Accounts Receivable Managment accounting.pptx
- 2. Accounts Receivable Accounts receivable are short-term financial assets that arise from sales on credit and are often called trade credit. Terms of trade credit usually range from 5 to 60 days, depending on industry practice, and may allow customers to pay in installments. Credit sales or loans not made in the ordinary course of business, such as those made to employees, officers, or owners, should appear separately under asset titles like Receivables from Employees
- 3. Why Companies sell on credit Companies that sell on credit do so to be competitive and to increase sales. In setting credit terms, a company must keep in mind the credit terms of its competitors and the needs of its customers. Obviously, any company that sells on credit wants customers who will pay their bills on time
- 4. Need of Credit Policy To increase the likelihood of selling only to customers who will pay on time, most companies develop control procedures and maintain a credit department. The credit department’s responsibilities include examining each person or company that applies for credit and approving or rejecting a credit sale to that customer. Typically, the credit department asks for information about the customer’s financial resources and debts. It may also check personal references and credit bureaus for further information. Based on the information it has gathered, it decides whether to extend credit to the customer.
- 5. Importance of Credit Policy Companies that are too lenient in granting credit can run into difficulties when customers don’t pay. For example, Sprint, one of the weaker companies in the competitive cell phone industry, targeted customers with poor credit histories. It attracted so many who failed to pay their bills that its stock dropped by 50 percent, to $2.50, because of the losses that resulted
- 6. Uncollectable Companies that extend credit to customers know that some of these customers cannot or will not pay. The accounts of such customers are called uncollectible accounts (or bad debts), and they are expenses of selling on credit. In accordance with accrual accounting, to match these expenses to the revenues they help generate, they should be recognized at the time credit sales are made.
- 7. Direct Charge-off Vs. allowance method Some companies recognize a loss when they determine that an account is uncollectible by reducing Accounts Receivable and increasing Uncollectible Accounts Expense. Federal regulations require companies to use this method —called the direct charge-off method—in computing taxable income. However, because a direct charge-off is usually recorded in a different period from the one in which the sale takes place, this method is not in accord with accrual accounting. Generally accepted accounting principles, therefore, require the use of the allowance method of accounting for uncollectible accounts
- 8. Uncollectible Accounts: The Allowance Method Transaction: Mandy Company made most of its sales on credit during its first year of operation, 2014. At the end of the year, accounts receivable amounted to $200,000. On December 31, 2014, management reviewed the collectible status of the accounts receivable. Approximately $12,000 of the $200,000 of accounts receivable were estimated to be uncollectible. Analysis: The adjusting entry to record estimated uncollectible accounts ▲ increases the Uncollectible Accounts ▲ increases the Allowance for Uncollectible Accounts Comment: This transaction is an application of accrual accounting in that uncollectible accounts expense is used to value accounts receivable at the amount that is expected to be collected
- 9. Iqbal & Sons provide allowance for uncollectible at 5% of A/R at end:- A/R balance Rs. 10,500 and allowance for uncollectible Rs. 2,000 on Jan, 1, 1997. During 1997 the following transactions were performed: • Credit sales Rs. 45,000 • Cash collected from customers Rs. 20,000 • A Customer’s account written off Rs. 1000 • Sales Discount Rs. 600 Required: Give journal entries to record above transactions. Adjusting entry for providing allowance for uncollectible Prepare partial balance sheet
- 10. Percentage of Net Sales Method The basis for the percentage of net sales method is the amount of this year’s net sales that will not be collected. The answer determines the amount of uncollectible accounts expense for the year.
- 11. Percentage of Net Sales Method • Transaction: The following balances represent Varta Company’s ending figures for 2014: Sales remain $322,500 while sales return and allowances is $20,000, Sales Discount $2,500 and Allowance for uncollectable had a balance of $1,800. The following are Varta’s actual losses from uncollectible accounts for the past three years: Year Net Sales Losses from Uncollectible Accounts Percentage 2011 $260,000 $5,100 1.96 2012 297,500 6,950 2.34 2013 292,500 4,950 1.69 Total $850,000 $17,000 2
- 12. Percentage of Net Sales Method: • Varta’s management believes that its uncollectible accounts will continue to average about 2 percent of net sales. The uncollectible accounts expense for the year 2014 is therefore estimated as follows: 0.02 * ($322,500 - $20,000 - $2,500) = 0.02 * $300,000 = $6,000
- 13. Question: On Dec. 31, 2022, the following balances appeared in the trial balance of Zulfiqar & Co: Accounts Receivable 260,000 Sales 500,000 Sales return and allowances 20,000 Required: Prepare the Journal entries to record the estimated bad debt of %% of net sales
- 14. Accounts Receivable Aging Method The aging of accounts receivable is the process of listing each customer’s receivable account according to the due date of the account. If the customer’s account is past due, there is a possibility that the account will not be paid. And that possibility increases as the account extends further beyond the due date. The aging of accounts receivable helps management evaluate its credit and collection policies and alerts it to possible problems.
- 15. Accounts Receivable Aging Method The basis for the accounts receivable aging method is the amount of the ending balance of accounts receivable that will not be collected. With this method, the ending balance of Allowance for Uncollectible Accounts is determined directly through an analysis of accounts receivable. The difference between the amount determined to be uncollectible and the actual balance of Allowance for Uncollectible Accounts is the expense for the period. In theory, this method should produce the same result as the percentage of net sales method, but in practice it rarely does.
- 16. Accounts Receivable Aging Method Statue A/R (Ending) Not yet due 34000 3% 1-30 days (Past due) 13000 5% 31-60 days (Past due) 70000 9% 61-90 days (Past due) 7000 12% Over 90 days past due 25000 25%
- 17. Following is the aging schedule of Faraz Company of December 31, 2015 Allowance for Bad Debt has a credit balance of Rs. 1,200 Required: Compute the amount of estimated uncollectible accounts and compute the bad debts expenses Record the adjusting entry for bad debts expenses Balance Not yet due Days Past Due 1 - 30 days 31-60 days 61-90 days Above 90 40,000 20,000 10,000 5,000 3,000 2,000
Editor's Notes
- #1: Chapter 10: Liabilities
- #2: Liabilities are debts owed from past transactions. Liabilities can be separated into two categories: Current and Non-current. Current liabilities are due to be paid within one year or the normal operating cycle of the business, whichever is longer. For most businesses, one year is longer than the operating cycle. Noncurrent liabilities are due to be paid sometime after one year.
- #3: Liabilities are debts owed from past transactions. Liabilities can be separated into two categories: Current and Non-current. Current liabilities are due to be paid within one year or the normal operating cycle of the business, whichever is longer. For most businesses, one year is longer than the operating cycle. Noncurrent liabilities are due to be paid sometime after one year.