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Accounting for Receiveables.pptx

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Accounting for Receiveables.pptx

  1. 1. FINANCIAL ACCOUNTING II ACCOUNTING FOR RECEIVABLES WEEK 4 BBA 3RD M1 & M2 INSTRUCTOR MR. NAWAB M AHMAD
  2. 2. CONTENTS; TYPES OF RECEIVABLES ACCOUNTS RECEIVABLES RECOGNIZING ACCOUNTS RECEIVABLES VALUING ACCOUNTS RECEIVABLES DISPOSING 06 ACCOUNTS RECEIVABLES
  3. 3. Receivables includes all money claims against other entities, including people, companies, and other organizations • Receivables that result from sales on account are normally accounts receivable or notes receivable • Notes and accounts receivable that result from sales may be called trade receivable
  4. 4. TYPES OF RECEIVABLE: • ACCOUNTS RECEIVABLE • NOTES RECEIVABLE • OTHER RECEIVABLE
  5. 5. ACCOUNTS RECEIVABLE • ACCOUNTS RECEIVABLE ARE AMOUNTS THAT CUSTOMERS OWE THE COMPANY FOR NORMAL CREDIT PURCHASES • RECEIVABLES ARE RECORDED AS DEBIT TO ACCOUNTS RECEIVABLE • ACCOUNTS RECEIVABLES ARE NORMALLY COLLECTED WITHIN A SHORT PERIOD, SUCH AS 30 OR 60 DAYS • THEY ARE CLASSIFIED ON BALANCE SHEET AS CURRENT ASSET
  6. 6. NOTES RECEIVABLE • NOTES RECEIVABLE ARE AMOUNTS OWED TO THE COMPANY BY CUSTOMERS OR OTHERS WHO HAVE SIGNED FORMAL PROMISSORY NOTES IN ACKNOWLEDGMENT OF THEIR DEBTS. • NOTES RECEIVABLE EXPECTED TO BE COLLECTED WITHIN A YEAR ARE CLASSIFIED ON BALANCE SHEET AS A CURRENT ASSET • NOTES OFTEN USED FOR CREDIT PERIODS MORE THAN 60 DAYS
  7. 7. Note receivable, or promissory note, is written document containing promise to pay face amount, usually with interest, on demand or at date in future • By signing a note, debtor recognizes debt and agrees to pay it according to its terms • A note is a stronger legal claim over an account receivable
  8. 8. OTHER RECEIVABLE Other receivables include: • Interest receivable • Taxes receivable • Receivables from officers or employees Other receivables reported separately on balance sheet • If expected to be collected within one year, classified as current assets. • If collection expected beyond one year, classified as noncurrent assets and reported under the caption
  9. 9. ACCOUNT'S RECEIVABLES
  10. 10. ACCOUNT'S RECEIVABLES INTRODUCTION; YOU MAY STILL FIND YOURSELF CONFUSED ABOUT ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE. BOTH PROCESSES ARE PART OF THE ACCOUNTING CYCLE AND ARE REGULARLY USED BY BUSINESS THAT USE DOUBLE ENTRY OR ACCRUAL ACCOUNTING. WHILE ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE ARE MANAGED IN A SIMILAR WAY, THERE ARE SOME MAJOR DIFFERENCES BETWEEN THE TWO, WITH THE SINGLE BIGGEST DIFFERENCE BEING THAT ACCOUNTS PAYABLE IS A LIABILITY, WHILE ACCOUNTS RECEIVABLE IS AN ASSET ACCOUNT. IF YOU RECALL , ASSETS ARE ANYTHING YOUR BUSINESS OWNS, WHILE LIABILITIES ARE ANYTHING YOUR BUSINESS OWES. REMEMBERING THIS DISTINCTION WILL MAKE IT MUCH EASIER TO MANAGE ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE FOR YOUR BUSINESS, THOUGH MAKING THE CHOICE TO USE SMALL BUSINESS ACCOUNTING SOFTWARE WILL MAKE THE PROCESS EASIER STILL
  11. 11. OVERVIEW; WHAT ARE ACCOUNTS RECEIVABLE:- • ANY TIME YOU SELL GOODS OR SERVICES TO YOUR CUSTOMERS , YOU’RE INCREASING YOUR ACCOUNTS RECEIVABLE BALANCE. ACCOUNT'S RECEIVABLE REPRESENTS THE MONEY OWNED TO YOU BY YOUR CUSTOMERS WHO HAVE BEEN EXTENDED CREDIT TERMS. • PROPERLY MANAGING YOUR ACCOUNTS RECEIVABLE BALANCE IS VITAL FOR ANY BUSINESS, PARTICULARLY SMALL BUSINESSES WITH LIMITED CASH FLOW. PROPER ACCOUNTS RECEIVABLE MANAGEMENT ACTUALLY STARTS AT THE INITIAL DECISION TO PROVIDE YOUR CUSTOMERS WITH CREDIT AND ENDS WITH IMPLEMENTING PROPER COLLECTION ACTIVITIES FOR CUSTOMERS THAT DON’T PAY ON TIME. • ONE OF THE EASIEST WAYS TO DETERMINE HOW QUICKLY YOUR CUSTOMERS ARE PAYING YOU IS TO CALCULATE YOUR ACCOUNTS RECEIVABLE RATIO , WHICH TELLS YOU HOW EFFICIENTLY YOUR ENTIRE ACCOUNTS RECEIVABLE PROCESS IS FUNCTIONING.
  12. 12. HOW TO RECORD ACCOUNTS RECEIVABLE:- • THE JOURNAL ENTRY TO RECORD ACCOUNTS RECEIVABLE IS SIMPLE , THOUGH YOU’LL NEED TO REMEMBER TO SEPARATE OUT YOUR SALES TAX ,SINCE THAT WILL NEED TO BE REMITTED TO THE CORRECT AUTHORITY WHETHER YOUR INVOICE IS PAID BY YOUR CUSTOMER OR NOT.
  13. 13. • REMEMBER , BECAUSE ACCOUNTS RECEIVABLE IS AN ASSET ACCOUNT, WE’LL HEED TO DEBIT IT . ONCE THE INVOICE HAS BEEN PAID , YOU’LL THEN DEBIT ( INCREASE) YOUR CASH ACCOUNT WHILE CREDITING ACCOUNTS RECEIVABLE , WHICH HAS DECREASED. THE ENTRY TO RECORD THE INVOICE SENT TO JOHNSON FABRICS IS:-
  14. 14. DISCOUNTS ON ACCOUNTS RECEIVABLE VS ACCOUNTS PAYABLE:- ANOTHER IMPORTANT NOTE TO MAKE IS THAT SOMETIMES COMPANIES WILL ATTACH DISCOUNTS TO THEIR ACCOUNT RECEIVABLE ACCOUNTS TO INCENTIVES THE BORROWER TO PAY BACK THE AMOUNT EARLIER. THE DISCOUNTS BENEFIT BOTH PARTIES BECAUSE THE BORROWER RECEIVES THEIR DISCOUNT WHILE THE COMPANY RECEIVES THEIR CASH REPAYMENT SOONER, AS COMPANIES REQUIRE CASH FOR THEIR OPERATING ACTIVITIES. NOTATIONS FOR DISCOUNTS:- HERE ARE TWO NOTATIONS THAT ARE COMMONLY USED:  X/10 OR X/20 ( WHERE “X” IS USUALLY ANY NUMBER BETWEEN 1 AND 4 )  N/30 • FOR THE FIRST NOTATION, WE READ IT AS AN “X” PERCENTAGE DISCOUNT IF THE AMOUNT IS PAID BACK OR RECEIVED WITHIN 10 DAYS. SOME COMPANIES MAY CHOOSE TO EVEN GIVE A DISCOUNT IF THE AMOUNT IS PAID BACK OR RECEIVED WITHIN 20 DAYS. HERE IS WHAT AN EXAMPLE OF A 4•/• DISCOUNT ,IF PAID BACK WITHIN 15 DAYS ,WOULD LOOK LIKE 4/15. • THE SECOND NOTATION, USUALLY USED AFTER THE DISCOUNT NOTATION, MEANS THE NET AMOUNT MUST BE PAID WITHIN 30 DAYS OR HOW MANY DAYS YOU DECIDE. A PERFECT WAY TO DEMONSTRATE WHAT THIS WOULD MEAN IS TO SHOW AN EXAMPLE.
  15. 15. ACCOUNTS PAYABLE EXAMPLE:- • ON MARCH 31,2017 COOPERATE FINANCE INSTITUTE DECIDED TO PURCHASE $750 WORTH OF INVENTORY ON ACCOUNT FROM FO SUPPLIES. THE TERM OF THIS TRANSACTION WERE 2/10,N/30. THIS IS WHAT IT LOOK LIKE IN THE JOURNAL ENTRY • THIS IS WHAT THE INITIAL PURCHASE OF INVENTORY WOULD LOOK LIKE IN THE JOURNAL ENTRY. WE EXCLUDED THE TERMS IN THE DESCRIPTION PORTION OF OUR JOURNAL ENTRY BECAUSE IT IS OPTIONAL. IT’S UP TO YOU THE INDIVIDUAL WHETHER OR NOT THEY WISH TO INCLUDE THE TERMS OF THE TRANSITION. • THE NEXT PORTION IS RECORDING THE DISCOUNT IF THE ACCOUNT IS PAID BACK WITHIN THE DISCOUNT PERIOD. IN ORDER TO DETERMINE THE DISCOUNT , WE NEED TO TAKE THE$750 AND MULTIPLY BY 0.02(2•/•). THIS IS WHAT IT WOULD LOOK LIKE IN YOUR JOURNAL ENTRY. • INVENTORY. THIS IS BECAUSE WE ARE RECOGNIZING THAT WE PAID LESS FOR THE INVENTORY THAT WE RECEIVED . THIS IS TO PREVENT OVERSTATEMENT OR UNDERSTATEMENT OF THE INVENTORY AMOUNT AT THE END OF THE FISCAL YEAR IN OUR FINANCIAL STATEMENTS , ESPECIALLY THE BALANCE SHEET
  16. 16. HERE WE WILL USE TO THE SAME EXAMPLE AD ABOVE BUT INSTEAD , COOPERATE FINANCE INSTITUTE SELLS $750 WORTH OF INVENTORY TO FO SUPPLIES. THE TERMS ARE STILL THE SAME , AT 2/10,N/30 THIS IS THE FIRST ENTRY THAT AN ACCOUNTANT WOULD RECORD TO IDENTIFY A SALE ON ACCOUNT. AFTERWARD, IF THE RECEIVABLE ARE PAID BACK WITHIN THE DISCOUNT PERIOD,WE NEED TO RECORD THE DISCOUNT.
  17. 17. NOTICE THAT WE HAVE AN ACCOUNT CALLED SALES DISCOUNT AND ALLOWANCES. THIS ACCOUNT IS CONTRA ACCOUNT THAT GOES AGAINST SALES REVENUE ON THE INCOME STATEMENT . LASTLY IF THE RECEIVABLE ARE PAID BACK AFTER THE DISCOUNT PERIOD , WE RECORD IT AS A REGULAR COLLECTION OF RECEIVABLES.
  18. 18. RECOGNIZING ACCOUNTS RECEIVABLES
  19. 19. RECOGNIZING ACCOUNTS RECEIVABLES THIS IS THE SYSTEM UNDER WHICH YOU RECORD AN ACCOUNT RECEIVABLE. ... TO RECORD A JOURNAL ENTRY FOR A SALE ON ACCOUNT, ONE MUST DEBIT A RECEIVABLE AND CREDIT A REVENUE ACCOUNT. WHEN THE CUSTOMER PAYS OFF THEIR ACCOUNTS, ONE DEBITS CASH AND CREDITS THE RECEIVABLE IN THE JOURNAL ENTRY.
  20. 20. HOW ARE ACCOUNTS RECEIVABLE RECOGNIZED IN THE ACCOUNTS? • ACCOUNT'S RECEIVABLE ARE RECORDED AT INVOICE PRICE. THEY ARE REDUCED BY SALES RETURNS AND ALLOWANCES. CASH DISCOUNTS REDUCE THE AMOUNT RECEIVED ON ACCOUNTS RECEIVABLE. WHEN INTEREST IS CHARGED ON A PAST DUE RECEIVABLE, THIS INTEREST IS ADDED TO THE ACCOUNTS RECEIVABLE BALANCE AND IS RECOGNIZED AS INTEREST REVENUE.
  21. 21. RECOGNIZING ACCOUNTS RECEIVABLES; ASSUME THAT JORDACHE CO. ON JULY 1, 2017, SELLS MERCHANDISE ON ACCOUNT TO POLO COMPANY FOR $1, 000 TERMS 2/10, N/30. PREPARE THE JOURNAL ENTRY TO RECORD THIS TRANSACTION ON THE BOOKS OF JORDACHE CO. JUL. 1 ACCOUNTS RECEIVABLE 1, 000 SALES REVENUE 9 -5 1, 000 LO 1
  22. 22. RECOGNIZING ACCOUNTS RECEIVABLES ILLUSTRATION: ON JULY 5, POLO RETURNS MERCHANDISE WORTH $100 TO JORDACHE CO. JUL. 5 SALES RETURNS AND ALLOWANCES ACCOUNTS RECEIVABLE 100 ILLUSTRATION: ON JULY 11, JORDACHE RECEIVES PAYMENT FROM POLO COMPANY FOR THE BALANCE DUE. JUL. 11 CASH 882 SALES DISCOUNTS ($900 X. 02) 18 ACCOUNTS RECEIVABLE 9 -6 900 LO 1
  23. 23. ACCOUNTS RECEIVABLE CONCLUSION • YOU WILL ACCOUNT FOR THE OUTSTANDING AMOUNT IN THE GENERAL LEDGER ACCOUNT CALLED ACCOUNT RECEIVABLES. THE OUTSTANDING BALANCE IN THE ACCOUNT IS REPORTED ON THE BALANCE SHEET OF THE COMPANY. ACCOUNTS RECEIVABLES ARE WHEN A CUSTOMER OWES THE COMPANY MONEY.
  24. 24. VALUING ACCOUNTS RECEIVABLES
  25. 25. VALUING ACCOUNTS RECEIVABLES VALUING ACCOUNTS RECEIVABLES INVOLVES REPORTING THEM AT THEIR NET REALIZABLE VALUE .NET REALIZABLE VALUE IS THE AMOUNT EXPECTED TO BE RECEIVED IN CASH. CREDIT LOSSES ARE CONSIDERED A NORMAL AND NECESSARY RISK OF DOING BUSINESS ON A CREDIT BASIS. CREDIT LOSSES ARE DEBITED TO BAD DEBTS EXPENSE. THE KEY ISSUE IN VALUING ACCOUNTS RECEIVABLE IS WHEN TO RECOGNIZE THESE CREDIT LOSSES. IF THE COMPANY WAITS UNTIL IT KNOWS FOR SURE THAT A SPECIFIC ACCOUNT WILL NOT BE COLLECTED , IT COULD END UP RECORDING THE BAD DEBT EXPENSE IN A DIFFERENT PERIOD THAN THE REVENUE. IF CREDIT LOSSES ARE NOT RECORDED UNTIL THEY OCCUR, NO ATTEMPT IS MADE TO MATCH BAD DEBTS EXPENSE WITH SALES REVENUES OR TO SHOW THE NET REALIZABLE VALUE OF THE ACCOUNTS RECEIVABLE. THIS VIOLATES THE MATCHING PRINCIPLE. TO AVOID A MISMATCH, WE DON’T WAIT UNTIL WE KNOW EXACTLY WHICH RECEIVABLES ARE UNCOLLECTIBLE. INSTEAD ,WE MUST ESTIMATE THE UNCOLLECTIBLE ACCOUNTS RECEIVABLE.
  26. 26. THERE ARE THREE METHODS OF ESTIMATE THE UNCOLLECTIBLE ACCOUNTS RECEIVABLE:-  ALLOWANCE METHOD:- • THE ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS INVOLVES ESTIMATING THE UNCOLLECTIBLE ACCOUNTS AT THE END OF EACH PERIOD. • AS A RESULT , THE BAD DEBT EXPENSE IS RECORDED IN THE SAME PERIOD AS THE REVENUE FROM CREDIT SALES, AND THE ACCOUNTS RECEIVABLE ARE REPORTED AT THEIR NET REALIZABLE VALUE ON THE BALANCE SHEET . • THE ALLOWANCE METHOD IS REQUIRED FOR FINANCIAL REPORTING PURPOSES WHEN BAD DEBTS ARE MATERIAL ( SIGNIFICANT) IS AMOUNT . IT HAS THREE ESSENTIAL FEATURES :-  RECORDING ESTIMATED UNCOLLECTIBLE  RECORDING THE WRITE- OFF AN UNCOLLECTIBLE ACCOUNTS  RECOVERY OF AN UNCOLLECTIBLE ACCOUNTS
  27. 27. RECORDING ESTIMATED UNCOLLECTIBLE:- ESTIMATED UNCOLLECTIBLE ARE DEBITED TO BAD DEBTS EXPENSE AND CREDITED TO ALLOWANCE FOR DOUBTFUL ACCOUNTS THROUGH AN ADJUSTING ENTRY AT THE END OF EACH PERIOD. THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS A CONTRA ASSET ACCOUNT THAT IS DEDUCTED FROM ACCOUNTS RECEIVABLE, RESULTING IN THE NET REALIZABLE VALUE OF THE RECEIVABLES APPEARING ON THE BALANCE SHEET
  28. 28. ACCOUNTS RECEIVABLE – ALLOWANCE FOR DOUBTFUL ACCOUNTS= $200,000 - $25,000. NET REALIZABLE VALUE $175 .000 ILLUSTRATION 8-3:- FORMULA COLLECTING NET REALIZABLE VALUE ESTIMATING THE ALLOWANCE:- TWO APPROACHES ARE USED TO ESTIMATE THE AMOUNT OF UNCOLLECTIBLE: 1.PERCENTAGE OF SALES 2.PERCENTAGE OF RECEIVABLES
  29. 29. PERCENTAGE OF SALES APPROACH:-  THIS METHOD CALCULATES BAD DEBTS EXPENSE AS A PERCENTAGE OF NET CREDIT SALES BASED ON PAST EXPERIENCE AND THE COMPANY’S CREDIT POLICY.  WHEN CALCULATING THE AMOUNT IN THE ADJUSTING ENTRY ,THE EXISTING BALANCE IN THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS IGNORED.  IF THE WRITE- OFFS IN THE NEXT YEAR ARE VERY DIFFERENT FROM THE AMOUNT ESTIMATED THIS YEAR, MANAGEMENT SHOULD ADJUST THE PERCENTAGE IN CALCULATING THE ADJUSTING ENTRY .  THIS APPROACH TO ESTIMATING UNCOLLECTIBLE RESULTS IS AN EXCELLENT MATCHING OF EXPENSES WITH REVENUES BECAUSE THE BAD DEBTS EXPENSE IS RELATED TO THE SALES RECORDED IN THE SAME PERIOD.  THIS APPROACH IS SOMETIMES CALLED THE INCOME STATEMENT APPROACH BECAUSE AN INCOME STATEMENT ACCOUNT,SALES,IS USED TO CALCULATE ANOTHER INCOME STATEMENT ACCOUNT, BAD DEBT EXPENSE. TO ILLUSTRATE ,ASSUME THAT ADORABLE JUNIOR GARMENT DECIDES TO USE THE PERCENTAGE OF SALES APPROACH . IT CONCLUDES THAT 2 PERCENTAGE OF NET CREDIT SALES WILL BECOME UNCOLLECTIBLE. RECALL THAT NET CREDIT SALES FOR THE CALENDAR YEAR 2007 ARE $1.2 MILLION. THE ESTIMATED BAD DEBTS EXPENSE IS $24,000(2•/• ×$1,200,000) . THE ADJUSTING ENTRY IS
  30. 30. PERCENTAGE OF RECEIVABLES APPROACH:-  UNDER THE PERCENTAGE OF RECEIVABLES APPROACH , MANAGEMENT USES PAST EXPERIENCE ESTIMATE THE PERCENTAGE OF RECEIVABLES THAT WILL BECOME UNCOLLECTIBLE ACCOUNTS.  ONE METHOD IS TO MULTIPLY THE TOTAL AMOUNT OF ACCOUNTS RECEIVABLE BY A PERCENTAGE BASED ON OVERALL ESTIMATE OF THE TOTAL UNCOLLECTIBLE ACCOUNTS.  A SECOND METHOD IS TO USE DIFFERENT PERCENTAGES DEPENDING ON HOW LONG THE ACCOUNTS RECEIVABLE HAVE BEEN OUTSTANDING.  A SCHEDULE MUST BE PREPARED, CALLED AN AGING SCHEDULE, WHICH SHOWS THE AGE OF EACH ACCOUNT RECEIVABLE. THE LONGER A RECEIVABLE IS PAST DUE OR OUTSTANDING ,THE LESS LIKELY IT IS TO BE COLLECTED.  AFTER THE AGES OF THE DIFFERENT ACCOUNTS RECEIVABLE ARE DETERMINED THE LOSS FROM UNCOLLECTIBLE ACCOUNTS IS ESTIMATED.  THIS IS DONE BY APPLYING PERCENTAGES BASED ON PAST EXPERIENCE TO THE TOTALS IN EACH CATEGORY.
  31. 31. • BECAUSE THE BALANCE SHEET IS EMPHASIZED IN THE PERCENTAGE OF RECEIVABLES APPROACH , THE EXISTING BALANCE IN THE ALLOWANCE ACCOUNT MUST BE CONSIDERED WHEN CALCULATING THE BAD DEBTS EXPENSE IN THE ADJUSTING ENTRY.
  32. 32. IF THE TRIAL BALANCE SHOWS ALLOWANCE FOR DOUBTFUL ACCOUNTS WITH A CREDIT BALANCE OF $1,000,AN ADJUSTING ENTRY FOR $24,000($25,000- $1,000) IS NECESSARY , AS FOLLOWS: • AFTER THE ADJUSTING ENTRY IS POSTED , ADORABLE JUNIOR GARMENT’S ACCOUNTS WILL SHOW THE FOLLOWING
  33. 33.  IF THE ALLOWANCE ACCOUNT HAS A DEBT BALANCE , PRIOR TO ADJUSTING ENTRY , THE DEBIT BALANCE IS ADDED TO THE REQUIRED BALANCE WHEN THE ADJUSTING ENTRY IS MADE.  THE PERCENTAGE OF RECEIVABLES APPROACH IS SOMETIMES CALLED THE BALANCE SHEET APPROACH.  BOTH THE PERCENTAGE OF SALES AND PERCENTAGE OF RECEIVABLES APPROACH ARE GENERALLY ACCEPTED.  THIS METHOD USED IS A MANAGEMENT DECISION.
  34. 34. RECORDING THE WRITE-OFFS OF AN UNCOLLECTIBLE ACCOUNTS:- • WHEN ALL OF THE WAYS OF COLLECTING A PAST – DUE ACCOUNT HAVE BEEN TRIED AND COLLECTION APPEARS IMPOSSIBLE, THE ACCOUNT SHOULD BE WRITTEN OFF. • TO ILLUSTRATE A RECEIVABLES, WRITE- OFF, ASSUME THAT THE VOICE – PRESIDENT OF FINANCE OF ADORABLE JUNIOR GARMENT AUTHORIZES THE WRITE- OFF OF A $4,500 BALANCE OWED BY A DELINQUENT CUSTOMER , KIDS ONLINE, ON MARCH 1,2008. THE ENTRY IS RECORD THE WRITE – OFF IS AS FOLLOWS:  BAD DEBTS EXPENSE IS NOT INCREASED WHEN THE WRITE- OFF OCCURS.  UNDER THE ALLOWANCE METHOD, EVERY ACCOUNT WRITE – OFF IS DEBITED TO THE ALLOWANCE FOR DOUBTFUL ACCOUNTS RATHER THAN TO BAD DEBTS EXPENSE.  A DEBIT TO BAD DEBTS EXPENSE WOULD BE INCORRECT BECAUSE THE EXPENSE WAS ALREADY RECOGNIZED WHEN THE ADJUSTING ENTRY WAS MADE FOR ESTIMATED BAD DEBTS LAST YEAR. • A WRITE OFF AFFECTS ONLY BALANCE SHEET ACCOUNTS . THE WRITE- OFF OF THE ACCOUNT REDUCES BOTH ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. NET REALIZABLE VALUE IN THE BALANCE SHEET REMAIN THE SAME, AS SHOWN BELOW:  AS MENTIONED EARLIER, THE ALLOWANCE ACCOUNT CAN SOMETIMES END UP IN A DEBIT BALANCE POSITION AFTER THE WRITE – OFF OF AN UNCOLLECTIBLE ACCOUNT.  THIS CAN HAPPEN IF THE WRITE OFF IN THE PERIOD ARE MORE THAN THE OPENING BALANCE. IT MEANS THE ACTUAL CREDIT LOSSES WERE GREATER THAN THE ESTIMATED CREDIT LOSSES.  THE BALANCE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS WILL BE CORRECTED WHEN THE ADJUSTING ENTRY FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS IS MADE AT THE END OF PERIOD.
  35. 35. RECOVERY OF AN UNCOLLECTIBLE:- • OCCASIONALLY , A COMPANY WILL COLLECT ON AN ACCOUNT THAT HAS PREVIOUSLY BEEN WRITTEN OFF.THE ENTRIES ARE REQUIRED TO RECORD THE RECOVERY OF THE BAD DEBT: REVERSE THE ENTRY THAT ORIGINALLY WROTE OFF THE CUSTOMER’S ACCOUNT AND THEN RECORD THE RECEIPT OF THE CASH FOR THE DEBT. • TO ILLUSTRATE , ASSUME THAT ON JULY1,2008 KIDS ONLINE PAYS THE $4,500 AMOUNT THAT HAD BEEN WRITTEN OFF ON MARCH 1. THE ENTRIES ARE AS FOLLOWS: • IT IS NECESSARY TO BOTH DEBIT AND CREDIT AR SO THAT THE TRANSACTION GOES THROUGH THE CUSTOMERS SUB- LEDGER ACCOUNT AND SHOWS THAT THE CUSTOMER DID PAY OFF THE BALANCE OWING.
  36. 36. DISPOSING 06 ACCOUNTS RECEIVABLES
  37. 37. DISPOSING OF ACCOUNTS RECEIVABLE TO ACCELERATE THE RECEIPT OF CASH FROM RECEIVABLES, OWNERS FREQUENTLY 1. SELL TO A FACTOR, SUCH AS A FINANCE COMPANY OR A BANK 2. MAKE CREDIT CARD SALES
  38. 38. DISPOSING OF ACCOUNTS RECEIVABLE (CONT.) A FACTOR BUYS RECEIVABLES FROM BUSINESSES FOR A FEE AND COLLECTS THE PAYMENTS DIRECTLY FROM CUSTOMERS. CREDIT CARDS ARE FREQUENTLY USED BY RETAILERS WHO WISH TO AVOID THE PAPERWORK OF ISSUING CREDIT. RETAILERS CAN RECEIVE CASH MORE QUICKLY FROM THE CREDIT CARD ISSUER.
  39. 39. CREDIT CARD SALES THREE PARTIES ARE INVOLVED WHEN CREDIT CARDS ARE USED IN MAKING RETAIL SALES THE CREDIT CARD ISSUER THE RETAILER THE CUSTOMER THE RETAILER PAYS THE CREDIT CARD ISSUER A PERCENTAGE FEE OF THE INVOICE PRICE FOR ITS SERVICES.
  40. 40. BANK CARD SALES • SALES RESULTING FROM THE USE OF VISA AND MASTERCARD ARE CONSIDERED CASH SALES BY THE RETAILER. THESE CARDS ARE ISSUED BY BANKS. UPON RECEIPT OF CREDIT CARD SALES SLIPS FROM A RETAILER, THE BANK IMMEDIATELY ADDS THE AMOUNT TO THE SELLER'S BANK BALANCE.

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