Chap 009

Chapter 9
ACCOUNTING FOR RECEIVABLES
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
9- 2
C1
SALES ON CREDIT
On July 1, TechCom had a credit sale of $950 to

CompStore and a collection of $720 from RDA
Electronics from a prior credit sale.
9- 3
C1
SALES ON CREDIT
9- 4
C1
CREDIT CARD SALES

Advantages of allowing customers to use
credit cards:
Customers’
credit is Sales increase by
evaluated by providing purchase
the credit card options to the customer.
issuer.
The risks of extending credit

are transferred to the credit
Cash collections
card issuer.
are quicker.
9- 5
P1
VALUING ACCOUNTS RECEIVABLE

Some customers may not pay their account.
Uncollectible amounts are referred to as bad debts.
There are two methods of

accounting for bad debts:
Direct Write-Off Method
Allowance Method
9- 6
P1
MATCHING VS. MATERIALITY
The matching
Materiality states that
(expense recognition)
an amount can be
principle requires
ignored if its effect on
expenses to be
the financial
reported in the same
statements is
accounting period as
unimportant to users’
the sales they helped
business decisions.
produce.
The direct write-off method usually does not best

match sales and expenses.
9- 7
P1
ALLOWANCE METHOD
At the end of each
period, estimate total bad
debts expected to be
realized from that
period’s sales.
Two advantages to the allowance method:

1. It records estimated bad debts expense in the period
when the related sales are recorded.
2. It reports accounts receivable on the balance sheet
at the estimated amount of cash to be collected.
9- 8
P1
RECORDING BAD DEBTS EXPENSE

TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
9- 9
P1
BALANCE SHEET PRESENTATION

TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
9- 10
P1
WRITING OFF A BAD DEBT
TechCom decides that J. Kent’s $520 account is

uncollectible.
9- 11
P1
WRITING OFF A BAD DEBT
The write-off does not affect the realizable

value of accounts receivable.
9- 12
P1
RECOVERING A BAD DEBT

To help restore credit standing, a customer sometimes
volunteers to pay all or part of the amount owed on an
account even after it has been written off.
On March 11, Kent pays in full his $520 account

previously written off.
9- 13
P2
ESTIMATING BAD DEBTS EXPENSE
Two Methods
1. Percent of Sales Method
2. Accounts Receivable Methods
 Percent of Accounts Receivable
 Aging of Accounts Receivable
9- 14
P2
PERCENT OF SALES METHOD
Bad debts expense is computed as follows:

Current Period Sales
× Bad Debt %
= Estimated Bad Debts Expense
9- 15
P2
PERCENT OF RECEIVABLES METHOD

1. Compute the estimate of the Allowance
for Doubtful Accounts.
Year-end Accounts Receivable × Bad Debt %
2. Bad Debts Expense is computed as:
Total Estimated Bad Debts Expense
– Previous Balance in Allowance Account
= Current Bad Debts Expense
9- 16
P2
AGING OF RECEIVABLES METHOD
Classify each receivable by how

long it is past due.
Each age group is multiplied by its

estimated bad debts percentage.
Estimated bad debts for each group

are totaled.
9- 17
P2
AGING OF ACCOUNTS RECEIVABLE

9- 18
C2
NOTES RECEIVABLE
A promissory note is a written promise to pay a specified
amount of money, usually with interest, either on
demand or at a definite future date.
9- 19
C2
INTEREST COMPUTATION
Even for If the note is

maturities less expressed in
than one year, days, base a
the rate is year on 360
annualized. days.
9- 20
END OF CHAPTER 9

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Chapter 9

ACCOUNTING FOR RECEIVABLES

On July 1, TechCom had a credit sale of $950 to

CREDIT CARD SALES

The risks of extending credit

VALUING ACCOUNTS RECEIVABLE

There are two methods of

MATCHING VS. MATERIALITY

The direct write-off method usually does not best

Two advantages to the allowance method:

RECORDING BAD DEBTS EXPENSE

BALANCE SHEET PRESENTATION

WRITING OFF A BAD DEBT

TechCom decides that J. Kent’s $520 account is

WRITING OFF A BAD DEBT

The write-off does not affect the realizable

RECOVERING A BAD DEBT

On March 11, Kent pays in full his $520 account

ESTIMATING BAD DEBTS EXPENSE

PERCENT OF SALES METHOD

Bad debts expense is computed as follows:

PERCENT OF RECEIVABLES METHOD

AGING OF RECEIVABLES METHOD

Classify each receivable by how

Each age group is multiplied by its

Estimated bad debts for each group

AGING OF ACCOUNTS RECEIVABLE

Even for If the note is

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