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Lecture Financial accounting: Information for decisions (7/e): Chapter 7 - John J. Wild

Chapter 7 - Reporting and analyzing receivables. After completing this unit, you should be able to: Describe accounts receivable and how they occur and are recorded, describe a note receivable, the computation of its maturity date, and the recording of its existence, explain how receivables can be converted to cash before maturity,. | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 7 Reporting and Analyzing Receivables Accounts Receivable Amounts due from customers for credit sales. Credit sales require: Maintaining a separate account receivable for each customer. Accounting for bad debts that result from credit sales. C1 7- With some credit cards and nearly all debit cards, the seller deposits the credit card sales receipts in the bank just like it deposits a customer’s check. The bank increases the balance in the company’s checking account. The company usually pays a fee of 1% to 5% of card sales, for the service. Credit Card Sales C1 7- Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two methods of accounting for bad debts: Direct Write-Off Method Allowance Method Valuing Accounts Receivable P1/P2 7- Matching vs. Materiality The matching (expense recognition) principle requires expenses to be reported in the same accounting period as the sales they help produce. The materiality constraint states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions. P1 7- At the end of each period, estimate total bad debts expected to be realized from that period’s sales. There are two advantages to the allowance method: It records estimated bad debts expense in the period when the related sales are recorded. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. Allowance Method P2 7- Two Methods Percent of Sales Method (Income Statement Method); and Accounts Receivable Methods (Balance Sheet Methods) Percent of Accounts Receivable Method Aging of Accounts Receivable Method. Estimating Bad Debts Expense P2 7- Estimate based on % of Sales Emphasis on Matching Sales Bad Debts Exp. Income Statement Focus Estimate based on % of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Balance Sheet Focus Estimate based on an Aging of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Balance Sheet Focus Summary of Allowance Methods: P2 7- $1,000.00 July 10, 2013 Ninety days Barton Company, Los Angeles, CA One thousand and no/100 --------------------------------- Dollars First National Bank of Los Angeles, CA 42 12% Julia Browne after date I promise to pay to the order of Payable at Value received with interest at per annum No. Due Oct. 8, 2013 Term Payee Maker Notes Receivable C2 Principal Interest Rate Due Date 7- Date of note Now, let’s change our discussion to notes receivable. A promissory note is a written promise to pay a specific amount of money, usually plus interest, at a specific future date. Part One An example of the note is pictured on the slide. Part Two The following information is included in a note: term of the promissory note, the payee, and the maker. The payee on the note is the recipient of the cash at maturity. The maker on the note is the debtor who owes the money. Notes also include information about the principal, interest rate, and due date. End of Chapter 7 7-