ACC 1101 FINANCIAL

ACCOUNTING AND
REPORTING 1
TOPIC 9: RECEIVABLES
Subclassification of Assets
WHAT ARE COMMON TYPES OF RECEIVABLES, AND HOW ARE
CREDIT SALES RECORDED?

• A receivable occurs when a business sells goods or services to

another party on account (on credit).
• A receivable is a monetary claim against a business or an individual.
• A receivable is a right to receive cash in the future from a current
transaction.
• A creditor is the party who receives a receivable.
• A debtor is the party to a credit transaction who is obligated to pay later.

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1. Accounts Receivable/Trade Receivables
• Accounts receivable, also called trade receivables are classified as
current assets in the financial statements when:
a) It expects to realize the asset, or intends to sell or consume it in its
normal operating cycle.
b) It holds the asset primarily for the purpose of trading.
c) It expects to realize it within twelve months after the reporting
period.

• An entity shall measure trade receivables at the fair value of the

consideration received or receivable.

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2. Notes Receivable
• Notes receivable usually have longer terms than accounts receivable.
• Notes receivable are sometimes called promissory notes.
• A note receivable represents a promise to pay a fixed amount of principal
plus interest by a certain due date.
• The maturity date is the date on which a note receivable is due.

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3. Other Receivables
• Other receivables are any other types of receivables.
• Receivables are classified as either current or long term, depending
on whether they will be received within one year or longer.
• Examples include:
• Dividends receivable
• Interest receivable
• Taxes receivable

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 Presentation of Trade
Presentation inReceivables
the statement of financial
position
Internal Control Over Receivables
• Internal control over cash payments received by mail (usually
cheques) or online (EFTs) is important.
• A critical element of internal control is the separation of
cash-handling and cash-accounting duties.
• The credit department should have no access to cash.
• Those who handle cash should not be in a position to grant credit to
customers.

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Recording Sales on Credit
Smart Touch Learning provides $5,000 in services to Brown on account and sells $10,000
(sales price) of merchandise inventory to Smith on account on August 8. Ignore Cost of
Goods Sold.

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Recording Sales on Credit
The control account, Accounts Receivable, shows a balance of $15,000. The individual
customer accounts in the subsidiary ledger (Accounts Receivable—Brown $5,000 +
Accounts Receivable—Smith $10,000) add up to $15,000.

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Recording Sales on Credit
When the business collects cash from both customers on August 29—$4,000 from Brown
and $8,000 from Smith—Smart Touch Learning makes the following entry:

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Recording Sales on Credit
After posting:

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Sales Discount
▪ The company offer sales discounts to encourage bulk purchases and prompt payment.
▪ Example:

During the year, Focus Eye Bhd sold

goods to Gee Bhd for RM1,000. A
The initial measurement of
trade discount of 10% is given to
receivables can be done as follows:
Gee Bhd. Determine the amount to
be measured in the trade
Dr Account receivables 900
receivables account.
Cr Sales 900
Sales Discount
▪ Cash discount also given as a deduction in the amount owed by the customer
▪ Example:

In January, Focus Eye Bhd sold The initial measurement of

goods at a quoted price RM10,000 receivables:
with a credit term of 2/10, net 90.
Determine the amount to be Dr Account receivables 10,000
measured in the trade receivables. Cr Sales 10,000

Dr Bank/ Cash 9,800

Dr Discount allowed 200
Cr Account receivables 10,000
Sales Return
▪ Most businesses allow their customers to return products that do not meet their
requirements.
▪ Example:
The initial measurement of
receivables:

In January, Focus Eye Bhd sold Dr Trade receivables 19,000

goods on credit to its customer Cr Sales 19,000
amounting to RM 19,000. The
customer returned some faulty The initial measurement of sales
products amounting to RM 2,000. return:
Determine the amount to be
measured in the trade receivables Dr Sales return 2,000
account and sales return account. Cr Account receivables 2,000
ACCOUNTING FOR THE UNCOLLECTIBLES AMOUNT

• Bad debts expense arises from failure to collect from some customers
who purchase on account.
• There are two methods of accounting for uncollectible receivables:
• Direct write-off method
• Allowance method (IFRS)

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Direct Write off Vs Allowance Method
Direct Write Off (not allowed under
IFRS) Allowance Method
• The direct write-off method is a method of • Most companies use the allowance method to
accounting for uncollectible receivables in which measure bad debts.
the company records bad debts expense when a – The allowance method is based on the
customer’s account receivable is uncollectible. matching principle.
• This method is primarily used by small, nonpublic - It records bad debts in the same period as the
companies. sales revenue.
• Accounts receivable are written off when the • A contra asset account called Allowance for
business determines that it will never collect from doubtful Debts reduces the Accounts Receivable to
a specific customer. the net realizable value.
• Once an account receivable is written off, the
company stops pursuing the collection.
• The direct write-off method violates the matching
principle.
Summary of journal entries – allowance
method
Recording estimated uncollectible
Dr Bad debts account
Cr Allowance for doubtful debts account
A decrease in allowance for doubtful debts
Dr Allowance for doubtful debts account
Cr Bad debts account
Recording the write off of an uncollectible account
Dr Allowance for doubtful debts account
Cr Accounts receivable
Recording bad debts recovered (Reinstate AR)
Dr Accounts receivable Dr Cash
Cr Allowance for doubtful debts account Cr Accounts receivable
Recording Bad Debts Expense—Allowance
Method

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Estimating and Recording Bad Debts
Expense—Allowance Method
• Companies estimate bad debts expense based upon:
• Past experience
• The industry in which they operate
• Other variables
• There are three methods to estimate uncollectibles using the
allowance method:
– Percent-of-sales
– Percent-of-receivables
– Aging-of-receivables

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 1. Percent-of-Sales Method

• The percent-of-sales method computes bad debts expense as a

percentage of net credit sales.
• Some companies use all sales, not just credit sales.
• This method is also called the income-statement approach.

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 Percent-of-Sales Method
Smart Touch Learning uses the percent-of-sales method to account for uncollectibles. Past
experience suggests that 0.5% of credit sales will be uncollectible, which amounted to
$60,000 for the year.

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 Percent-of-Sales Method
At December 31, Smart Touch Learning records the following adjusting entry to recognize
bad debts expense for the year:

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 Percent-of-Sales Method
After posting the adjusting entry, Smart Touch Learning has the following balances in its
accounts. Ignore the previously recorded reversal of the write-off and assume that
collections on account during the year are $58,000:

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2. Percent-of-Receivables Method
The percent-of-receivables method involves computing bad debts
expense as a percentage of accounts receivable.

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Percent-of-Receivables Method
On December 31, 2020, Smart Touch Learning’s unadjusted Accounts Receivable balance is
$6,375, and 4% of accounts receivable is estimated to be uncollectible. The Allowance for
Bad Debts account has a credit balance of $55, so the adjustment is $200.

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Percent-of-Receivables Method
Smart Touch Learning records the following adjusting entry on December 31 to recognize
bad debts expense for the year:

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Percent-of-Receivables Method
After posting the adjusting entry, Smart Touch Learning has the following balances:

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Percent-of-Receivables Method
Martin’s Music has a debit balance in its Allowance for Bad Debts account of $150. It
estimates uncollectible accounts will be 2% of $40,000 of Accounts Receivable.

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3. Aging-of-Receivables Method
• The aging-of-receivables method is similar to the
percent-of-receivables method.
• In the aging method, businesses group individual accounts based on
how long the receivable has been outstanding.
• Different percentages are applied to each category.

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Aging-of-Receivables Method

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Aging-of-Receivables Method
The procedure for recording the year-end adjusting entry under the
aging-of-receivables method is similar to the percent-of-receivables
method.

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Aging-of-Receivables Method
Smart Touch Learning knows the target balance of the Allowance for Bad Debts account is
$185.

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Aging-of-Receivables Method
After posting the adjusting entry, Smart Touch Learning has the following balances in its
balance sheet and income statement accounts:

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Comparison of Accounting for Uncollectibles

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HOW ARE NOTES RECEIVABLE ACCOUNTED
FOR?
• Promissory note—A written promise to pay a specified amount of
money at a particular future date, usually with interest.
• Maker of the note (debtor)—The entity that signs the note and
promises to pay the required amount.
• The maker of the note is the debtor.
• Payee of the note (creditor)—The entity to whom the maker
promises future payment; the payee of the note is the creditor.
• The creditor is the company that loans the money.

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HOW ARE NOTES RECEIVABLE ACCOUNTED
FOR?
• Principal—The amount loaned by the payee and borrowed by the maker of
the note.
• Interest—The revenue to the payee for loaning money.
• Interest is an expense to the debtor and revenue to the creditor.
• Interest period—The period of time during which interest is computed.
• It extends from the original date of the note to the maturity date.
• Also called the note term.

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HOW ARE NOTES RECEIVABLE ACCOUNTED
FOR?
• Interest rate—The percentage rate of interest specified by the note.
• Interest rates are almost always stated for a period of one year.
• Maturity date—As stated earlier, this is the date when final payment of the
note is due.
• Also called the due date.
• Maturity value—The sum of the principal plus interest due at maturity.
• Maturity value is the total amount that will be paid back.

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HOW ARE NOTES RECEIVABLE ACCOUNTED
FOR?

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HOW ARE NOTES RECEIVABLE ACCOUNTED
FOR?
Smart Touch Learning lends Lauren Holland $1,000 on September 30, 2019, for one year,
at an annual rate
of 6%.

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Identifying Maturity Date
• Some notes specify the maturity date.
• Other notes state the period of the note in days or months.
• When the period is given in months, the note’s maturity date falls on the
same day of the month as the date the note was issued.
• When the period is given in days, the maturity date is determined by counting
the actual days from the date of issue.
• Count the maturity date
• Omit the issue date

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Identifying Maturity Date
A 180-day note dated February 16, 2019, matures on August 15, 2019, as shown
here:

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Computing Interest on a Note
The formula for computing the interest is as follows:

In the formula, time represents the portion of a year that

interest has accrued on the note.
• It may be expressed as a fraction of a year in months
(number of months/12)
• Or a fraction of a year in days (number of days/365)

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Computing Interest on a Note
Using the data in Exhibit 9-4, Smart Touch Learning computes
interest revenue for one year as follows:

• The maturity value of the note is $1,060 ($1,000 principal +

$60 interest).
• The time element is 12/12, or 1, because the note’s term is
one year.

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Computing Interest on a Note
Interest on a $2,000 note at 10% for nine months is computed as
follows:

The interest on a $5,000 note at 12% for 60 days can be computed as

follows:

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Accruing Interest Revenue and Recording
Honored Notes Receivable
Refer to Exhibit 9-4, which shows Smart Touch Learning lending Lauren
Holland $1,000 on September 30, 2019, for one year at an annual
interest rate of 6%. On December 31, interest should be accrued.

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Accruing Interest Revenue and Recording
Honored Notes Receivable
For 2020, Smart Touch Learning earns nine months of interest:

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Accruing Interest Revenue and Recording
Honored Notes Receivable
On the maturity date of the note, Smart Touch Learning will receive
cash for the principal amount plus interest. The company considers
the note honored and makes the
following entry:

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Accruing Interest Revenue and
Recording Honored Notes Receivable
On July 1, 2019, Rosa Electric sells household appliances for $2,000 to
Dorman Builders. Dorman signs a nine-month promissory note at 10% annual
interest. Rosa’s entries:

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Accruing Interest Revenue and
Recording Honored Notes Receivable
Sports Club cannot pay Blanding Services the amount due on accounts
receivable of $5,000. Blanding accepts a 60-day, $5,000 note receivable, with
12% interest, on Nov. 19, 2019.

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 Recording Dishonored Notes Receivable

• When a maker dishonors a note, the dishonored note and the unpaid
interest are transferred to Accounts Receivable.
• Later, the Accounts Receivable can be written off under the direct
write-off method or the allowance method.

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 Recording Dishonored Notes Receivable

Suppose Rubinstein Jewelers has a six-month, 10% note receivable for $1,200 from Mark
Adair that was signed on March 3, 2019, and Adair defaults. Rubinstein Jewelers will
record the default on September 3, 2019, as follows:

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