a n d u

ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS

_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
S

[a
SESSION 4
t]i s b . ed u

B h a n s ali/
a n s a li 2 0
a
2
n s a li 2 0 2

25 lin B h B h
2 0 h a n _ n _
a li / S ali a li
ns u /S h
/S h
B h a Accounts Receivables
. ed
s a l i
s a l i
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.1 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
Learning objectives a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
1. Learn the accounting basics for accounts i n receivable h . ed . ed
l B
h a
l i n_
t] i sb t]isb
2. Account for bad debt with three different /S methods Sha 5 [a 5 [a
d u li/ 0 2 0 2
. e s a li 2 li 2
3. Describe the principles ofisbsound accounts receivable a n management s a s a
[a t] B h a n a n
4. Get familiar with 0footnotes 25 relating toalAR in B h B h
2 h n _ n _
a li / S ali a li
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
20 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.2 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
lin t ]i h a
Accounts receivables – meaning, need and /basic S h a accounting 2 5 [a
i n B
l
s ali l i2 0 h a h
a n s a / S / S
h a n u u
AR definition: amounts owed to the company in B B h . ed . ed
l
▪ Trade receivables: amounts owed from customers. h a The company extends
l i n_ a line of credit.
t] i sb t]isb
S
/require h a [a [a
Normally these receivables have terms that u payments within
S a relatively short time 5
period. 5
. ed ali/ 2 0 2
2 0 2
▪ Other receivables: various and sundry b amounts owed foratransactions
n s other than sales to ali li
i s s a s a
customer.
[a t] B h a n a n
25 lin B h B h
2 0 h a n _ n _
a li / S ali a li
Need for Trade receivables
a ns u
d impossible to transact business l i /S h
i /S h
l buyer had to
▪ AR facilitates B2B B h trade. It would be.enearly s a ifathe
s
immediately l i _ in cash (Who would
npay t]isb collect? How would the cash ha n be keptansecure? What about
h
h a intercontinental[asales?) B B
long-distance,
S 2 5 lin lin
0 a a
▪ AR can increase sales for
a li2the company. If the customer S his givenShtime to pay, it creates the
/make payment
/
s
opportunity for the ncustomer to resell the goods and u u on the AR. Absent that, the
customer mightBnot
a
h be able to buy the goods in.ethe d first.eplace.
d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.3 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Basics of AR accounting B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
Illustration 4.1. Prepare journal entries for the /following S transactions
h a [a [a
u S 5 5
1. During the month, a company providesdservices
. e
and bills customers
ali/ 100,000
2 0 2
2 0 2
2. During the month, the company collects
s b 40,000 cash from n scustomers a li a li
t]i h a n s n s
5 [a B h a h a
Initial sale 02AR Dr 100,000 (A+) a lin _ B _B
li 2 S h li n li n
a / → a a
a ns Revenue
d u
Cr 100,000 (R+ SE+)
l i /S h
l i /S h
B h . e s a s a
Cash collection lin_ Cash]Dr
t isb40,000 (A+) ha n
h an
h a [a AR Cr 40,000 (A-) B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
ha receivable
Accounts
B . ed .e d
Opening l i n_ 0 Cash received t ] isb t]isb
40,000
Credit salesha 100,000 5 [a 5 [a
S 2 2
2 0 2 0
Closing 60,000 s ali s ali
h an han
_ B _B
li n li n
a a
4.4 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
Accounting for uncollectibles h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
• Accounts receivables are reflected in the balance sheet B h at net realizable a n
value i.e. after adjusting u u
i n h . ed . ed
l B
for estimates for uncollectible and returns.
h a
l i n_
t] i sb t]isb
• In the ordinary course or business, some customers / S will fail to payhor a return goods.
5 [a 5 [a
u
d exactly which customers S
li/ won’t pay / return goods202 202
• But we don’t know at the time of the sale
b . e s a li li
i s a n s a s a
• Managers estimate the allowance
[a t] for uncollectible Band h returns based on experience, a n customer a n
fortunes, economy and industry 25 expectations, andacompany lin policies. B h B h
2 0 n _ n _
• The terms “Bad debt”,sa li
“Doubtful Sh
debt”, and /“Uncollectible debt” are interchangeably h ali
h a li
used
a n d u l i /S l i /S
B h . e s a s a
l i n_
Three ways of accounting for uncollectible
t]isb amounts ha n
h an
a
1. Direct write-off
h method [a B B
5
S as percentage of2Accounts Receivable lin lin
2. Allowance 0 a a
3. Bad debt as a percentage a li2of Sales / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] i sb t]isb
The objective
h ais that the AR shown on the[abalance[asheet should reflect the best assessment of how
S be recovered from customers.
much can really 0 25 025
a li2 a li2
n s n s
B ha Bha
l i n_ l i n_
h a h a
4.5 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Illustration 4.2. HM Co made credit sales of $100,000 B h during the year a n
20X1. Of these sales the u u
i n h . ed . ed
l B
company collected $40,000 in cash from customers.aThereafter,
h
HM Co learns
l i n_ that two customers have
t ] i sb t]isb
filed for bankruptcy and will likely not pay /$2,000. S At what amount
h a will accounts receivables[a be [a
recorded on the balance sheet? u i /S 2 5 2 5
.e d al 2 0 2 0
b s l i l i
t]is h an n sa n sa
5 [a B ha Bha
Use all three methods to record02these transactions. alin B
1. Direct write off method l i 2 S h l i n_ l i n_
s a / h a h a
2. Allowance as percentage a n of AR [Assume
d u 5% of ending AR is uncollectible] l i/S ali/S
3. Bad debt expense h
B as percentage of sale e
. [Assume 3% of all sales are a
sbad] ns
_ s b n
a lin a t]i ha h a
5[ B B
Sh 2 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.6 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
Method # 1 Direct write-off method a n s a / S / S
B h a n u u
i n h . ed . ed
l B
• Assumes that all sales are fully collectible until h a
proven otherwise l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u S
li/ bankruptcy and will not pay 2 2
• At the time when it is known that two.ecustomers have filedsfor a 2 0 their 2 0
s bbooks. This processaof n a li a li
dues, they are “removed” from the t]i h reducing receivables is s
called
n “writen s
5 [a “bad B h a h a
off” and the resulting loss is 2recorded
0
as debt
a lin
expense”
_ B _B
li 2 S h li n li n
a / a a
• This method is simple
a ns and inexpensiveduto use. If bad debts are smallli/Sand h infrequent
l i /S h then this
h
practice will notBmisstate the economic.esituation in a material way. a
s s a
l i n_ t]isb ha n
h an
h a for financial reporting.
• Not acceptable [a B B
S 2 5 lin lin
i2 0 h a h a
• Followed for tax reporting a l / S / S
n s purposes. u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
Beware of the context: The s aliterms“write-off”
ali is much misused in normal
n n
parlance, B haoftenBhconfused
a with tax deductions
_ _
a lin a lin
4.7 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Initial sale AR Dr 100,000 (A+) B h a n u u
i n → h . ed . ed
Revenue Cr 100,000 l (R+ SE+) B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
Cash collection Cash Dr 40,000
d u (A+)
li/S 2 2
. e a 2 0 2 0
ARbCr 40,000 (A-)
s n s a li a li
t]i h a n s n s
[a
5 debt expense Dr 2,000 B h a h a
Write off 02Bad a lin (E+ → SE-) _ B _B
li 2 AR Cr 2,000S(A-) h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 l in l in
Accountsli2 0
receivable h a h a
Opening 0 s a Cash received 40,000 /
S / S
a n d u d u
Credit sales
B h100,000 Write off 2,000
. e .e
l i n_ t ] isb t]isb
Closing ha 58,000 [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.8 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Method # 2 Allowance as a percentage of receivables B h a n u u
i n h . ed . ed
a l _ B b b
• Losses due to non-payments by certain (unknown) h l i n t] i s t] i s
/S customers are bound
h a to happen at some point.a
5 [ 5 [a
d u li/ S 2 2
. e a 2 0 2 0
• Recognize expected losses in the same
s b time period as the n s
revenue is recognized. ali a li
t]i h a n s n s
[a B h a h a
• Create a reserve / allowance 25/ provision which aislilike n a cushion to absorb thoseBexpectedBlosses.
l i 2 0
S h l i n_ l i n_
This “allowance forsbad a debt” is a contra-asset / account (XA) attached tohaccounts a h areceivable.
a n d u l i/S ali/S
B h . e s a swhat proportion of
• The firm lanalyzes
i n _ receivables i s
at b the end of the year and a n
determines a n
a is likely to be uncollectible. [a t] B h B h
h
receivables 5
S
02 a lin a lin
a l i2 S h S h
Balance sheets
n / /
Gross ARha XXX d u d u
B . e .e
l
_
Less:inAllowance (XXX)
t ] isb t]isb
Net
h a AR XXX [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.9 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n sa / S / S
B h a n u u
• Once the ending balance of allowance is determined, i n h . ed . ed
l the firm will work B backwards
a after absorbing anyin_writeoff, it ends up at the ]isb
to determine
how much allowance should be set up so that h l t t] i sb
S a [a [a
desired ending balance of the allowance.u / S h 5 5
. ed ali/ 2 0 2
20 2
s b n s ali a li
t]i h a n s n s
[a B h a h a
• That means, when specific25AR are written off,lin no loss is recognized because _ B it was_Balready
2 0 a
h the allowance is reduced n
i reflecting in that the
recognized in the accounting a li adjustment. Instead,S
/ losses is now reduced. h a l a l
n
cushion that was previouslys created for u
future S S h
h a d l i / l i /
B . e s a s a
in_ AR that weret]previously
• Similarly,alwhen isb written off are recovered, ha n a n
h gain is recognized.
no
h [a
5 to the previous level. B B
S the allowance is reset
Instead,
02 a lin a lin
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.10 Sh Sh
 a n u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI
Initial sale AR Dr 100,000 /I
(A+) B .ed
ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu I / IS
_
h
b
Revenue Cr 100,000 (R+ → SE+) lin t ]i s h a
h a [a B
i /S 2 5 lin
a l 2 0 h a h
Cash collection Cash Dr 40,000 (A+)
n s ai l S S
AR Cr 40,000 (A-) ha n s / /
B h a d u d u
l i n B . e . e
Write off Allowance for badSdebts ha Dr 2,000 (XA-) lin_ t] isb t]isb
/ (A-) ha [a [a
AR Cr u 2,000 S 5 5
. ed ali/ 2 0 2
20 2
s b n s a li a li
Estimate allowance i
] expense Dr 4,900 [hPLUG] (E+→ SE-)
Bad tdebt a n s ns
[a B h a h a
025 Allowance for bad a lindebts Cr 4,900 [ % OF AR] (XA+) _ B _B
li 2 S h n
i debts
lbad li n
Accounts receivable s a / Allowance for
h a h a
Opening 0 a n d u l i /S l
Opening i /S 0
B h Cash received 40,000 . e s a a
s debt expense 4,900
Credit sales 100,000 i n _ Write off i s b2,000 Write off 2,000
a n an
Bad
al [a t] B h B h
h 5
Closing
S
58,000 02 a lin alin Closing 2,900
i 2 h h
s al / S / S
Allowance = Ending AR balance a n × 5%, = (100,000 − 40,000 − d2,000) u × 5% d u= 2,900
Bad debt expense required h
B to bring allowance UP TO 2,900b=.e4900 [ b0+.ex – 2000 = 2900]
_ is is
a lin t ] t ]
h
Balance Ssheet Income 5 [a statement
5[a
0 2 02
AR, gross 58,000 l i 2
Bad debt
l i 2expense 4,900
Allowance (2,900) n sa n sa
a ha
AR, net 55,100 Bh B
l i n_ l i n_
h a h a
4.11 S S
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n sa / S / S
Reversal of allowance B h a n u u
i n h . ed . ed
Continuing from Illustration # 4.2. the ending balanceaof l the allowance for bad B debts was $2,900. Suppose
the company decides that it requires only $1,000 /ofSallowance. h How would l i _
nwe account for it ? t] isb t]isb
h a [a [a
u S 5 5
. ed ali/ 2 0 2
20 2
s b n s ali a li
Reversal of allowance t]i
Allowance for bad debts Dr a
h 1,900 (XA-) n s n s
[a B h a h a
025 Gain on reversal a linof allowance Cr 1,900 (R+ _→BSE+) _B
a li2 S h
al in al in
n s / h h
a d u l i /S l i /S
What is the net_impact Bh of this transaction
b . e on the statement n s a of ncash
s a flows?
lin t]i s ha h a
a a B B
Sh 2 5[ lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.12 Sh Sh
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ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n sa / S / S
Recovery of an Uncollectible Account B h a n u u
n h d d
Continuing from Illustration # 4.2. we had writtenaloff $2,000 because_ certain customers filed forsb.e
i B
sb
. e
h l i n t] i t] i
bankruptcy. Suppose one of our customers that filed / Sfor bankruptcy, sold h acertain of their assets in the [next
5 a 5 [a
year and returned $500. How should we account u
d for it? li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
Reset AR and allowance
025AR Dr 500 (A+) alin _ B _B
li 2 AllowanceSfor h bad debts Cr 500 (XA+) li n li n
a / a a
a ns u
d (A+) l i /S h
l i /S h
Cash collection B h Cash Dr.e500 s a s a
i n_ isARb a n an
a l a t] Cr 500 (A-) h h
h 5 [ B B
S
02 a lin a lin
a li2 S h
/ the income/ S h
What is the net impact n s of this transactionu on statement ?
ha d d u
B . e .e
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.13 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n
a allowance at thensend of the perioda / S / S
Aging schedule – A commonly way to estimate required B h a u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
Customers Total d u
1-30 days 31-60 li/Sdays 61-90 days > 90 days
2 2
. e a 2 0 2 0
A 5,000isb 5,000 n s a li a li
t] h a n s n s
B [a
10,000 10,000 B h a h a
025 a lin _ B _B
C 2
li 15,000 10,000
S h 5,000 li n li n
a / a a
D a ns 22,000 du 2,000 10,000 li/Sh10,000 l i /S h
B h . e s a s a
E n_ 6,000isb n n4,000 2,000
l i t] ha a
h 14,000
h
Totala [a
58,000 27,000 15,000B B 2,000
S 2 5 l i n l i n
Historic bad debt % li20 0.00% ha 2% ha 5% 100%
sa / S / S
n u u
Allowance to be provided
B ha 3,000 0ed
. .e d 300 700 2,000
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
20 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.14 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Method # 3 Bad debt expense as a percentage of sales B h a n u u
i n h . ed . ed
l B
• This method is similar in spirit to the allowance S
a _
asha % of AR method.alItinis just that the order of t] isb t]isb
posting the JEs is reverse.
/
S h 5 [a 5 [a
d u li/ 0 2 0 2
b . e s a li 2 li 2
i s a n
] a % of sales based hon historic trends, increasing the s a s a
• First, bad debt expense is estimated tas n allowance n
[a B h a h a
for the year
025 a lin _ B _B
li 2 S h li n li n
a / a a
• Then, any write-offs reduce
a ns the allowance du l i /S h
l i /S h
B h . e s a s a
• Determine theliendingn_ balance in thet]allowance isb account ha n
h an
h a [a B B
S 2 5 lin lin
• Ending balance of allowance 0 a a
a li2 is netted off from Gross AR / S h reportSnet
to
/
h AR.
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.15 Sh Sh
 AR Dr 100,000 (A+) a d u n
Initial sale h e
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu
B . I / IS
Revenue Cr 100,000 (R+ → SE+) _ s b
alin a t ]i h a
h 5 [ B
Cash collection Cash Dr 40,000 (A+) l i /S 0 2 a lin
sa i2 l h h
AR Cr 40,000 (A-) a n s a / S / S
B h a n u u
i n h . ed . ed
l B
Estimate bad debts (3% sales) Bad debt expense Dr 3,000 h a (E+ → SE-)
l i n_
t] i sb t]isb
Allowance for / Sbad debts Dr 3,000 (XA+) ha
5 [a 5 [a
d u li/S 2 2
. e a 2 0 2 0
s bfor bad debts Dr 2,000 n s a li a li
Write off Allowancet] i h a (XA-) n s ns
[a B h a h a
025 AR Cr 2,000 (A-)
a lin _ B _B
li 2 S h li n li n
a / a a
a ns
Accounts receivable
d u Allowance
l i /S h bad debts
for
l i /S h
Opening 0 B h Cash received 40,000 . e s a Opening s a 0
i n _ i s b a n a n
Credit sales al
100,000 Write off
[a t] 2,000 Write off B h
2,000 B Badh debt expense 3,000
h 5
S
02 a lin alin
Closing 58,000
a li2 / S h
/ S h Closing 1,000
a ns d u d u
B h . e .e
n _ s b s b
a li a t ]i a t ]i
Balance S h
sheet
2 5[ 2 5[ Income statement
AR, gross 58,000 l i 20 l i 20 Bad debt expense 3,000
Allowance (1,000) s a s a
n an
AR, net 57,000 Bha B h
n _ n _
a li a li
4.16 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Comparing the 3 methods h n u u
n B h a ed ed
l i B . .
Direct write off
h a
Allowance as a % of sales
l i n_ Allowance as a % of AR
t] i sb t]isb
What we are doing Ostrich approach: / S statement approach:
Income h a Balance sheet approach: [a
5 5 [a
Don’t estimate anything u
d Match bad debts expense S
li/ to Create allowance that20relates 2 2
. e a 2 0
s b sales in the sameanperiod s directly to the ARabalance li a li
t]i h n s n s
5 [a B h a h a
Initial sale Record sales and 2
0 increase AR Record sales
a lin and increase AR Record sales _ B and increase
_ B AR
li 2 S h li n li n
a / a a
Estimate bad debts No estimate
a ns at all d uAs % of sales
l i /SNoh directSestimate
l i /
h
B h . e s a s a
i n_ cash and decrease isARb Record cash and decreaseaAR n Record an cash and decrease AR
Cash collection
a lRecord
a t] h h
h 5 [ B B
S
02 a l in a l in
Write off Record Bad debt
a li2 expense Decrease allowance
S h
/ AR / S h Decrease allowance
n s Decrease Gross
u u
Decrease Gross AR
B ha . ed .e d
Estimate allowance No
l i n_ estimate at all t
No
] isbdirecttestimate
] isb As % of ending AR
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.17 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
Other Estimates Using Similar Accounting h
BStructures a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
S a [a [a
• Banking: Loan Loss Provisions u / S h 5 5
ed ali/ 0 2 0 2
• Merchandising: Sales Returns; .
b Sales Discountsans a li 2
a li 2
t]i s s s
• Pharma: Rebates; Chargebacks [a B h a n a n
25 Expenses lin B h B h
• Manufacturing: Warranty 2 0 a n _ n _
li S h li li
• Airlines: Frequent a Flyer Miles / a a
a ns u l i /S h
l i /S h
• AllowancesBfor h Inventory Obsolescence . ed
s a s a
• Consumer l i n_Electronics: Service t]isb Agreements ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.18 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu hB . e I / IS
_ s b
Best practices for receivables management halin 5 [a t ]i
B h a
/S 2 l i n
s ali l i2 0 h a h
a n s a / S / S
1. Determine to whom to extend credit - If the credit B hpolicy is too tight, a
then company will lose u u
i n h . ed . ed
l B
sales. But if the credit policy is too loose, the company
h a may sell to
l i n _
customer who will pay either
t] i sb t]isb
very late or not at all. /S ha
5 [a 5 [a
u
dcredit period will encourage li/ S 2 2
. e a 2 0 2 0
2. Establish a payment period - Longer
s b n s sales but the company
a li will
a li
be without cash for that much longer. t] i h a n s n s
[a B h a h a
3. Monitor collections - 2Companies 0 25 should prepare a lin an accounts receivable aging _ B schedule _B at
li Shidentifies problem accounts. n
li It helps n
li managers
least monthly to keepsatrack of collections and / h a h a
a n
estimate the timingh of future cash inflows. u
d Companies also keep track aofl AR days. i /S l i /S
B . e s s a
l i n _
t ] i sb a n a n
h cash,Bhsooner the company can
a Cash Receipts [–a Faster the AR gets convertedBinto
4. Accelerating
h
use that Scash for operations. Common 2 5 methods include- lin lin
0 a a
• Pledging - Use a li2 as collateral for a loan. / The
A/R S h firmSretains
/
h the A/R and the risk of
collection ans u u
• Factoring h . ed e d
atb.a discount that reflects an interest charge
_ B- Sell A/R to a financial institution b
and the n
li risk of uncollectibility t ]i s t ]i s
a a a
Sh
• Securitization - Selling A/R to 2 5a[ separate2 5[ legal entity (called a Variable Interest Entity)
created for the exclusive purpose l i 20 of lsecuritizing
i 20 receivables. The VIE borrows money from
investors and then uses nthe
a
s proceeds a
s to buy the A/R from its parent
n
B ha Bha
_ n_
Factoring is a l i nnot aa perfect
l i substitute for efficient AR management:
4.19 Sh Sh
https://www.cfo.com/news/ge-kicks-the-factoring-habit/655653/
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu Bh . e I / IS
_ s b
Footnotes relating to AR a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n
a – Page 269 s a / S / S
Refer the following – (i) Note 2.7B – Page 327, (iii) Note 2.21 h n u u
n B h a ed ed
l i B . .
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.20 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.21 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu h
B . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n a
a of the year? Is thisnsa significant amount? / S / S
Q1. What amount do customers owe to the company at thehend u u
n B h a ed ed
l i B . .
h a 2022
l i n_ 2023
t] i sb t]isb
/S h a 68,012 73,743 5 [a 5 [a
Gross AR
d u li/S 2 2
. e a 2 0 2 0
Total assets
s b n s 297,469 322,851a li a li
t]i h a n s n s
Gross AR / Total assets [a B 22.86% h a
22.84% h a
025 a lin _ B _B
li 2 S h li n li n
Q2. What percentage ofnits a
s total accounts receivable / does the company deemSuncollectible? h a h a
a d u l i / l i /S
B h . e s a s a
l i n_ t]isb ha n2022 an
h 2023
h a [a B B
Allowance S 2 5 l i n 1,194
l i n 1,258
Gross AR l i 20 S ha Sha68,012 73,743
s a / / 1.76% 1.70%
Allowance / Gross ARan u u
h . ed .e d
B
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.22 Sh Sh
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu hB . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
n a / S / S
Q3. What amount of bad debts expense did the report in itsBincome ha statement in athe nscurrent fiscal u u
year? Is this a significant expense? i n h . ed . ed
l B
h a
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
Allowance for credit losses
d u li/S 2022 2023 2 2
. e a 2 0 2 0
Beginning balance
s b n s 1,296 1,194
ali a li
Add: provision made during the year, i
t] bet of reversals Bh a (3) 84
n s n s
[a h a h a
Less: write offs
025 a lin 99
_ B 20 _B
Ending balance li2 S h 1,194 lin l in
1,258
s a / h a h a
a n u l i /S l i /S
SALES (Total revenue B h from operations) .ed s a215,452
s a 246,698
in _ is b a n an
a l a t] h h
Bad debt expense / Sales [ B B
0.00% 0.00%
Sh 2 5 li n li n
2 0 h a h a
a li S S made during the year affects
Refer to note 2.21 Selling s & other expenses on page 343 to /see how provision /
income statement ha
n d u d u
B b. e b .e
n _ s s
a li at ]i a t ]i
Sh 2 5[ 2 5[
l i 20 l i 20
n sa n sa
B ha Bha
l i n_ l i n_
h a h a
4.23 S S
 a n d u
ShaIlinI_BhIansIaliI202I5[aIt]iIsb.IeduI /I ShIaliIn BIhanIsalIi/SIhalIin_IBhaInsaIli2I025I[atI]isIb.eIdu B h . e I / IS
_ s b
a lin a t ]i h a
h 5 [ n B
/S 2 l i
s ali l i2 0 h a h
a n s a / S / S
B h a n u u
Coming up l i n B h . ed . ed
• Next session – Inventory and Evaluating h a efficiency of operations
l i n_
t] i sb t]isb
/S h a
5 [a 5 [a
d u li/ S 2 2
. e a 2 0 2 0
s b n s a li a li
t]i h a n s n s
[a B h a h a
025 a lin _ B _B
li 2 S h li n li n
a / a a
a ns d u l i /S h
l i /S h
B h . e s a s a
l i n_ t]isb ha n
h an
h a [a B B
S 2 5 lin lin
0 a a
a li2 / S h
/ S h
n s u u
B ha . ed .e d
l i n_ t ] isb t]isb
h a [a [a
S 2 5 2 5
2 0 2 0
s ali s ali
h an han
_ B _B
li n li n
a a
4.24 Sh Sh