College Accounting Notes - Chapter 9

Chapter Nine                                                                     Page 353

                                  Accounting for Receivables


Objective: To have students demonstrate their knowledge of accounts receivable, notes receivable, and interest calculations by applying the direct and allowance methods for A/R. They will estimate uncollectable amounts and calculate bad debts while providing an appropriate reserve using the B/S or I/S method.


Topics to be covered:


Accounts Receivable


-       Valuing A/R

-       Ease of converting to cash

-       Estimating Bad Debts

o   Setting up reserves

o   I/S Method

o   B/S Method



Notes Receivable


-       Compute Maturity and Interest

-       Recording Notes Receivable

-       Valuing the settlement of Notes Receivable

-       Honoring and Dishonoring Notes



Disposal of Receivables


            - Selling of Receivables

                        - Factoring

            -  Write-offs

            - N/R pledge for A/R

Sales made on account or for credit


Recognizing accounts receivables – Sales occur on account (or for credit) from customers who will pay for them later.

The J/E made for sales on account or for credit:

                                    Dr. A/R (customers name)

                                                Cr. Sales

When payment is received on those sales:

                                    Dr. Cash

                                                Cr. A/R (customer)


The A/R transaction portion is recorded in the A/R subsidiary Ledger by customer account and the Cash Receipts Journal.


Credit Card Sales

-       Direct credit to customers, get goods now pay for them later; Sears, Macys, ect.

o   Third party cards; Visa, MC, Amex

Debit Cards

-       Debit (deduction) to your account right away.


Merchants get charged a fee for each credit card transaction. The expense is recorded at the time of use. (pg 357)

The merchant’s entry is;

                        Dr. A/R (credit card company name)       96

                        Dr. Credit Card Expense                            4

                                    Cr. Credit Card Sales                                 100


Bad Debts


-       The amount of money that is not paid or will not be paid on a credit sale. The amount of the credit sale that is deemed uncollectable. The total of uncollectable account amounts is an expense to the company who made the sale.

-       There are two methods to record the bad debt or uncollectable amounts; Direct Write-off method and the Allowance method.


Direct Write-off Method

-       w/o an uncollectable when it becomes uncollectable. A sale made in January could become uncollectable in June.

o   This does not follow the Matching Concept (matching revenues and expenses in the period they relate to)

o   Must follow materiality constraint (used in small amounts and small companies)

o   The expense is recognized when the uncollectability is determined.

The J/E to write-off a customer’s amount is;

                  Dr. Bad Debt Expense

                              Cr. A/R (customer)

The J/E to reinstate the receivable when a customer pays you for a portion or whole amount of a receivable that has been previously w/o;

                  Dr. A/R (customer) For amount received

                              Cr. Bad Debt Expense

                  Dr. Cash

                              Cr. A/R (customer)


Allowance Method

-       Conforms to the Matching Concept

-       Uses a new Contra – Asset Account called: Allowance For Doubtful Accounts, this account has a natural credit balance.

-       Has two different calculations to choose from

o   Income Statement Method

o   Balance Sheet Method

-       Both methods setup and use a reserve or estimated bad debts.

-       The entry is the same for both:

o   To set up the reserve in the month of the sale:

§  Dr. Bad Debt Expense

·      Cr Allowance for Doubtful Accounts

The entry now used to W/O the uncollectable at a later time period is:

                        Dr. Allowance for Doubtful Accounts

                                    Cr. A/R (customer)

            If a customers pays all or a portion of the W/O later just reverse the W/O and reinstate the receivable:

                                                Dr. A/R (customer)

                                                            Cr. Allow for D/A

                                                Dr. Cash

                                                            Cr. A/R (customer)


Income Statement Method (Percent of Sales Method)


 This method is used to calculate the estimated bad debt on sales made on account. Based on some historical information; maybe prior write-offs in that month, you take that percentage of w/o and multiply it by the credit sales in that month. This represents the amount of sales that you feel, based on prior w/o, will become eventually uncollectable. You might be right or wrong or close or not, this is your best estimate.

   An example of the calculation is:

            Prior year April actual W/O were 5% of credit sales that month.

            This year we had $10,000 in credit sales for April.

  So this year’s April reserve will be 10,000 x .05 = 500

There are other calculations that you can base your reserve on.

            The J/E would be:

                                    Dr. Bad Debt Expense   500

                                                Cr. Allowance for Doubtful Accounts    500

The way this would be shown on the Balance Sheet is:

                        Gross A/R     10,000

Less:  Allowance for D/A        (500)

                        Net A/R            9,500





Balance Sheet Method (Accounts Receivable Method)


 This method maintains a balance in the reserve account (Allowance for Doubtful Accounts) that is a constant percent of the gross accounts receivable balance.

  An example of the calculation is:

                        Current Allowance for D/A balance          $1,000 (cr. Balance)

                        Current A/R balance                              $100,000 (dr. Balance)

                        Required Reserve Percent                                                           2.5%


Current balance 1,000

Required bal.     2,500

J/E amount         1,500

            J/E – Dr. Bad debt expense           1,500

                                    Cr. Allowance for D/A          1,500


Under both methods when you determine a write-off is needed you would use the allowance account because the estimated w/o has be expensed in the reserve entry made in the month of the sale. The W/o J/E is

                        Dr. Allowance for D/A

                                    Cr. A/R (customer)


Aging of A/R (pg 366)


In order to get better detail the A/R balance might be broken up into “Aging Buckets”. This breaks down the A/R balance by how old it is from the invoice date. The older the balance the higher the reserve required. As balances get older the amount of the receivable should be going down as well. Each bucket has its own reserve rate and all of them together would make up the reserve required in the Allowance for D/A.


Bucket            0-30 days      31-60             61- 90            over 91

A/R                  700,000         150,000         100,000         50,000

            Bad Debt Rate         .5%       1%                    2%                 5%

            Required Reserve   $3,500           $1,500           $2,000           $2,500  = $9,500 cr

                                                                                    Allowance For D/A Balance       2,500 cr

                                                                                                J/E needed                      7,000

                                    J/E: Dr. Bad Debt Exp         7,000

                                                            Cr. Allowance for D/A          7,000

** If the Allowance for D/A has a debit balance then the calculation is:

                                                                                                            Allow For D/A  2,500 dr

                                                                                                Required reserve      9,500 cr

                                                                                                            J/E needed    12,000

                                    J/E: Dr. Bad Debt Exp         12,000

                                                            Cr. Allowance for D/A          12,000          


Companies will monitor their accounts receivable to make sure that they are collecting cash on it. They do it by using the A/R Turnover calculation. This calculation tells how many times you’re A/R balance is converted into cash. This gets compared to other companies and your month to month results.

                        Net Sales/ Average A/R (average is current year plus last year)


They will also sell their receivables for cash in loo of collecting them themselves. They might sell it for 90% of the total value or something like that. This is called Factoring. (pg 371) The J/E is:

                                    Dr. Cash                    900,000

                                    Dr. Factoring Fee     100,000

                                                Cr. A/R                                   1,000,000







Demo Problem pg 332-333


  Quick Study, Exercises, and Problems


1. Do QS:       9-1 – Credit Card Sales pg 377


            Ex.     9-1 – Credit Card Sales pg 378

                        9-9 -  Selling A/R & Factoring pg 380



2. Do QS:       9-2 –  Allowance Method pg 378

                        9-3 – Percent of A/R & Percent of Sales pg. 378

                        9-4 – Percent of Sales pg 378


            Ex.      9-3 – Percent of sales & W/O pg 378 & 9

            Ex.      9-4 – Percent of A/R pg 379


3. Do QS:       9--5 – Notes Receivable pg 378

                        9-6 – Notes Receivable pg. 378


            Ex.       9-2 A/R Sub Ledger, Schedule of A/R pg. 378  


4. Do QS:       9-7 -  A/R Turnover pg 378


Ex.       9-13 A/R Turnover pg 381

            9-10 Honoring a note pg. 380

            9-11 Dishonoring a note pg 380  


5. Do  Prob.   9-1 Sales on Account pg. 381      




6. Do Ex.        9-8 Estimated Bad Debts   pg 380


            Prob.  9-3 Estimating & Reporting Bad Debt pg 382


7. Do Ex.        9-5 Aging of A/R pg 379 

                        9-6 Percent of Receivables pg 379


            Prob. 9-4 Aging of A/R pg 382


8. Do Ex.        9-7 W/O of A/R pg 379


            Prob. 9-2 A/R & Bad Debt pg 381





( extra problem 9-5 N/R pg 382)