Types of Receiveables
Amounts owed to a company by its customers, emplyoyees, government and others, considered financial assets
Claims that are expected to be collected in cash
Frequently classified as
Accounts receiavle -amounts owed by scustomers resulting from the sale of goods and services
Notes receibale - written promises to repay debt
a/r and n/r resulting from sales transactions are often referred to as trade receivables
Other receibables (nontrade receivables)
Do not result from the normal operations of th ebusiness
Interest receivable, loans to company officers and advanes to employees, sales tax recoverable, income tax receivable
Recording accounts receivable
A receivable is recorded when services is provided on account or at point os sale of merchandise on account
Initially recorded at the transaction price
A receivable is reduced by variable consideration such as expected sales returns and allowances and by sales discounts
Also reduced when payment is received or the merchandise is returned by the customer
Subsidiary Ledgers
The subsidiary ledger for accounts receivable provides the details that support the total balance for accounts receivable in the general ledger
The single accounts receivable account in the general ledger is the control account
The balance in the control account must always equal the total of all the individual subsidiary ledger accoutns (one for each customer) in the subsidiary ledger
Accounting for credit losses
Somes accoutns receivable become uncollectible
Expected credit losses are debited to an account called credit losses
Bsed on company's historical credit loss experiaence
Also called bad debt expense or impairment losses
Credit loss expense is recognized in the same period that the related sales revenue is reported.
Allowance Method
This method estimates the expected cdit losses at the end of each period
The amount estimated is shown in the allowance for expected credit losses (formerly allowance for doubtful accountants)
A contra asset acccount- normally with a credit balance
Shown below the netted with amounts receivable to determine the carrying amount
Not that the allowance is an estiamate - it does not show specific customer accounts
Estimating the Allowance
Most companies use the percentage of receivables basis to determine the allowance
Estimate the percentage of receivables that are likely to be uncollectible
Either one percentage that is applied to the entire accounts receivable balance or
Different percentages applied to accounts receivable that are classified accourding to the length of time they have been outstanding (called an aging of accounts receivable)
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Once the appropriate estimate for uncollectible accounts is determined, an adjusting entry can be recorded
The amount of credit losses to be expensed in the period is the difference between the required balance and the exisitng balance in the allownace account
This amount is the credit losses for the period
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Measuring and recording estimated uncollectible accounts
Credit losses are reported in the statement of income as an operating expense. The balance in the allowance for expected credit losses is deducted from accounts receivable in the current assets section of the statement of financial position
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Recording the Recovery of an uncollectible account
An account prevously written off may be collected in the future- called a credit loss recovery
Record in 2 separate entreis
Reverse the write-off entry to retinstate the account, and
Record the cash collection
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Summary of the allowance method
Measuring and recording estimated uncollectible account (credit loss entry)
Determined using a percentage of total or aged receivables
Any increase to the allowance is recorded as a debit to credit losses
Recording the write off of an uncollectible account (write off entry)
Actual accounts are written off when they are determined to be uncollectible
This write off reduces the allowance
Recording the recovery of an uncollectible account recorvery entries)
If a wirtten off account is later collected, the write off is reversed and the collection recorded
Account for notes receivable
Stronger legal claim to assets than accounts receivable; written promise to repay on demand (promissory note)
Credit instrument that normally
Requires the payment of interest
Extends for time periods greater than 30 days
Often used
When people and companies borrow money
When the amount and the length of credit period exceeds normal limits
To settle an accounts receivable when payment accnot be made within the established credit period
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Derecognizing Notes receivable
Honoured- collected
Paid in full at maturity date
Collection recorded
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Dishonoured
Not collected
Not paid at maturity date; note no longer negotiable
Balance transferred to accounts receivable if eventual collection expected
Balance written off to credit losses if eventual collection not expected
Dishonoured notes receivable
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Statement Presntation
Statement of Financial position
Short term receivables reported in the current assets section
Following cash and trading investments
Reported at carrying amount, but must also disclose gross amount of receivable and the expected credit losses
Receibables due more than a year are presented sepately in the non-current assets section
Statement of income
Credit losses are reported as an operating expense
Interest income is reported in the non operating section as other icnomeand expenses
Managing Accounts Receivables
Determine to whom to extend credit to
Establish a payment period
If a customer does not pay within this period, and interest (financing) charge may be added to the amount due
Monitor collections
Prepare and update an accounts receivable aging schedule
Evaluate the liquidity of receivables
Evaluting the Liquidity of receivables
Liquidity is measured by how quickly certain assets can be converted into cash
Measures used to assess liquidity
Receivables turnover ratio
Average collection period
Receivables turnover
The number of times on average that receivables are collecteed during the year
Turnover = Credit Sales/ Average gross accoutns receivables
The higher the receiveables turnover ratio, the more liquid the company's receivables are
Average Collection Period
The average amount of time that a recievable is otuatanding
Average collection period= 365 days/ receivables turnover
The lower the average collection period, the more liquid the company's receivables are
Review of IFRS and ASPE
Wiley Chapter 8 Practice
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