Chapter 7 - Accounts and notes receivable. After completing this chapter, students will be able to: Describe accounts receivable and how they occur and are recorded; describe a note receivable, computation of its maturity date and the recording of its existence; explain how receivables can be converted to cash before maturity;. | Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Accounts and Notes Receivable Conceptual Learning Objectives C1: Describe accounts receivable and how they occur and are recorded. C2: Describe a note receivable, computation of its maturity date and the recording of its existence. C3: Explain how receivables can be converted to cash before maturity. 7- Analytical Learning Objectives A1: Compute accounts receivable turnover and use it to help assess financial condition. 7- Procedural Learning Objectives P1: Apply the direct write-off method to account for accounts receivable. P2: Apply the allowance method and estimate uncollectibles based on sales and accounts receivable. P3: Record the honoring and dishonoring of a note and adjustments for interest. 7- 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. C 1 7- With bank credit cards, the seller deposits the credit card sales receipt 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% for the service. Credit Card Sales C 1 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 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; and Accounts Receivable Methods Percent of Accounts Receivable Method Aging of Accounts Receivable Method. Estimating Bad Debts Expense P2 7- % of Sales Emphasis on Matching Sales Bad Debts Exp. Income Statement Focus % of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Balance Sheet Focus Aging of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Balance Sheet Focus Summary P2 7- $1, July 10, 2011 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, 2011 Term Payee Maker Notes Receivable C2 Principal Interest Rate Due Date 7- End of Chapter 7 7-
