Account Receivable

Topics: Accounts receivable, Balance sheet, Debt Pages: 10 (1140 words) Published: September 25, 2013
Financial Accounting

Week 3 Lecture Summary

Accounting for Receivables
Definition
Receivables are amounts due from other persons or entities. Receivables are highly liquid, which means it is expected that they will be converted into cash quickly, and are classified as current assets.

Types of Receivables
Accounts Receivable: amounts due from customers for sales on credit. Businesses sell to customers on credit in an attempt to increase their sales. Also called Trade Debtors.
Bills Receivable: similar to accounts receivable but bills receivable are a legal instrument. Interest is charged on the bill receivable and it usually gives more time to pay than accounts receivable.

interest receivable, rent receivable
Accounts Receivable
Recognition of accounts receivable
Recorded when goods/services are provided on credit (at time of sale) invoice provides evidence of the sale
Valuation of accounts receivable
be collected are called bad debts (some customers cannot
pay their account, other customers will not pay their account) is expected to be collected
ess to estimate the amount of receivables that will become
bad debts
Bad and Doubtful Debts
When a business sells on credit there are usually some customers who do not pay their account. These uncollectable accounts are called bad debts and are an expense of selling on credit.
There are 2 methods that can be used to account for bad debts: 1. The Direct Write-off Method
2. The Allowance Method

Page 1

Financial Accounting

Week 3 Lecture Summary

1.
The Direct Write-off Method
Under this method the bad debt is recorded as an expense at the time that it is determined to be uncollectable. This can happen at any time during the accounting period.
The entry to record the bad debts expense is:
Date
Details
Debit Credit
Bad debts expense XXX
GST Collections
XX
Accounts receivable
XXXX
Write off account as bad
Under this method bad debts are NOT estimated at the end of the period. This method is not recommended as it does not show the receivables on the Balance Sheet at the amount that is estimated to be collected. This method is only suitable if bad debts are not material.

2. The Allowance Method
Under this method bad debts are estimated at the end of the period. The receivables amount on the Balance Sheet is the amount that is estimated to be collected. This method is the recommended method as it avoids overstating receivables on the Balance Sheet. There are 3 steps in the allowance method of accounting for bad debts:

Step 1: Estimate bad debts
At the end of the period the business must make an estimate of bad debts (the uncollectable accounts receivable). This estimate is usually based on past experience. The entry to record the estimate of bad debts at the end of the period is: Date

Details
Debit
Credit
30 June
Bad debts expense
XX
Allowance for doubtful debts
XX
Estimate of bad debts expense
The Allowance for Doubtful debts is a contra-asset account. It is subtracted from Accounts Receivable on the Balance Sheet.

Page 2

Financial Accounting

Week 3 Lecture Summary

Step 2: Write-off bad debts
At any time during the period the business may determine that an account is bad (it is uncollectable). It must be removed from their accounts if it is determined to be bad. The entry to write-off a bad debt at any time is:

Date
Details
Debit Credit
Allowance for doubtful debts XXX
GST Collections
XX
Accounts receivable
Write-off an account as a bad debt

XXX

Step 3: Recovery of an account written-off
In some cases, after an account has been written-off as a bad debt it is collected (in part or in full) at a later date. This can happen at any time during the accounting period.
The entry for the recovery of a bad debt that was previously written-off is: Date
Details
Debit Credit
Cash at Bank
XXX
GST collections
XX
Bad debts recovered
XXX
Recovery of Bad Debt
Note: Bad Debts Recovered is an income...
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