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Chapter 09 - Accounting for Receivables
CHAPTER 9
ACCOUNTING FOR RECEIVABLES
Related Assignment Materials
Student Learning Objectives Questions
Quick
Studies* Exercises* Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe accounts receivable
and how they occur and are
recorded.
1 9-1, 9-13 9-1, 9-2 9-1, 9-4 9-5, 9-7,
9-8, 9-9
C2. Describe a note receivable, the
computation of its maturity date
and recording of its existence.
9 9-8 9-10 9-5
C3. Explain how receivables can be
converted to cash before
maturity.
9-11 9-14 9-5
Analytical objectives:
A1 Compute accounts receivable
turnover and use it to help
assess financial condition.
9-12 9-15 9-1, 9-2
Procedural objectives:
P1. Apply the direct write-off and
allowance methods to account
for accounts receivable.
2, 3, 5, 6, 8 9-2, 9-3, 9-4 9-3
P2. Apply the allowance method
and estimate uncollectibles
based on sales and accounts
receivable.
7,10 9-4, 9-5, 9-6,
9-7
9-4, 9-5,
9-6, 9-7,
9-8, 9-9,
9-16
9-2, 9-3, 9-4 9-2, 9-3,
9-4, 9-6,
9-9
P3. Record the honoring and
dishonoring of a note and
adjustments for interest.
4 9-9, 9-10 9-11, 9-12,
9-13
9-5
*See additional information on next page that pertains to these quick studies, exercises and problems.
9-1
Chapter 09 - Accounting for Receivables
Additional Information on Related Assignment Material
The Serial Problem for Success Systems continues in this chapter. Problem 9-1A and 9-5A can be
completed with Sage 50 Software. Problem 9-5A and the Serial Problem can be completed with
QuickBooks.
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be
used in practice, homework, or exam mode
Synopsis of Chapter Revisions
Skai Blue Media: NEW opener with new entrepreneurial assignment
Enhanced 3-step process for estimating allowance for uncollectibles
New T-accounts to enhance learning of receivables
Enhanced infographic on methods to estimate bad debts
New notes on pros/cons of allowance vs direct write-off
Updated receivables analysis using Dell and HP
9-2
Chapter 09 - Accounting for Receivables
Chapter Outline Notes
I. Accounts Receivable—Amounts due from customers for credit
sales. They occur when a customer uses credit cards issued by third
parties and when a company gives credit directly to customers.
A. Recognizing Accounts Receivable:
1. Sales on credit—Increase (debit) Accounts Receivable for
the full amount of the sale and increase (credit) Sales.
a. The General Ledger continues to keep a single (total)
2. Credit card sales (Examples: Visa, MasterCard, American
Express).
a. Advantages: (1) eliminates the company’s need to
evaluate each customer’s credit standing (2) avoids
seller’s risk (3) seller receives cash sooner than when
they grant credit directly (4) more credit options
potentially increase sales.
b. Credit card sales (when cash is received immediately
upon deposit of sales receipt) results in debit to Cash for
the amount of sale less the credit card company charge,
debit to Credit Card Expense for this fee and credit to
Sales for full invoice amount.
c. Credit card sales ((when cash receipt is received some
time after deposit of sales receipt) results in debit to
Accounts Receivable for the amount to be collected, and
a debit to Credit Card expense for the amount of the fee
and credit to Sales for full invoice. Later, when payment
is received, debit Cash and credit Accounts Receivable.
B. Installment Sales and Receivables
Amounts owed by customers from credit sales where payment is
required in periodic amounts over an extended time period.
1. Customer is usually charged interest.
2. Should be classified as current assets even if credit period
exceeds year if the company regularly offers customers such
9-3
Chapter 09 - Accounting for Receivables
Chapter Outline Notes
1. Direct Write-off Method
Records the loss from an uncollectible account receivable
when it is determined to be uncollectible.
a. To write off uncollectible and recognize loss: debit Bad
2. Allowance Method
Matches the estimated loss from uncollectibles against the
sales they helped produce.
a. At the end of each accounting period, bad debts expense
normal collection of account entry.
9-4
Chapter 09 - Accounting for Receivables
Chapter Outline Notes
D. Estimating Bad Debts Expense—two methods:
1. Percent of Sales Method (uses income statement relations to
estimate)—bad debts expense is computed as a percentage of
sales for the period. (% x sales = Bad Debt Expense)
2. Percent of Accounts Receivable Method (uses balance sheet
relations to estimate)—desired credit balance in Allowance for
Doubtful Accounts is computed: ( % x Acc/Rec = Desired
balance in Allowance for Doubtful Accounts)
1. Maturity date is the date the note must be repaid.
2. Amount to be repaid is principal plus interest (maturity value).
3. The period of the note is the time from the note’s date to its
maturity date.
4. Formula for computing annual interest:
Annual Time of note
1. Recording an honored note—debit Cash for maturity value
(face value and interest), credit Note Receivable for face value
and credit Interest Revenue for the interest amount.
9-5
Chapter 09 - Accounting for Receivables
Chapter Outline Notes
2. Recording a dishonored note—debit Accounts Receivable for
maturity value (face value + Interest), credit Note Receivable
for face amount and credit Interest Revenue for the interest
amount. If account receivable remains uncollected, it will be
written-off.
3. Recording End-of-Period Interest Adjustment—record accrued
interest by debiting Interest Receivable and crediting Interest
Revenue for accrued interest earned.
4. Collection entry if some interest was accrued requires a debit
to Cash for full amount received, credits to Interest Receivable
(amount previously accrued), Interest Revenue (amount
1. Buyer, called a factor, charges the seller a factoring fee and
then collects the receivables as they come due.
2. Entry: debit Cash (amount received), and Factoring Fee
1. Company borrows money by pledging its receivables as
security.
2. Borrower retains ownership of the receivables.
3. If borrower defaults, the lender has right to be paid from
receipts on accounts receivable when collected.
4. The pledge should be disclosed in financial statement
footnotes.
5. The loan is recorded as a debit to Cash and a credit to Notes
Payable.
9-6
Education.
Chapter 09 - Accounting for Receivables
Chapter Outline Notes
9-7
Chapter 09 - Accounting for Receivables
VISUAL # 9-1
METHODS OF ACCOUNTING FOR BAD DEBTS
DIRECT WRITE-OFF METHOD
Accounts for bad debts from an uncollectible account
receivable at the time account is determined to be
uncollectible.
ALLOWANCE METHOD
At the end of each accounting period,
bad debts expense is
estimated and recorded.
Year-end No adjusting entry
Adjusting entry required:
Bad Debt Expense XXX
Allowance for Uncollectible Accounts XXX
(The amount is an estimate based on a percentage of sales or a
percentage of outstanding accounts receivable. If the estimate is based
on sales, the full estimate is used in the adjusting entry. If the estimate
is based on accounts receivable the allowance account balance is
brought to the amount of the estimate.)
When an account is
determined to be
uncollectible
Write-off entry required:
Bad Debts Expense XXX
Accounts Receivable/Customer XXX
(The amount is the balance of the uncollectible account.)
Write-off entry required:
Allowance for Uncollectible Accounts XXX
Accounts Receivable/Customer XXX
(The amount is the balance of the uncollectible account.)
When an account
previously written
off is recovered
1. Reinstate account by reversing write-off:
Accounts Receivable/Customer XXX
Bad Debts Expense XXX
(The amount is the account balance that was written off.)
2. Record collection on account normally:
Cash XXX
Accounts Receivable/Customer XXX
(The amount is the amount collected.)
1. Reinstate account by reversing write-off:
Accounts Receivable/Customer XXX
Allowance for Uncollectible Accounts XXX
(The amount is the account balance that was written off.)
2. Record collection on account normally:
Cash XXX
Accounts Receivable/Customer XXX
(The amount is the amount collected.)
Advantages: Does not require adjusting entry.
Does not require year-end estimating of
uncollectibles.
Matches expense against related revenues.
Reports the net realizable accounts receivable on the balance
sheet (a more accurate reporting of assets).
Disadvantages: Violates matching (expense recognition) principle,
therefore only allowed if qualified under
materiality principle. (Permitted if a business
anticipates an immaterial amount of uncollectibles.)
Requires adjusting entry.
Requires year-end estimating of uncollectibles.
9-8
Chapter 09 - Accounting for Receivables
9-9
