sales Example
8 - 14Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Aging of Accounts Receivable
This approach is also called the statement of financial position approach because it focuses on accounts receivable.
Individual accounts receivable from specific customers are analysed according to the length of time they remain outstanding.
8 - 15Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Aging of Receivables Example
Assume that International Hospital’s past collection experience indicates the following:
Length of time % uncollectible 1-30 days 2.0 31-60 days 3.0 61-90 days 5.0 90 + days 8.0
8 - 16Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
AccountsReceivable
Provision for Bad Debts
Length Amount %1-30 $1,900,000 2 $
38,00031-60 1,000,000 3 30,00061-90 700,000 5 35,00090 + 500,000 8
40,000Total $4,100,000
$143,000
Aging of Receivables Example
8 - 17Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Aging of Receivables Example
The provision account is adjusted to this $143,000 balance:
Assume that the account currently has a credit balance of $100,000.
What is the adjustment?
8 - 18Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
June 30
Bad debts Expense 43,000Provision for Bad debts 43,000
To record the provision for bad debts
June 30
Bad debts Expense 43,000Provision for Bad debts 43,000
To record the provision for bad debts
What if the account had adebit balance of $1,000?What if the account had adebit balance of $1,000?
Aging of Receivables
8 - 19Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Provision for Bad Debts
Adjustment 1,000 144,000
Adjusted balance 143,000
Provision for Bad Debts
Adjustment 1,000 144,000
Adjusted balance 143,000
Aging of Receivables
8 - 20Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Comparing the Percentage of Sales
and Aging MethodsProvision Method
Percent of Sales Method Aging of Accounts Receivable Method
Adjusts Provision For Bad Debts
Adjusts Provision For Bad debts
BY TO
BAD DEBTSEXPENSE
EXPECTED UNCOLLECTABLEACCOUNTS RECEIVABLE
Amount of Amount of
8 - 21Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Writing OffBad Debts
What happens when it becomes apparent that an account will not be collected?
It must be written off. How?
Debit Provision for Bad Debts.
Credit Accounts Receivable.
8 - 22Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Recoveries
How is the collection of a previously written- off account recorded?
Debit Accounts Receivable (to reinstate the account).
Credit Provision for Bad Debts. Then
Debit Cash.
Credit Accounts Receivable (to record the collection).
8 - 23Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Use the direct write-off methodto account for bad debts.
Objective 3
8 - 24Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Direct Write-Off Method
Using this method, an account is written off only when it becomes uncollectible.
No provision account is created. This method is simple to use – but: The statement of financial position is
overstated. The statement of financial performance
is understated.
8 - 25Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Credit Card and Bankcard Sales
These save retailers the cost of a credit department.
The retailer is required to pay a fee (called a discount) for usage.
8 - 26Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Credit Card and Bankcard Sales
How would Anna’s Boutique record a $100 credit card sale with a 3% service charge?
Accounts Receivable (credit card) 97Credit Card Charge 3
Sales Revenue 100
To record a credit card sale of $100less a 3% service charge fee
Accounts Receivable (credit card) 97Credit Card Charge 3
Sales Revenue 100
To record a credit card sale of $100less a 3% service charge fee
8 - 27Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Debit Card Sales
Using a debit card is like
paying with cash.
Using a debit card is like
paying with cash.
8 - 28Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Bills Receivable: an Overview
A bill receivable may arise from a sale or may be given in settlement of an account receivable.
The ‘Acceptor’ pays the ‘Drawer’ the maturity value.
The maturity value is paid on the maturity date and includes principal plus interest.
See Exhibit 8-5 page 342 of the textbook
8 - 29Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Identifying a Bill’sMaturity Date
When the period is given in days…– the maturity date is determined by counting
the days from the date of issue. When the period is given in months… – the maturity date is on the same day of the
month as the date the bill was issued. Although the period of the bill is usually less
than one year interest rates are usually stated as an annual rates.
8 - 30Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Principal × Rate × Time = InterestPrincipal × Rate × Time = Interest
$10,000 × 10% × 90 ÷ 360 = $246.58$10,000 × 10% × 90 ÷ 360 = $246.58
Calculating Interest on a Bill
Calculate interest on the bill due to State Bank.Principal: $10,000Interest: 10%Time: June 1, 2004, to August 29, 2004
Calculate interest on the bill due to State Bank.Principal: $10,000Interest: 10%Time: June 1, 2004, to August 29, 2004
8 - 31Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Account for bills receivable.
Objective 4
8 - 32Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Recording Bills Receivable
Assume the accounting period ended June 30.
How much interest was earned by the bank as of June 30?
$10,000 × 10% × (30* ÷ 365) = $82.19
[* 30 days from June 1 to June 30]
8 - 33Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Recording Bills Receivable
June 30
Interest Receivable 82.19Interest Revenue82.19
To accrue interest on the bill
June 30
Interest Receivable 82.19Interest Revenue82.19
To accrue interest on the bill
8 - 34Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Recording Bills Receivable
How does the bank record the collection at maturity?
August 29
Cash 10,246.58Bill Receivable
10,000.00Interest Receivable
82.19Interest Revenue
164.39
Record interest on bill
August 29
Cash 10,246.58Bill Receivable
10,000.00Interest Receivable
82.19Interest Revenue
164.39
Record interest on bill
8 - 35Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Discounting a Bill Receivable
The drawer (one who will receive the money) may sell (discount) a bill so they receive money now, rather than at maturity.
From the previous example State Bank discounts the bill on June 21, discount rate is 12% (this is not the actual interest rate).
$10,246.58 × 12% × 70* / 365 = $235.81
[*70 days is June 21 to August 29]
8 - 36Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Discounting a Bill Receivable
How does the bank record the discounting?
June 21
Cash 10,010.77Bill Receivable
10,000.00Interest Revenue
10.77
Record interest on bill
June 21
Cash 10,010.77Bill Receivable
10,000.00Interest Revenue
10.77
Record interest on bill$10.77 = $10,246.58 - $235.81$10.77 = $10,246.58 - $235.81
8 - 37Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Dishonored Bills Receivable
If the maker of the bill fails to pay the maturity value to the new payee, then the original payee legally must pay the bank the amount due (unless the discounting is without recourse).
This gives rise to a contingent liability for the drawer when they discount a bill.
8 - 38Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Report receivables on the statement of financial position
Objective 5
8 - 39Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Reporting Receivables
Some companies report a single amount for its current receivables in the body of the statement of financial position.
They use a note to the financial statements to give more details.
See Qantas example pages 346-47 text.
8 - 40Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Use the acid-test ratio and days’sales in receivables to evaluate
a firm’s financial position.
Objective 6
8 - 41Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Acid-test ratio = (Cash + Short-term investments+ Net current receivables) ÷ Total current liabilities
Acid-test ratio = (Cash + Short-term investments+ Net current receivables) ÷ Total current liabilities
Acid-Test Ratio
This is a stringent test of liquidity than the current ratio.
It measures the entity’s ability to pay its current liabilities immediately.
8 - 42Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Days’ Sales in Receivables
It is a measure of the time it takes to collect receivables.
A smaller number indicates a quick conversion to cash.
8 - 43Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
One day’s sales = Net sales ÷ 365 daysOne day’s sales = Net sales ÷ 365 days
Days’ sales in average accounts receivable =Average net accounts receivable ÷ One day’s sales
Days’ sales in average accounts receivable =Average net accounts receivable ÷ One day’s sales
Days’ Sales in Receivables