CHAPTER 2: CASH AND RECEIVABLES

2.1. Cash

2.2. Bank Reconciliation

Double bookeeping: ghi kép giao dịch kế toán
2.3. Accounts Receivable Dr/Cr entry (nợ/có bút toán); total debit = total credit
Debit
Credit
2.4. Notes Receivable T-account
Asset: tăng debit; giảm credit
Liability
2.5. Presentation and Disclosure Equity
Expense
Revenue

FINANCIAL ACCOUNTING 1 1
CHAPTER 2: CASH AND RECEIVABLES
OBJECTIVE:

 After studying this chapter, you should be able to

 Identify Cash and accounting for cash transaction

 Understanding the purpose and practice Bank Reconciliation

 Recognition and accounting for Accounts Receivable

 Recognition and accounting for Notes Receivable

FINANCIAL ACCOUNTING 1 2
2.1. CASH
2.1.1. Cash and Cash equivalent
2.1.2. Accounting for Cash transaction
2.1.3. The Petty Cash and Cash control

FINANCIAL ACCOUNTING 1 3
 CASH AND CASH EQUIVALENT

DEFINITION of CASH
A current assets account which includes
 all currency coins, checking accounts, undeposited checks received from customers
 coins owned by the company
 all deposits in the bank including checking accounts and short-
term savings accounts vendee checks, customer checks, cashier's checks
Cash is the most liquid asset a company can own.

Cash là một tài sản ngắn hạn, đồng tiền, đồng xu, tài khoản thanh toán,

FINANCIAL ACCOUNTING 1 4
 CASH AND CASH EQUIVALENT

DEFINITION OF CASH EQUIVALENT

Cash equivalents are investments securities that are for short-
term investing, and they have high credit quality and are highly
liquid, includes:
 Treasury bills, government bond
 Commercial papers
 Marketable Securities
…

FINANCIAL ACCOUNTING 1 5
 SOURCE DOCUMENTS chứng từ kế toán

Remittance advice Lệnh chi tiền từ ngân hàng

A remittance advice is a statement that accompanies a payment to a supplier,
detailing what was paid. để thanh toán cho nhà cung cấp, thông tin gửi đến cả ngân hàng và supplier
A remittance advice includes the invoice number and payment amount for each
invoice paid

CASH RECEIPT Voucher một chứng từ bán được hàng, ghi nhận tiền => tăng cash
It details of payment received. Receipt is used to describe a document which is
issued as a proof of a sales transaction
Invoice hóa đơn
Supplier cung cấp hóa đơn, bằng chứng chứng minh hàng hóa giao dịch thành công
An invoice (bill or tab) is a source document issued by a seller to a buyer, relating to
a sale transaction and indicating the products, quantities, and agreed prices for
products or services the seller had provided the buyer.
thông tin: người bán, người mua, hàng hóa, địa điểm, ngày giao hàng, phương thức giao hàng, mã
code, thuế...

FINANCIAL ACCOUNTING 1 6
 ACCOUNTING FOR CASH TRANSACTION
Books of original entry sổ nhật ký ban đầu: thông tin về giao dịch ban đầu, sổ nhật ký

Tiền lặt vặt: giấy, nước, cà phê,...

Sales day book Petty cash book

Purchases day book The payroll

Cash book The journal

ghi nhận giao dịch thu chi bằng tiền của công ty: bao gồm cash receipt, cash payment
FINANCIAL ACCOUNTING 1 7
 ACCOUNTING FOR CASH TRANSACTION
Book OF prime entry

• CASH BOOK: The cash book is used to record money received and paid out by the
business through the business bank account. The book of original entry

• PETTY CASH BOOK: Some cash, in notes and coins, is usually kept on the business
premises in order to make occasional payments for odd items of expense
Accounted for separately in a petty cash book.

FINANCIAL ACCOUNTING 1 8
 DOUBLE ENTRY FOR CASH TRANSACTIONS

• PRINCIPLE:
CASH ACCOUNT/ BANK ACCOUNT

• A cash payment is a credit entry in the cash account

• A cash receipt is a debit entry in the cash account

acquired = purchased
cash in advance: trả trước; lease: hợp đồng; prepaid rent (tài sản ngắn hạn): chi phí thuê trả trước
Cash flow FA là tăng cash; OA là giảm cash
partial payment: trả trước một phần

FINANCIAL ACCOUNTING 1 9
DOUBLE ENTRY FOR CASH TRANSACTIONS

FINANCIAL ACCOUNTING 1 10
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Capital Introduction: owners injects capital on cash:

1.Increase assets (cash)
2.Increase equity (common stock)
• DR CASH
• CR CAPITAL

FINANCIAL ACCOUNTING 1 11
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Cash Sale:
1.Increase Cash
2.Increase Sale
DR CASH
CR SALE

FINANCIAL ACCOUNTING 1 12
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Receipt from credit customer:

1.Increase Cash
2.Decrease Trade receivable
DR CASH
CR TRADE RECEIVABLE

FINANCIAL ACCOUNTING 1 13
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Cash Purchase:
1.Increase assets (goods/ purchase)
2.Decrease Cash
DR GOODS/ PURCHASE
CR CASH

FINANCIAL ACCOUNTING 1 14
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Acquisition a Non current Assets by cash:

1.Increase assets (Non current Assets)
2.Decrease Cash
DR Non current Assets
CR CASH

FINANCIAL ACCOUNTING 1 15
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Payment salary to employee:

1.Increase expense/ Decrease payroll liability
2.Decrease Cash
DR expense/ DR payroll liability
CR CASH

FINANCIAL ACCOUNTING 1 16
DOUBLE ENTRY FOR CASH DISCOUNT

• A discount allowed arises when a business records one amount as being

due from a customer, but then allows the customer to pay slightly less in full
settlement.
• A discount received arises when a business records one amount as being
due to a supplier, but then receives notice from the supplier that slightly less
can be paid in full settlement.
 NOTED in separate columns in the CASH BOOK

FINANCIAL ACCOUNTING 1 17
DOUBLE ENTRY FOR CASH DISCOUNT

• A discount receipt
DR TRADE PAYABLE
CR CASH
CR DISCOUNT RECEIPT

FINANCIAL ACCOUNTING 1 18
DOUBLE ENTRY FOR CASH DISCOUNT

• A discount allowed
DR CASH
DR DISCOUNT ALLOWED
CR TRADE RECEIVABLE

FINANCIAL ACCOUNTING 1 19
Double entry for discounts

Discount received (example)

Jun 4 Bought goods on credit from Major RM900
9 Paid Major RM855 by cheque, having deducted RM45 cash discount

FINANCIAL ACCOUNTING 1 20
 Ledger accounting and double entry
Double entry for discounts

Discount received (example)

FINANCIAL ACCOUNTING 1 21
Double entry for discounts

Cash Discount - Discount Allowed

• The cash discount given by the trader to his customer is considered a cost to the
trader because he receives a smaller amount than what is owed to him.
• Example:
Jun 10 Sold goods to Kay on credit RM400.Terms of payment: 10% 14 days.
20 Kay paid for the amount owed by cheque and received a cash discount
of10%.

FINANCIAL ACCOUNTING 1 22
Double entry for discounts

Dr Kay Cr
Date Particulars Amt Date Particulars Amt
Jun 10 Sales 400 Jun 20 Bank 360
Discount
allowed 40

Dr Bank Account Cr
Date Particulars Amt Date Particulrs Amt
Jun 20 Kay 360

Dr Discount Allowed Account Cr

Date Particulars Amt Date Particulars Amt
Jun 10 Kay 40
FINANCIAL ACCOUNTING 1 23
 PRACTICE
Cash book
The receipts part of the cash book for 1 September would look like this:
Cash book (receipts)
Date
Narrative Total receipts VAT Receivables Cash sales Other
20X7
£ £ £ £ £ £

1 Sept Balance b/d* 900

Cash sale (a) 96

Receivables: Hay (b) 380

Receivables: Been (c) 720

Receivables: Seed (d) 140

Loan: Len Dinger (e) 1,800

Cash sale (f) 144

Sale of non-current assets (g) 200

Total 4,380

* tb/d = brought down (je brought forward)

FINANCIAL ACCOUNTING 1 24
 PRACTICE
Cash book
There is usually space on the right hand side of the cash book 50 that the receipts can be analysed —
for example, ‘VAT’, ‘(cash from) receivables’, ‘cash sales’ and ‘other (receipts)’.
The cash received in the day amounted to £3,480. Added to the £900 at the start of the day, this
comes to £4,380. This is not the amount to be carried forward to the next day, because first we have
to subtract all the payments made on 1 September.
The payments part of the cash book for 1 September would look like this:
Cashbook (payments)
Date Total
Narrative VAT Payables Petty cash Wages Other
20X7 receipts
£ £ £ £ £ £ £
1 Sept Payables: Kew (h) 120 120
Payables: Hare (i) 310 310
Telephone bill (j) 384 64 320
Service charge bill (k) 288 48 240
Petty cash (I) 100 100
Machinery purchases (m) 1,500 1,500
Total payments 2,702 112 430 100 - 2,060
Balance c/d (4,380—2,702) 1,678
Total 4,380 ACCOUNTING 1
FINANCIAL 25
 PRACTICE
DOUBLE BOOKEEPING

FINANCIAL ACCOUNTING 1 26
 PRACTICE
DOUBLE BOOKEEPING

FINANCIAL ACCOUNTING 1 27
 2.1.3. THE PETTY CASH AND CASH CONTROL
The petty cash
Most businesses keep a small amount of cash on the premises to make occasional
small payments in cash, eg staff refreshments, postage stamps, to pay the office
cleaner, taxi fares, etc. This is often called the cash float or petty cash account.

Petty cash imprest system - this system is created to enable the proper control of
petty cash fund.
There are 3 distinct steps within the system:
• Establishment of a petty cash fund or float
• Recording of expenditures paid through the petty cash fund
• Getting the reimbursements for expenditures made

FINANCIAL ACCOUNTING 1 28
 2.1.3. THE PETTY CASH AND CASH CONTROL

Petty cash book: The book of original entry for SMALL payments and receipts of cash.

Most common, petty cash use the imprest system  reimburse/ refund the total
amount paid out in a period (i.e. if on 1 Dec petty cash paid out $100  under
imprest system, on 2 Dec accountant will draw $100 to top-up the amount paid in
yesterday).
Under what is called the imprest system, the amount of money in petty cash is kept at
an agreed sum or 'float' , so that each toping is equal to the amount paid out in the
period.
Although the amounts are small, petty cash transactions still need to be recorded to
prevent fraudulent or misuse of funds (i.e. IOU).
There are usually more payments than receipts in petty cash

FINANCIAL ACCOUNTING 1 29
 2.1.3. THE PETTY CASH AND CASH CONTROL

Petty cash book

FINANCIAL ACCOUNTING 1 30
 2.1.3. THE PETTY CASH AND CASH CONTROL

Petty cash and the imprest system

Opening balance (imprest amount) (balancing figure)

Add amount received from staff

Less expenditure

Cash in hand at end of month

= Top up amount

FINANCIAL ACCOUNTING 1 31
 2.2. BANK RECONCILIATION

The cash at bank account, the cash book and the bank statement
• The cash at bank account in the nominal ledger is the control
account for the cash book, although often they are one and the
same.
• The cash at bank account, the cash book and the bank statement
all reflect transactions through the business's bank account.

FINANCIAL ACCOUNTING 1 32
 2.2. BANK RECONCILIATION
BANK RECONCILIATION: Bank statement
• Cash is an asset (a debit balance) in the business's ledger
accounts. As far as the bank is concerned it owes the business
money. Thus every item recorded as a debit in the business's
books – a positive bank balance, and any receipts of cash –
will be shown as a credit on the bank statement.
• When cash is a liability (a credit balance) in the business's
books, as far as the bank is concerned it is owed money. Thus
every credit entry in the business's books – a negative bank
balance, and any payments of cash – will be shown as a debit
on the bank statement.

FINANCIAL ACCOUNTING 1 33
 2.2. BANK RECONCILIATION
BANK RECONCILATION
Disagreement with the cash book
There are five common explanations for differences between cash
book and bank statement.
• Error
• Unrecorded bank charges or bank interest.
• Automated payments and receipts.
• Dishonoured cheques
• Timing differences

FINANCIAL ACCOUNTING 1 34
 2.2. BANK RECONCILIATION

Bank reconciliation:
• A comparison of a bank statement (sent monthly, weekly or even daily
by the bank) with the cash book.
• Differences between the balance on the bank statement and the balance
in the cash book should be identified and satisfactorily reconciled
• When doing a bank reconciliation, have to look for the following items
on the bank statement and in the cash book:
• Errors in the cash book
• Corrections and adjustments to the cash book
• Errors in the bank statement
• Items reconciling the correct cash book balance to the bank
statement (timing differences)

FINANCIAL ACCOUNTING 1 35
 2.2. BANK RECONCILIATION

Bank reconciliation:
Corrections and adjustments to the bank statements (timing
differences):
• Unpresented cheques (outstanding cheque): Cheques drawn (ie paid) by the
business and credited in the cash book, which have not yet been presented to
the bank, or 'cleared', and so do not yet appear on the bank statement
• Uncleared lodgements: Cheques received by the business, paid into the bank
and debited in the cash book, but which have not yet been cleared and entered
in the account by the bank, and so do not yet appear on the bank statement
The corrected cash book balance is then equal to the corrected bank
balance

FINANCIAL ACCOUNTING 1 36
 2.2. BANK RECONCILIATION

Bank reconciliation:
Corrections and adjustments to the cash book
• Payments made into the bank account or from the bank account by
way of standing order or direct debit, which have not yet been entered
in the cash book
• Dividends received (on investments held by the business), paid direct
into the bank account but not yet entered in the cash book
• Bank interest and bank charges, not yet entered in the cash book
• Errors in the cash book that need to be corrected
The corrected cash book balance is then shown in the statement of
financial position.

FINANCIAL ACCOUNTING 1 37
 2.2. BANK RECONCILIATION

Reconciliation procedures

+ -
- -
+
+/- +/-

CORRECT BALANCE CORRECT BALANCE

FINANCIAL ACCOUNTING 1 38
 2.2. BANK RECONCILIATION
PRACTICE

At 30 September 20X6, the balance in the cash book of Wordsworth Co was

$805.15 debit. A bank statement on 30 September 20X6 showed Wordsworth Co
to be in credit by $1,112.30.
On investigation of the difference between the two sums, it was established that:
(i) The cash book had been undercast by $90.00 on the debit side*
(ii) Cheques paid in not yet credited by the bank amounted to $208.20, called
outstanding
lodgements
(iii) Cheques drawn not yet presented to the bank amounted to $425.35 called
unpresented cheques
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to the balance
per cash book.

FINANCIAL ACCOUNTING 1 39
 PRACTICE
BANK RECONCILIATION

FINANCIAL ACCOUNTING 1 40
ACCOUNT RECEIVABLE

FINANCIAL ACCOUNTING 1 41
 SOURCE DOCUMENTS
Delivery notes

The delivery note is most often prepared with reference to the sales order.
Note:
Good received note& Good delivery note

Invoice

An invoice (bill or tab) is a source document issued by a seller to a buyer, relating to

a sale transaction and indicating the products, quantities, and agreed prices for
products or services the seller had provided the buyer.

FINANCIAL ACCOUNTING 1 42
 2.3. ACCOUNTS RECEIVABLE
Books of original entry

The main books of original entry are:

Sales day book Petty cash book

Purchases day book The payroll

Cash book The journal

FINANCIAL ACCOUNTING 1 43
 2.3. ACCOUNTS RECEIVABLE
Sales day book

Sales day book: The book of original entry in respect of credit sales, including both
invoices and credit notes

FINANCIAL ACCOUNTING 1 44
 ACCOUNTING FOR ACCOUNT RECEIVABLE
The receivables ledgers

 It is a statements of credit customers at the end of each month

 It shows credit position of individual customers, and to ensure that no customer
is exceeding credit limit.
 Need to match payments received against debts owed.

FINANCIAL ACCOUNTING 1 45
 ACCOUNTING FOR ACCOUNT RECEIVABLE
Accounting for receivables
• At any time the balance on the receivables control account
should be equal to the sum of the individual personal
account balances on the receivables ledger.
– Most customers have a debit balance
– Some customer may have a credit balance, perhaps because
it has overpaid the business, or paid for goods and then
returned some.

• Contra: When a person or business is both a customer and a

supplier, amounts owed by and owed to the person may be
'netted off' by means of a contra

FINANCIAL ACCOUNTING 1 46
 DOUBLE ENTRY FOR CASH TRANSACTIONS

• PRINCIPLE:
TRADE ACCOUNTS RECEIVABLE

• An increase of Trade receivable is a debit entry in the Account Receivable

• An decrease of Trade receivable is a credit entry in the Account Receivable

FINANCIAL ACCOUNTING 1 47
2.3. ACCOUNTS RECEIVABLE

The receivables ledgers

FINANCIAL ACCOUNTING 1 48
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Credit Sale:
1.Increase trade receivable
2.Increase Sale
DR ACCOUNT RECEIVABLE
CR SALE

FINANCIAL ACCOUNTING 1 49
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Disposal a Non current Assets on credit:

1.Increase assets (account receivable)
2.Increase disposal non current asset
DR account receivable
CR disposal non current asset

FINANCIAL ACCOUNTING 1 50
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Receipt from credit customer:

1.Increase Cash
2.Decrease Trade receivable
DR CASH
CR TRADE RECEIVABLE

FINANCIAL ACCOUNTING 1 51
 DOUBLE ENTRY FOR CASH TRANSACTIONS

Contra Entry:
1.Decrease trade payable
2.Decrease trade receivable
DR trade payable
CR trade receivable

FINANCIAL ACCOUNTING 1 52
 ACCOUNTING FOR ACCOUNT RECEIVABLE
PRACTICE
At 1 July 20X2, the Outer Business Company (not registered for VAT) had no trade
receivables. During July, the following transactions affecting credit sales and
customers occurred:
(a) July 3: invoiced A Arnold for the sale on credit of hardware goods: £100
(b) July 11: invoiced B Bagshaw for the sale on credit of electrical goods: £1 50
(c) July 15: invoiced C Cloning for the sale on credit of hardware goods: £250
(d) July 10: received payment from A Arnold of £90, in settlement of his debt in full,
having taken a permitted cash discount of £10 for payment within seven days
(e) July 18: received a payment of £72 from B Bagshaw in part settlement of £80 of
his debt; a cash discount of £8 was allowed for payment within seven days of
invoice
(f) July 28: received a payment of £120 from C Cloning, who was unable to claim
any discount
(g) July 31: received notice that B Bagshaw had become insolvent, so no more
payments could be expected from him, The balance of his debt was to be ‘written
off’ as irrecoverable (£70)
FINANCIAL ACCOUNTING 1 53
 ACCOUNTING FOR ACCOUNT RECEIVABLE
PRACTICE

FINANCIAL ACCOUNTING 1 54
 2.3. ACCOUNTS RECEIVABLE
Irrecoverable Debts
An irrecoverable debt is a debt which is not expected to be paid by
Definition debtor.

Debtor:
When?  Die, bankrupt, foreign governments restrict payment, dishonest…

Irrecoverable debt are specific debts owed to a

business which it decides are never going to be
paid
Entry:
Dr Irrecoverable debts
Cr Receivables (Receivables
Accounting treatment control account)
written off as an expense on the income
statement

FINANCIAL ACCOUNTING 1 55
 Irrecoverable debts and allowances
Accounting treatment

For irrecoverable debt  use irrecoverable debt account:

Dr Irrecoverable debt a/c (expense in P&L)

Cr Trade account receivable

End of accounting period  use I&E a/c to balance Irrecoverable

account
Dr I&E a/c
Cr Irrecoverable debt a/c

If irrecoverable debt was recovered in same If irrecoverable debt was recovered in

accounting period: different accounting period:
Dr Trade account receivable/Bank Dr Trade account receivable/Bank
Cr Irrecoverable debt a/c
Cr Irrecoverable debt a/c

FINANCIAL ACCOUNTING 1 56
 Irrecoverable debts and allowances
Allowances for receivables

An allowance for receivables is an estimate of the percentage of

Definition debts which are not expected to be paid.

may be specific (an allowance against a particular receivable)

How?
simply a percentage allowance based on past experience of
irrecoverable debts.

An increase in the allowance for shown as an expense in the

receivables income statement

shown net of any receivables Trade receivables in the balance

allowance sheet

FINANCIAL ACCOUNTING 1 57
 Irrecoverable debts and allowances
Accounting principles

Income Statement
initially charged as an (for period which
allowance expense allowance is
created)

increased in allowance
allowance subsequently  charged as expense
(in P&L for the period
already exist increased in which increased
allowance made)

the decreased in
allowance  credited
allowance subsequently back to Income
already exist decreased Statement (for the period
in which decreased
allowance made)

The value of trade accounts receivables in

Balance sheet  shown after deducting
FINANCIAL ACCOUNTING 1
Prudence concept 58
allowance for receivable
 Irrecoverable debts and allowances
Example:

ABC Co makes sales of $300,000 (all on credit) and bad debt write off to
$6,000. Cash received from customers during year $244,000, so that at 30
June 2006, the business has outstanding receivables of $50,000. The
allowance for bad debt is 5%.

Sales 300,000
Cash received from customer 244,000
56,000
Bad debt written off 6,000
Trade receivables outstanding 50,000
 Allowance = 5% * $50,000 =$2,500  Expense in P&L
 in BS  trade receivable shown:
Total receivables at 30 June 06 50,000
Less allowance for receivable (2,500)
47,500
FINANCIAL ACCOUNTING 1 59
 Irrecoverable debts and allowances

Double entry for Allowances

Only movement (increase, decrease ) amount  debit/credit to irrecoverable debts in

Income statement

When business provide Dr Irrecoverable debts account (expense)

allowance for first time Cr Allowance for receivable

If a higher allowance is required

Dr Irrecoverable debts expense (only increased amount)
Cr Allowance for receivables (only increased amount)

In subsequently, business
provide allowance 
movement If a lower allowance is required
Dr Allowance for receivable (only decreased amount)
Cr Irrecoverable debt expense (only decreased amount,
income in the I&E)
FINANCIAL ACCOUNTING 1 60
 Irrecoverable debts and allowances
PRACTICE

Fatima's receivables at 31 May 20X7 were $723,800. The balance on the

allowance for receivables account at 1 June 20X6 was $15,250. Fatima needs to
adjust the allowance for receivables to be the equivalent of 1.5% of receivables
at 31 May 20X7.
On 14 May 20X7 Fatima received $540 in final settlement of an amount written
off during the year ended 31 May 20X6.
Required
What total amount should be recognised for receivables in the statement of profit
or loss for the year ended 31 May 20X7?

FINANCIAL ACCOUNTING 1 61
 Irrecoverable debts and allowances
PRACTICE

FINANCIAL ACCOUNTING 1 62
NOTES RECEIVABLE

FINANCIAL ACCOUNTING 1 63
 2.4.NOTES RECEIVABLE

Notes receivable is an asset of a company, bank or other organization that

holds a written promissory note from another party.

For example: if a company lends one of its suppliers $10,000 and the supplier
signs a written promise to repay the amount, the company will enter the
amount in its asset account Notes Receivable.
The supplier will also enter the amount in its liability account Notes Payable

FINANCIAL ACCOUNTING 1 64
 2.4.NOTES RECEIVABLE

Term
$1,000.00 July 10, 2009
Payee
Ninety days after date I promise to pay to
thePrincipal
order of TechCom, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars

Payable at First National Bank

Interest of Los Angeles, CA
Rate
Maker
Value received with interest at 12% per annum
No. 42 Due Oct. 8, 2009 Julia Browne

Due Date
FINANCIAL ACCOUNTING 1 65
 DOUBLE ENTRY FOR NOTE RECEIVABLE

DOUBLE ENTRY FOR INTEREST RECEIVE:

1.Increase ASSET
2.Increase interest receive

DR ASSET (CASH/ INTEREST RECEIVE)

CR INTEREST INCOME (FINANCE INCOME)

FINANCIAL ACCOUNTING 1 66
 DOUBLE ENTRY FOR NOTE RECEIVABLE

ISSUING NOTE RECEIVABLE:

1.Increase ASSET note receivable
2.Decrease Cash/ Account Receivable

DR NOTE RECEIVABLE
CR CASH/ACCOUNT RECEIVABLE

FINANCIAL ACCOUNTING 1 67
 DOUBLE ENTRY FOR NOTE RECEIVABLE

REDEEMPTION OF NOTE RECEIVABLE:

1.Increase CASH
2.Decrease NOTE Receivable

DR CASH
CR NOTE RECEIVABLE

FINANCIAL ACCOUNTING 1 68
 2.4.NOTES RECEIVABLE
The maturity date is October 8th. To determine this date, we start with the
number of days in the month the note originated and subtract the date of the
note. This gives the number of days in the originating month to count toward
the maturity date. In this example, it was 21. Then, we add the days from
the next three months until they add up to the note term. In this example we
would add 31 days in August, and another 30 days in September, and 8 days
in October to add up to the note term of 90 days.

Redeemable date: 08.10.2009

FINANCIAL ACCOUNTING 1 69
 2.4.NOTES RECEIVABLE
Aruba Bungee Cords (ABC) sells a number of bungee cords to Arizona
Highfliers for $15,000, with payment due in 30 days. After 60 days of
nonpayment, the two parties agree that Arizona will issue a note payable to
ABC for $15,000, at an interest rate of 10%, and with payment of $5,000 due
at the end of each of the next three months.
Accounting treatment

Dr Notes receivable: 15,000

Cr Accounts receivable: 15,000

At the end of the month, Arizona pays $5,000 under the terms of the note, as
well as interest, which is calculated as $15,000 x 10% x 30 days/365 days =
$123.

Dr Cash: 5,123
Cr Notes receivable : 5,000
Cr Interest income : 123

FINANCIAL ACCOUNTING 1 70
 2.4.NOTES RECEIVABLE
At the end of the second month, Arizona pays another $5,000 under the
terms of the note, as well as interest, which is calculated as $10,000 x 10% x
30 days/365 days = $82. The amount of interest has declined, since it is based
on the remaining amount of principal outstanding, which was only $10,000
during the month
Accounting treatment
Dr Cash: 5,082
Cr Notes receivable : 5,000
Cr Interest income : 82

At the end of the third and final month, Arizona pays the last $5,000
increment under the terms of the note, as well as interest, which is
calculated as $5,000 x 10% x 30 days/365 days = $41

Dr Cash: 5,041
Cr Notes receivable : 5,000
Cr Interest income : 41

FINANCIAL ACCOUNTING 1 71
 2.4.NOTES RECEIVABLE
If Arizona had been unable to pay the final installment of $5,000 and the
related interest payment of $41, and ABC had been accruing the interest
income, then ABC would have to write off the remaining note balance, as well
as the related interest income. It could do so with the following entry:

Dr Allowance for doubtful accounts: 5,041

Cr Notes receivable : 5,000
Cr Interest Receivable : 41

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Presentation and Disclosure

FINANCIAL ACCOUNTING 1 73
 PRESENTATION AND DISCLOSURE
STATEMENT OF FINANCIAL POSITION

 CURREN ASSET
 CASH & CASH EQUIVALENT
 TRADE RECEIVABLE
 NOTE RECEIVABLE
 OTHER RECEIVABLES

FINANCIAL ACCOUNTING 1 74