BackChapter 8: Reporting and Analyzing Receivables – Study Notes
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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
Customer | Jan. 31 Balance |
|---|---|
Sych Ltd. | 6,500 |
Downey Inc. | 0 |
Pawlak Corp. | 0 |
Polo Limited | 925 |
Total (Subsidiary Ledger) | 7,425 |
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
Number of Days Outstanding | Accounts Receivable | Estimated % Uncollectible | Total Estimated Uncollectible Accounts |
|---|---|---|---|
0–30 days | $111,500 | 2% | $2,230 |
31–60 days | $41,400 | 5% | $2,070 |
61–90 days | $38,000 | 10% | $3,800 |
91–120 days | $6,600 | 25% | $1,650 |
Over 120 days | $2,500 | 50% | $1,250 |
Total | $200,000 | $11,000 |
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:
Accounts receivable | $200,000 |
Less: Allowance for doubtful accounts | 11,000 |
Carrying amount | $189,000 |
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
Measure and record estimated uncollectible accounts (allowance entry).
Record the write-off of an uncollectible account (write-off entry).
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.
