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Learning Objectives
1. Define receivables and identify the different types of
receivables.
2. Explain accounting issues related to recognition and
valuation of accounts receivable.
3. Assignment of Accounts Receivables.
4. Explain accounting issues related to recognition and
valuation of notes receivable.
5. Explain how receivables are reported and analysed.
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Section 1:
Definition and types
of receivables
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Receivable -Definition
Amounts due from individuals and companies.
Types of receivables:
Account receivables
Notes receivables
Other receivables
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Accounts receivables
Receivable associated with the normal operating
activities of a business
e.g. Credit sales of goods & services to customers
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Notes receivables
Receivables that are evidenced by a formal written promise
to pay a certain sum of money at a specified date
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Other receivables
Non-trade receivable
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Accounts Receivable Issues
Recognition and valuation of accounts
receivable
Trade discounts
Cash discounts
Sales returns and allowances
Valuation of trade debtors
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Accounts Receivable:
RECOGNITION
Recognizing accounts receivables
Companies record accounts receivable at point of sale
Entry is recorded to increase both Accounts
Receivable and Sales as follows:
Journal entry:
DR Accounts Receivable RMXXX
CR Sales RMXXX
(to record sales of RMXXX)
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RECORDING DISCOUNTS
There are two methods:
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RECORDING DISCOUNTS
Gross Method Net Method
Record revenue at gross Record revenue at gross
amount of sales amount of sales less cash
discount
When customer takes the When customer forfeits
discount, record cash discount, record
discounts discounts not taken
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Accounts Receivable:
RECOGNITION
Sales discount (Gross method)
Cash (sales) discounts are inducements to customers for
prompt payment of amounts billed.
Cash discounts are normally recorded and appear in
books as a reduction of sales revenue (gross method).
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Accounts Receivable: Recognition
Example: if the sales invoice of RM100 include the credit
terms 2/10, net 60 days -> 2% cash discount on gross
invoiced amount is given if pays within 10 days.
Using the Gross method the transaction would be
recorded as follows:
At date of sale:
Dr Accounts Receivable 100
Cr Sales 100
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Accounts Receivable: Recognition
A) At the date of receipt (assume discount is taken):
Dr Cash 98
Dr Cash discount on sales 2
Cr Accounts Receivable 100
B) At the date of receipt (assume payment is
received after discount period):
Dr Cash 100
Cr Accounts Receivable 100
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Net Method:
At point of sale:
Dr. Accounts Receivable 98
Cr. Sales 98
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Accounts Receivable:
RECOGNITION
Trade discounts
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Accounts Receivable:
RECOGNITION
Sales return & allowances
Allowances are to be made for
Goods that are returned by customers, and/or
Goods that are damaged during shipment, spoiled or defective
goods, or shipment of an incorrect quantity or type of goods.
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Accounts Receivable: Recognition
Example:
Assume that books A costing RM700 are sold and
shipped to customer B for RM1,200. Buyer calls to
inform that Book C were actually ordered. Buyer
agrees to accept the goods if a reduction in price is
given. The company allows an allowance of RM250.
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Accounts Receivable: Recognition
The entry to record the sales allowance:
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VALUATION OF ACCOUNTS
RECEIVABLE
According to FRS 139, loan and receivable are
valued at amortized cost.
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Valuation of Accounts Receivable
Short term accounts receivable are shown at their net
realizable value as follows:
RM
Accounts Receivable (gross) XXX
Less: Provision for bad & doubtful debts _ XX
Amortized cost XX
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Uncollectibles of Accounts
Receivables
It is common for companies to have uncollected
receivables.
Journal entries involved:
Dr. Bad debts expense
Cr. Allowance for doubtful debts
Companies have to estimate
If cannot may make direct write off of the
uncollectible debts
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Methods to estimate bad debts:
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Example:Percentage of sales
method
Based on past experience, RGY Company
estimates 2% of credit sales become uncollectible.
If in 2015, net credit sales for RGY are $800,000 it
records bad debt expense as follows:
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Example: Percentage of receivable method
- Aged Receivable Analysis
2 Journal entries:
DR Bad debts expense RM36,850
CR Allowance for doubtful debts RM36,850
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Writing off bad debts
Estimated bad debts written off /Allowance
(estimated) write off
Direct write off
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Direct write off
Bad debts are charged directly to expense and removed
from the accounts receivable at the time the account
becomes uncollectible.
Dr Bad debts expense
Cr Accounts receivable
(To write off accounts receivable)
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Direct write off method
The direct write-off method does not match
revenues against expenses
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Collection of AR After Writing Off Bad
Debts
Dr. Cash
Cr. Bad debts Recovered
(for the amount collected)
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The holder of accounts or notes receivable may
transfer them for cash.
Assingment is an example of how holder of
account/notes receivables may transfer the
receivables for cash.
Assignment is a form of secured borrowings.
Assigning/pledging accounts receivable means
using them as collateral for a loan. Holder retains
ownership.
Assigning accounts receivable provide off-balance
sheet financing.
The transaction normally does not appear in in
your financial statements and your customers may
never knew that their accounts were assigned.
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Why use receivables as a source of cash?
Providing customer financing is mandatory in many
industries, e.g. autos, industrial and farm equipment,
durable goods.
Access to normal financing may be unavailable or
expensive, e.g., further borrowing may violate existing
debt covenants.
Seller may prefer to leave billing and collection to a
more specialized agency.
Receivables financing may be cheaper than debt, as
the former conveys ownership rights to the purchaser.
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Assignment of receivables
Trade debt may be assigned or pledged with a
banker to obtain funds to meet companys cash
needs.
Trade debts are used as collaterals to obtain the
financing.
Risk of bad debts are not passed on to the banker
because it has the full recourse on the company in
the event that the trade debtors are unable to settle
their debts.
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Assignment of receivables
Bill of exchange trade debt financing arrangements
to acknowledge its liability.
The trade debts are remained in the accounting
records and the cash received and the corresponding
bill payable should be recognized in the accounts.
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Assignment of receivables
Transferor records for note payable and finance charge.
No effect on accounting for accounts receivable.
Transferor collects accounts receivable.
Transferor records sales returns and sales discounts.
Transferor absorbs bad debts expense.
Transferor records interest expense on notes payable.
Transferor pays on the note periodically from collections.
Meanwhile, the banker will record for note receivables,
finance revenue, interest revenue and cash paid and
received.
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Assignment of receivables
Example 1
On January 2005, Provo Mercantile Co. assigns specific
receivables totaling RM300,000 to Salem Bank as collateral on a
RM200,000, 12% note. Salem assesses a 1% finance charge on
assigned receivables in addition to the interest on the note.
Provo is to make monthly payments to Salem with cash
collected on assigned receivables. The entry should be as
follows:
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Assignment of receivables
1/1/2005
DR Cash RM197,000
DR Finance charge RM3,000
CR Notes payable RM200,000
(to record the loan with Salem Bank)
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In the bankers book:
1/1/2005
DR Note Receivable 200,000
CR Finance revenue 3,000
CR Cash 197,000
(to record loan to Provo Co.)
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Assignment of receivables
31/1/05
31/1/05 RM RM
Cash 179,000
Cash Discounts 1,000
Sales return 2,000
Accounts Receivable Assigned 182,000
(to record collection in January)
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Assignment of receivables
1/2/05
February 2005, Payment to Salem Bank on amount
owed plus interest on note payable
Journal entries-1/2/05 RM RM
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In the bankers book:
1/2/05
DR Cash 181,000
CR Note receivable 179,000
CR Interest revenue 2,000
(to record receipts from Provo Co. and recognize interest
revenue)
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Assignment of receivables
28/2/05
Collection of the remaining 118,000 of receivables assigned
RM RM
DR Cash 118,000
CR Accounts Receivable 118,000
Assigned
(To record collection in February)
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Assignment of receivables
1/3/05
Remittance of balance due to Salem Bank
RM RM
DR Notes payable(200,000-179,000) 21,000
DR Interest expense (21,000 x 12% x 1/12) 210
CR Cash 21,210
(to record loan repayment)
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Section 4:
Notes receivable
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Introduction
A promissory note is a written promise to pay a sum of
money on a specified date in the future
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Terms used in Note Receivable
Principal - the amount borrowed/ the face value/ the
stated amount of the note
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Due date
The life of a note may be expressed in months or days.
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Example
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Computing interest
The formula for computing INTEREST is PRT:
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Computing interest
RM99
RM5099
RM5099
365 RM99
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Entries to record notes receivables
At the time a note is received, it is recorded at
face value with no interest added.
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Entries to record notes receivables
Notes receivable are reported at their cash (net) realizable
value
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Entries to record notes receivables
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Entries to record notes receivables
If a note is not paid in full at maturity, it is called a
dishonored note. If it can reasonably be assumed
that the amount due will ultimately be collected, it is
usually transferred to an Account Receivable.
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Entries to record notes receivables
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