Reporting and Analyzing Receivables

Learning Objectives

• Identify the types of receivables and record accounts receivable transactions.

• Account for bad debts.

• Account for notes receivable.

• Explain the statement presentation of receivables.

• Apply the principles of sound accounts receivable management.

Types of Receivables

Classification and Definitions

Receivables are amounts owed to a company by customers, employees, government, or others, and are expected to be collected in cash. They are classified as follows:

• Accounts Receivable (A/R): Amounts owed by customers from the sale of goods and services.

• Notes Receivable (N/R): Formal credit instruments, often referred to as Trade Receivables when related to sales.

• Other Receivables: Includes interest receivable, loans to company officers, advances to employees, sales tax recoverable, and income tax receivable.

Recording Accounts Receivable

Initial Recognition and Adjustments

Accounts receivable are recorded when services are provided or merchandise is sold on account, at the transaction price. Adjustments are made for:

• Expected sales returns and allowances

• Sales discounts

• Payments received or merchandise returned

Example Journal Entries

• Debit Accounts Receivable for the sale amount

• Credit Sales for the sale amount

• Adjust for returns, allowances, and discounts as needed

Accounts Receivable Subsidiary Ledger

Purpose and Structure

A subsidiary ledger is a group of accounts sharing a common characteristic. The subsidiary ledger for accounts receivable provides detailed support for the total balance in the general ledger's control account.

• The control account in the general ledger equals the sum of all individual receivable balances in the subsidiary ledger.

Accounting for Bad Debts

Recognition and Expense

Some accounts receivable become uncollectible. Expected credit losses are debited to Bad Debts Expense, recognized in the same period as the related sales revenue.

Allowance Method

Estimating Uncollectible Accounts

The Allowance for Doubtful Accounts is a contra asset account used to estimate uncollectible accounts at the end of each period. The carrying amount of accounts receivable is calculated as:

• Accounts Receivable minus Allowance for Doubtful Accounts

Estimating the Allowance

Most companies use the percentage of receivables basis, either applying one percentage to the entire balance or different percentages based on the aging of accounts receivable.

Adjusting Entry for Allowance

The adjusting entry for bad debts expense is the difference between the required balance and the existing balance in the allowance account.

• Journal Entry: Debit Bad Debts Expense, Credit Allowance for Doubtful Accounts

Measuring and Recording Estimated Uncollectible Accounts

Balance Sheet Presentation

• Accounts receivable: $200,000

• Less: Allowance for doubtful accounts: $11,000

• Carrying amount: $189,000

Recording the Write-Off and Recovery of Uncollectible Accounts

Write-Offs

• Write-off is authorized when an account is deemed uncollectible.

• Journal Entry: Debit Allowance for Doubtful Accounts, Credit Accounts Receivable

Recovery of Uncollectible Accounts

• If a previously written-off account is collected, reverse the write-off and record the cash collection.

• Journal Entries: (1) Debit Accounts Receivable, Credit Allowance for Doubtful Accounts (2) Debit Cash, Credit Accounts Receivable

Summary of the Allowance Method

1. Measure and record estimated uncollectible accounts (allowance entry)

2. Record the write-off of uncollectible accounts (write-off entry)

3. Record the recovery of uncollectible accounts (recovery entry)

Account for Notes Receivable

Definition and Use

Notes Receivable are written promises to pay a specified amount on demand or at a future date, usually with interest. They have a stronger legal claim than accounts receivable.

• Require payment of interest

• Extend for periods greater than 30 days

• Used for loans, extended credit, or settling accounts receivable

Recording Notes Receivable

• Journal Entry: Debit Notes Receivable, Credit Accounts Receivable

Formula for Calculating Interest

The interest income on an interest-bearing note is calculated as:

The interest rate specified is an annual rate.

Recording Interest for Notes Receivable

• Journal Entry: Debit Interest Receivable, Credit Interest Income

Derecognizing Notes Receivable

• Honoured: Paid in full at maturity; collection recorded.

• Dishonoured: Not paid at maturity; note is no longer negotiable. Balance transferred to accounts receivable if collection is expected, or written off to bad debts expense if not expected.

Statement Presentation

Financial Statement Reporting

• Statement of Financial Position: Receivables are reported in the current assets section, following cash and trading investments. Must disclose gross amount and allowance for doubtful accounts. Non-current receivables are presented separately.

• Statement of Income: Bad debts expense is reported as an operating expense; interest income is reported as a non-operating item.

Managing Accounts Receivables

Principles of Management

• Determine to whom to extend credit

• Establish a payment period; may add interest if overdue

• Monitor collections and update aging schedules

• Evaluate liquidity of receivables

Evaluating the Liquidity of Receivables

Key Ratios

• Receivables Turnover Ratio: Measures how many times receivables are collected during a period. Higher is better.

• Average Collection Period: Measures the average time a receivable is outstanding. Lower is better.

Formulas:

Comparing IFRS and ASPE

Overview

International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) may differ in the recognition, measurement, and presentation of receivables and related expenses. Students should consult the relevant standards for specific differences.

Additional info: These notes expand on the provided slides and exercises, adding definitions, formulas, and context for clarity and completeness.