Chapter17

AccountsReceivablesTopicsCovered17.1Risks 17.2Acredittransactiontakesplace 17.3Method1:DirectWrite-OffMethod17.4Method2:AllowanceMethod 17.5LedgerAccounts 17.6QuickSummaryofThisChapter 17.1RisksFromtheaccounting'spointofview,weneedtoestimatehowmuchmoneywecanreceivefromthosecustomers.Receivablesincludetradereceivables,interest,dividendsandrentreceivables.17.2AcredittransactiontakesplaceExample:AbusinesssellseightyunitsofgoodstothecustomerAandB,eachwithfortyunits,oncredit,withthesellingpricebeing$40each.Thecredittermis2/10,n/30andthismeansa2%discountisavailableifpaymentismadewithintendaysorthenetamount.Thediscountwillnotbeavailableifthepaymentisnotsettledintendays,andtotalpaymentisduewithinthirtydays.Adailyinterestrateof5%mayalsobeaccruedonanyamountnotsettledbeyondthirtydays.Thefollowingjournalentries:1.Whenthesaletakesplace:DrAccountsreceivable80unitsx$40 $3,200FromcustomerA:40unitsx$40FromcustomerB:40unitsx$40CrSalesrevenue $3,2002.Thecashdiscountisexpectedtobesettled:DrSalesrevenue$3,200x2% $64CrAccountsreceivable $6417.3Method1:DirectWrite-OffMethod17.3.1CustomerAWillNotPaytheInvoiceBeforetheFinancialStatementsyearend,customerAhasdeclareditsbankruptcywhichmeanscustomerAisnotgoingtopayustheinvoiceof$1,600.1.WhencustomerAannouncesitsbankruptcy:DrIrrecoverabledebtexpense(statementofprofitorloss) $1,600CrAccountsreceivable $1,600Theirrecoverabledebtexpensehasincreasedby$1,600whereastheaccountsreceivableassethasdecreasedby$1,600.2.Thecashdiscounthasnotbeentakenbythecustomer:DrAccountsreceivable($1,600x2%) $32CrSalesrevenue $32Theeffectsonthetrialbalance:17.3.2CustomerASettlestheInvoiceCustomerA(business)isprotectedbythecodeandallowedtoreorganiseorimproveitsbusinessoperations.Eventually,customerAisabletosettletheinvoice.Hencethefollowingjournalentry:DrBank $1,600CrIrrecoverabledebtexpense(statementofprofitorloss) $1,60017.4Method2:AllowanceMethodAn“allowance”accountisacontractaccounttotheaccountsreceivable.Anothercontractaccounttypewastheaccumulateddepreciationaccount.Anincreaseinallowancewillreducetheaccountsreceivableandadecreaseinallowancewillincreasetheaccountsreceivablebalance.Fromtheaboveexample，theaccountingtreatmentforthebaddebt：DrIrrecoverabledebtexpense(statementofprofitorloss) $1,600CrAccountsreceivable $1,600Thesubsequenttreatmentwillbethesameasbeforeifthereisnoallowance.

Anothercase:Thecompanyhasthreecredittransactions:creditsalesof$1,000tocustomerA,creditsalesof$5,000tocustomerB,and$7,000tocustomerC.Nocashdiscountsareofferedtothesecustomers.1.setuptheallowancefordoubtfuldebtDrIrrecoverabledebtexpense(statementofprofitorloss) $146CrAllowancefordoubtfuldebt(statementoffinancialposition) $1462.ThebaddebtexpenseDrAllowancefordoubtfuldebt(statementoffinancialposition)$100CrAccountsreceivable(statementoffinancialposition) $1003.Afewdayslater,thecustomerChassettledthepreviously-recognised$100baddebt.Step1:Reversetheaboveallowancejournal:DrAccountsreceivable(statementoffinancialposition) $100CrAllowancefordoubtfuldebt(statementoffinancialposition) $100Step2:Recordthecashtransaction:DrBank(statementoffinancialposition) $100CrAccountsreceivable(statementoffinancialposition) $100AssumingcustomerAandcustomerBhavenotsettledtheirinvoicesyetTheallowancefordoubtfuldebtwas$146atthestart,andnowithasgonedownto$55.Thefollowingjournalentry:DrAllowancefordoubtfuldebt(statementoffinancialposition) $91CrIrrecoverabledebtexpense(statementofprofitorloss) $91Now,customerDhasa$9,000credittransactionwiththebusiness.SupposethepreviouscustomersAandBhavesettledtheirinvoicesinpartof$300and$2,000andtherefore,theystilloweus$700and$3,000.Theallowancefordoubtfuldebthasnowgoneupby$153from$55to$208.Thefollowingjournalentry:DrIrrecoverabledebtexpense(statementofprofitorloss) $153CrAllowancefordoubtfuldebt(statementoffinancialposition)$15317.5LedgerAccountsExample：Thebusinesshasa$40,000openingbalanceforaccountsreceivableand$6,000allowancefordoubtfuldebt.Thecreditsaleswere$5,000.However,thecustomerannounceditsbankruptcyandtherefore,thefullsumof$5,000iswrittenoffasirrecoverabledebtexpense.However,thebusinesshassubsequentlyrecovered$4,500fromthatcustomer.Method1:Directwrite-offmethod:Credittransactiontookplace:DrAccountsreceivable $5,000CrSalesrevenue $5,000Baddebtincurred:DrIrrecoverabledebtexpense $5,000CrAccountsreceivable $5,000Baddebtrecovered:DrBank $4,500CrIrrecoverabledebtexpense $4,500Underthismethod,theclosingbalancefor:Accountsreceivable:$40,000Allowancefordoubtfuldebt:$6,000Irrecoverabledebtexpensechargedinthecurrentyear’sstatementofprofitorloss:$500Method2:Allowancemethod:Credittransactiontookplace:DrAccountsreceivable $5,000CrSalesrevenue $5,000Baddebtincurred:DrAllowancefordoubtfuldebt $5,000CrAccountsreceivable$5,000Baddebtrecovered:Step1:Reversetheaboveallowanceaccount:DrAccountsreceivable $4,500CrAllowancefordoubtfuldebt $4,500Step2:Recordthecashreceived:DrBank $4,500CrAccountsreceivable $4,500Supposethattheallowancefordoubtfuldebtdoesnotchange.AccountsreceivableaccountDr

Cr

$

$Balb/d40,000Allowancefordoubtfuldebt5,000Salesrevenue5,000Bank4,500Allowancefordoubtfuldebt4,500Balc/d40,000

49,500

49,500AllowancefordoubtfuldebtaccountDr

Cr

$

$Accountsreceivable5,000Balb/d6,000Balc/d5,500Accountsreceivable4,500

10,500

1,500Underthismethod,theclosi