Lecture International accounting: Chapter 7 - Nguyễn Quốc Nhất

Lecture "International accounting - Chapter 7: Receivables" has content: Receivables - An introduction, accounting for uncollectible, the allowance method, the direct write off method, the direct write off method, notes receivable, using accounting information for decision making.
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Lecture International accounting: Chapter 7 - Nguyễn Quốc NhấtInternational Financial AccountingChapter 7: RECEIVABLESInternational Financial AccountingChapter 7:RECEIVABLESMA. Nguyen Quoc NhatLearning ObjectivesChapter’s contentDefine and explain common types of receivables andreview internal controls for receivablesUse the allowance method to account forUncollectibleUnderstand the direct write-off method forUncollectibleAccount for notes receivableReport receivables on the balance sheet and evaluate acompany using the acid-test ratio, days’ sales inreceivables, and the accounts receivable turnover ratio7.1 Receivables: An Introduction7.1 Receivables: An IntroductionYou have a receivable when you sell goods or services toanother party on credit.You also have a receivable when you loan money toanother party. So a receivable is the right to receive cashin the future from a current transaction. It is something thebusinessowns; therefore, it is an asset. Each receivable transactioninvolves two parties:● The creditor, who will collect cash from the customer.● The debtor, who takes on an obligation/payable (aliability). The debtor will pay cash later.RECEIVABLES7.1 Receivables: An Introduction7.2 Accounting for Uncollectible (Bad Debts)7.3 The Allowance Method7.4 The Direct Write-Off Method7.5 Credit-Card and Debit-Card Sales7.6 Notes Receivable7.7 Using Accounting Information for DecisionMaking5MA. NguyenQuocNhat –nhatnq.faa@gmail.comTypes of ReceivablesThe two major types of receivables are● accounts receivable, and● notes receivable.RECEIVABLES61International Financial AccountingChapter 7: RECEIVABLES7.1 Receivables: An Introduction7.1 Receivables: An IntroductionAccounts receivable, also called trade receivables, areamounts to be collected from customers from sales madeon credit. Accounts receivable serves as a control accountbecause it summarizes the total of all the individualcustomer receivables.7RECEIVABLES7.1 Receivables: An Introduction7.2 Accounting for Uncollectibles (Bad Debts)Notes receivable are usually longer in term than accountsreceivable. Notes receivable represent the right to receivea certain amount of cash in the future from a customer orother party. The debtor of a note promises to pay thecreditor a definite sum at a future date—called thematurity date. The maturity date is the date the debtmust be completely paid off. A written document knownas a promissory note serves as the evidence of theindebtedness and is signed by both the creditor and thedebtor.As we discussed earlier, selling on credit (onaccount) creates an account receivable. The creation ofthis account receivable is really the first step in theprocess. However,if the company sells only for cash, it has no accountsreceivable and, therefore, no bad debts from unreceivedcustomer accounts.9RECEIVABLES10RECEIVABLES7.2 Accounting for Uncollectibles (Bad Debts)7.2 Accounting for Uncollectibles (Bad Debts)Greg’s Tunes sells $5,000 in services to customer Brownon account and also sells $10,000 of inventory to customer Smithon account on August 8, 2014. The revenue is recorded (ignoreCOGS) as followsThe business collects cash from both customers on August29—$4,000 from Brown and $8,000 from Smith. Collecting cashis the second step in the process and Greg’s makes the followingentry:20141aAug 82014Accounts Receivable - Brown5,000Service Revenue2aAug 29 Cash12,0005,000Accounts Receivable - Brown1bAug 8Accounts Receivable - SmithSales Revenue10,0008,000Accounts Receivable - SmithPerformed service on account4,000Collected cash on account10,000Sales Inventory on accountMA. NguyenQuocNhat –nhatnq.faa@gmail.com2International Financial AccountingChapter 7: RECEIVABLES7.2 Accounting for Uncollectible (Bad Debts)7.2 Accounting for Uncollectible (Bad Debts)7.3 The Allowance Method7.2 Accounting for Uncollectible (Bad Debts)Most companies use the allowance method tomeasure bad debts. The allowance method is based onthe matching principle. The offset to the expense is acontra account called Allowance for uncollectibleaccounts or the Allowance for doubtful accounts. TheAllowance account reduces Accounts receivable.The business does not wait to see which customers willnot pay. Instead, it records abad debt expense based on estimates developed from pastexperienceThere are two methods of accountingfor uncollectible receivables:● the allowance method, ● or, in certainlimited cases, the direct write-offmethod.RECEIVABLES7.3 The Allowance Method167.3 The Allowance MethodEstimating UncollectibleSo, how are uncollectible receivables estimated?Companies use their past experience as well asconsidering the economy, the industry they operate in, andother variables. In short, they make an educated guess,ca ...