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Receivables

Refers to amounts that are due to a business from its customers or other entities. Claims that are expected to be collected in cash. Classification:
Accounts receivable amounts owed by customers on account result from the sale of goods and services (credit card transactions using visa/mastercard/amex are considered as cash transactions but) if company sponsors its own credit cards, amounts owed by customers on these cards are included current asset Notes receivable claims where formal instruments of credit written promissory notes are issued as evidence of debt usually requires debtor to pay interest for time periods of 30 days or longer can both be a current or non-current asset Other receivables includes interest receivables, loans to company officers, advances to employees, recoverable sales tax, income tax

Recognizing Accounts Receivable


For a service company, a receivable is recorded when a service is provided on account; merchandising company, a receivable is recorded at the point of sale of merchandise on account. Should be recognized when the sales effort is substantially complete service is performed, or goods are delivered at point of sale.

Subsidiary Ledger
Group of accounts that share a common characteristic. Provides supporting detail to the general ledger, freeing it from excessive detail:
For Accounts Receivables, Has a receivable account for each customer Total of balances in the customer accounts in the subsidiary ledger should equal the total balance in the general ledger receivable account occurs because when receivables transactions are recorded in the subsidiary ledgers on a customer-by-customer basis, summaries of these transactions are recorded in the general ledger Example: used by companies sponsoring a credit card of their own; recording credit card receivables for each of the customers in the general ledger accounts would make it difficult to determine the balance owed by any one customer at a specific point in time. at the end of each month, can be used to easily determine the transactions in each consumer's account and then send the customer a statement of transactions that occurred that month; therefore, can be used to determine interest revenue if the customer doesn't pay in full within a specific period of time Other usage inventory (to track inventory quantities and balances) accounts payable (to track individual creditor balances) payroll (to track individual employee pay records)

Summarized in the general ledger through a control account; must equal the total of the respective subsidiary ledgers at all times. Due to this, each journal entry that affects the control account is posted twice to the subsidiary ledger, and to the general ledger control account.

Valuing Accounts Receivable


Allowance method
estimates the uncollectible accounts at the end of each period and shows this estimate in Allowance for Doubtful Accounts, which is a contra asset account with a credit balance that is shown below Accounts Receivable estimate of the amount of receivables that are expected to become uncollectible in the future Net realizable value = Accounts Receivable - Allowance for Doubtful Accounts Features recording estimated uncollectible accounts recording the write-off of an uncollectible account recording the recovery of an uncollectible account

Dishonouring Notes Receivable


Dishonoured note
note that is not paid in full at maturity no longer negotiable, however, payee still has a claim against the maker of the note for both the principal and any unpaid interest transfers the Notes Receivable balance and related interest to an Account Receivable dr to AR for principal + interest written off if there is no hope of collection dr to ADA

Valuing Notes Receivable


Notes receivable are reported at net realizable value. If eventual collection is in doubt, must be recorded in the same way as AR.

Statement Presentation of Receivables


Statement of Financial Position Income Statement
short-term receivables are reported in the current assets section; followed by cash and then short-term investments includes the revenue generated from sales or services on account; plus bad debts expense (operating expense section) and interest revenue (non-operating section)

Managing Receivables
Determine who to extend credit to. Establish a payment period. Monitor collections.
concentration of credit risk required to be discussed in the notes to a companys financial statements

Evaluate the liquidity of receivables.


uses receivables turnover ratio measures the number of times, on average, that receivables are collected during the year Receivables turnover ratio = Net credit sales / Average gross accounts receivable converted to Average collection period = 365 / Receivables turnover ratio alternatively, Average collection period = AR / Average amount of net credit sales per day

Accelerate cash receipts from receivables when necessary.


loans secured by receivables borrowing of money from the bank using receivables as collateral generally, banks are willing to provide financing for up to 75% of receivables less than 90 days old sale of receivables reasons establish a financing subsidiary that buys AR from the company to make the statement of financial position more liquid provides source of immediate cash flow allows company to save costs relating to the monitoring and collection of receivables types securitization transfer of receivables to investors in return for cash treated as a sales of receivables, but may also be treated as a secured loan involves many investors; lower costs; higher quality of receivables factoring sale to a finance company that buys receivables for a fee company is responsible for reimbursing the factor for uncollected amounts higher costs; lower quality of receivables