Accounts Receivable
Accounts receivable is the balance of money
due to a firm for goods or services delivered
or used but not yet paid for by customers.
Such accounts receivable are normally
expected to be collected within a
relatively short period, such as 30 or 60
days. They are classified on the balance
sheet as a current asset.
Uncollectible / Bad Debts
Accounts uncollectible are receivables
that have virtually no chance of being
received. An account may become
uncollectible for many reasons, including
the debtor’s bankruptcy, an inability to
find the debtor, fraud on the part of the
debtor, or lack of proper documentation
to prove that debt exists.
Allowance Method - Estimate Based on Sales
The estimate based on sales is added to any
balance in Allowance for Doubtful Accounts.
• Example: Assume that the allowance account
has a credit balance of $700 before
adjustment. It is estimated from past
experience that 1% of credit sales will be
uncollectible.
• If credit sales for the period are $300,000,
what is the adjusting entry for uncollectible
accounts at the end of the period?
Estimate Based on Analysis of Receivables
• The estimate based on
receivables is compared to the
balance in the allowance account
to determine the amount of the
adjusting entry.
• The longer an account receivable remains
outstanding, the less likely that it will be
collected.
• For this purpose, we can use a process called
aging the receivables.
• An aging schedule is prepared by classifying
each receivable by its due date. The number
of days an account is past due is determined
from the due date of the account to the date
the aging schedule is prepared.
Direct Write-Off Method
• If a business sells most of its goods or services
on a cash basis, the amount of its expense
from uncollectible accounts is usually small. In
such cases, the amount of receivables is also
likely to represent a small part of the current
assets. Examples of such a business are a
restaurant, and a small retail store such as a
hardware store. In such cases, the direct
write-off method of recording uncollectible
expense may be used.
• Under the direct write-off method,
uncollectible accounts expense is not recorded
until an account has been determined to be
worthless. Thus, an allowance account and an
adjusting entry are not needed at the end of
the period. The entry to write off an account
that has been determined to be uncollectible
is as follows:
Bad Debt Exp xxx
Accounts Receivable xxx
• If a customer later pays on an account that has
been written off, the account should be
reinstated.
Accounts Receivable xxx
Bad Debt Expenses xxx
Notes Receivable
Notes receivable are amounts that customers owe,
for which a formal, written instrument of credit has
been issued. As long as notes receivable are
expected to be collected within a year, they are
normally classified on the balance sheet as a current
asset.
Notes are often used for credit periods of more than
sixty days.
Notes may be used to settle a customer’s account
receivable.
Characteristics of Notes Receivable
• A claim supported by a note has
some advantages over a claim in the
form of an account receivable. By
signing a note, the debtor recognizes
the debt and agrees to pay it
according to the terms listed. A note
is therefore a stronger legal claim if
there is a court action.
• A promissory note is a written promise to
pay a sum of money on demand or at a
definite time. It is payable to the order of
a person or firm or to the bearer or
holder of the note. It is signed by the
person or firm that makes the promise.
The one to whose order the note is
payable is called the payee, and the one
making the promise is called the maker.
Due Date
• The date a note is to be paid is called
the due date or maturity date. The
period of time between the issuance
date and the due date of a short-
term note may be stated in either
days or months. When the term of a
note is stated in days, the due date is
the specified number of days after its
issuance.
Due Date
• The term of a note may be stated as
a certain number of months after the
issuance date. In such cases, the due
date is determined by counting the
number of months from the issuance
date.
Interest
• A note normally specifies that
interest be paid for the period
between the issuance date and the
due date. Notes covering a period of
time longer than one year normally
provide that the interest be paid
semiannually, quarterly, or at some
other stated interval.
Interest
• When the term of the note is less
than one year, the interest is usually
payable on the due date of the note.
The interest rate on notes is normally
stated in terms of a year, regardless
of the actual period of time involved.
Maturity Value
• The amount that is due at the maturity or due
date is called the maturity value.
• The maturity value of a note is the sum of the
face amount and the interest.
