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 its customers, employees, government, or others, expected to be collected in cash.

• Major types include:

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

  • Notes Receivable (N/R): Formal written promises (promissory notes) to pay a certain amount of money at a future date, often with interest.

  • Other Receivables: Interest receivable, loans to company officers, advances to employees, sales tax recoverable, income tax receivable, etc.

• Trade Receivables: A collective term for accounts and notes receivable arising from sales transactions.

Recording Accounts Receivable

Initial Recognition and Adjustments

• Receivables are recorded when service is provided on account or at the point of sale of merchandise on account.

• Initially recorded at the transaction price.

• Reduced by variable considerations such as expected sales returns, allowances, and sales discounts.

• Further reduced when payment is received or merchandise is returned by the customer.

Example Journal Entries

• Debit Accounts Receivable and credit Sales for sales on account.

• Debit Cash and credit Accounts Receivable when payment is received.

• Debit Sales Returns and Allowances and credit Accounts Receivable for returns.

Accounts Receivable Subsidiary Ledger

Purpose and Structure

• A subsidiary ledger (or subledger) is a group of accounts with a common characteristic, such as all receivable accounts.

• The subsidiary ledger provides details supporting the total balance in the general ledger's control account (Accounts Receivable).

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

Example Table: Subsidiary Ledger vs. General Ledger

Additional info: The general ledger's Accounts Receivable control account should match the total of the subsidiary ledger.

Accounting for Bad Debts

Recognition and Expense

• Some accounts receivable become uncollectible and are recognized as Bad Debts Expense (also called credit losses).

• Bad debts expense is recognized in the same period as the related sales revenue (matching principle).

Allowance Method

Estimating Uncollectible Accounts

• Estimates uncollectible accounts at the end of each period.

• The estimate is recorded in the Allowance for Doubtful Accounts, a contra asset account with a normal credit balance.

• The allowance is netted with Accounts Receivable to determine the carrying amount (net realizable value).

• The allowance is an estimate and does not identify specific customer accounts.

Estimating the Allowance

• Most companies use the percentage of receivables basis.

• Estimation methods:

  • Apply a single percentage to the total accounts receivable balance.

  • Apply different percentages to accounts receivable based on how long they have been outstanding (aging of accounts receivable).

Aging Schedule Example

Adjusting Entry for Allowance

• The adjusting entry amount is the difference between the required balance and the existing balance in the allowance account.

• This amount is recorded as Bad Debts Expense for the period.

Measuring and Recording Estimated Uncollectible Accounts

• The Allowance for Doubtful Accounts is deducted from Accounts Receivable in the current assets section of the statement of financial position.

Example:

Write-Offs and Recoveries

• Write-Off: When an account is determined to be uncollectible, it is written off by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable.

• Effect: The carrying amount of receivables does not change because both the asset and contra asset decrease by the same amount.

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

Summary of the Allowance Method

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

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

3. Record the recovery of an uncollectible account (recovery entries).

Account for Notes Receivable

Nature and Recording

• Notes Receivable are written promises to pay a specified amount of money at a future date, usually with interest.

• They have a stronger legal claim than accounts receivable.

• Used when customers borrow money, when the amount/period exceeds normal limits, or to settle overdue accounts receivable.

Recording Notes Receivable

• Debit Notes Receivable and credit Accounts Receivable (if converting an account to a note).

Calculating Interest

• The formula for interest on an interest-bearing note is:

• The interest rate is always annual unless otherwise specified.

Derecognizing Notes Receivable

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

• Dishonoured: Not paid at maturity; note is no longer negotiable.

  • If collection is expected, transfer to Accounts Receivable.

  • If not expected, write off to Bad Debts Expense.

Statement Presentation of Receivables

Financial Statement Reporting

• Receivables are reported in the current assets section, following cash and trading investments.

• Reported at carrying amount, with disclosure of gross receivables and allowance for doubtful accounts.

• Receivables due in more than one year are shown in the non-current assets section.

• On the statement of income, bad debts expense is an operating expense; interest income is a non-operating item.

Managing Accounts Receivables

Principles of Sound Management

• Determine to whom to extend credit.

• Establish a payment period; may charge interest if overdue.

• Monitor collections and prepare/update an aging schedule.

• Evaluate the liquidity of receivables.

Evaluating the Liquidity of Receivables

Key Ratios and Measures

• Liquidity is how quickly assets can be converted to cash.

• Key measures:

  • Receivables Turnover Ratio: Indicates how many times receivables are collected during a period.

  • Average Collection Period: Average number of days a receivable is outstanding.

• A higher turnover ratio and lower collection period indicate more liquid receivables.

Comparing IFRS and ASPE

Overview

• Both IFRS (International Financial Reporting Standards) and ASPE (Accounting Standards for Private Enterprises) provide guidance on the recognition, measurement, and presentation of receivables.

• Differences may exist in impairment testing, disclosure requirements, and measurement bases.

Additional info: Students should consult their course materials for specific differences relevant to their jurisdiction.