Financial

ACCOUNTING 1
Chapter 5
ACCOUNTING FOR
RECIEVABLES

Lecturer: Abdirahman Awil

(MBA, BA in Finance & Accounting)

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Receivables
• Meaning
• Receivables, also referred to as accounts receivable
, are debts owed to a company by its customers for
goods or services that have been delivered or used
but not yet paid for.
• It refers to the sum of all monies owed to the firm by
customers arising from the sale of goods or services
in the ordinary course of business.

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• A bad debt is a monetary amount owed to a
creditor that is unlikely to be paid and, or which the
creditor is not willing to take action to collect for
various reasons, often due to the debtor not having
the money to pay, for example due to a company
going into liquidation or insolvency.
• An allowance for doubtful accounts is a contra-
asset account that nets against the
total receivables presented on the balance sheet to
reflect only the amounts expected to be paid.
• The allowance for doubtful accounts is only an
estimate of the amount of accounts receivable
which are expected to not be collectible

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Features of receivables
• High working capital implies high interest rates.
• If receivables are low, sales becomes restricted.
• Receivables to be managed to optimize profits.
• Maximizes the overall return on investment of the
firm.

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Receivables Management
• Account Receivables Management refers to the set of
policies, procedures, and practices employed by a
company with respect to managing sales offered on credit.
• Objectives of receivables management
1. To optimize the amount of sales
2. To minimize cost of credit.
3. To optimize investment in receivables.
4. To increase credit sales.
5. To increase customer satisfaction

Therefore, the main objective of receivable management is

to create a balance between profitability and cost.
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Problem 1
• Journalize the following
• Sep 1. received $1200 from Abdi and wrote off
the remainder amount of $3900 as
uncollectable
• Nov 17, received $3900 from Abdi which
written off as uncollectable

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Solution
Date Particulars Dr Cr
? Accounts receivable account 5,100
Sales account 5,100

(for the sale of merchandise on account)

Date Particulars Dr Cr
Sep 1 Cash Account 1,200
Bad debt expense account 3,900
  Accounts receivable   5,100
account
(for the sale of merchandise on account)

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 Date Particulars Dr Cr
Nov Accounts receivable account 3,900
17
Bad debt expense 3,900
account

( For cancelation of bad debt on recovery)

Date Particulars Dr Cr
Nov 17 Cash Account 3,900
Accounts receivable 3,900
account

( For receipt of bad debt from Abdi)

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 Account receivable account
Sales Account 5,100 Cash Account 1,200

Bad debt 3,900

expense
Bad debt 3,900 Cash account 3,900
expense
9,000 9,000

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Problem 2
Journalize the following
Jan 1, sold merchandise for $4,500 to Aisha
Feb 2, received $500 from Aisha and wrote off
the remainder as uncollectable to an allowance
May 9, received 4,000 from Aisha.

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 Journal entries

Jan 1 A/receivables Account 4,500

Sales Account 4,500
(For sale of merchandise on account)
Feb 2 Cash Account 500
Allowance for doubtful account 4,000
Accounts receivable account 4,500
(For the receipt of partial amount in full settlement)
May 9 Accounts receivable account 4,000
Allowance for doubtful account 4,000
(For cancelation of allowance on its collection)
May 9 Cash Account 4,000
Accounts receivable account 4,000
(For collection of remaining cash from Aisha)

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Problem 3
A note for 2000 with a credit period of 90 days received on
16/8/2019 calculate date of note.
A note for 2000 with a credit period of 90 days received on 16/8/2019 calculate date of note.
Solution
Calculation of due date
Terms of the note 90
(-) Number days remaining in August 15
75
(-) Number of days in September 30
45
(-) Number of days in October 31
(-) November 14th due date

If credit period is 3 months what is the due date

Solution
Date of note 16.08.2019
(+) credit period in months 00.03.0000
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 Problem 4
Essa Company received a 120 day 9% note for
200,000 on 13.03.2019
• Required
a) Determine the due date
b) Determine the maturity value
c) Prepare journal entry on due date

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Solution
A) Calculation of due date
Terms of note 120 days
(-) remaining days in the month of March 18
102
(-) Number of days in April 30
72
(-) Number of days in May 31
41
(-) Number of days in June 30
July 11

Due date = 11/07/2019

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b) Determination of the maturity value
Interest = principle x interest rate x terms
9 120
= 200,000 x x = $ 6000
100 360
Maturity value = interest + principle
= 200,000 + 6000 = $ 206,000
Journal entry
11.07.2019 Cash account Dr 206,000
Notes receivable account 200,000
Interest revenue account 6,000
(For the receipt of principle with interest on due date)
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Problem 5
Problem 4
Ileys Company received a 60 days 6% note for $40,000 on 14.02.2019
Required
a) Determine the due date
b) Determine the maturity value
c) Prepare journal entry on due date
1) If honored
2) If dishonored

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A) Calculation of due date
Terms of note 60 days
(-) remaining days in the month of February h 18
46
(-) Number of days in March 31
April 15

Due date = 15/04/2019

b) Determination of the maturity value

Interest = Principle x Interest Rate x Terms
6 60
= 40,000 x x = $ 400
100 360
Maturity Value = Interest + Principle
= 40,000 + 400 = $ 40,400
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Journal entry on due date
1) When it is honored (paid)
11.07.2019 Cash account Dr 40,400
Notes receivable account 40,000
Interest revenue account 4, 00
(For the receipt of principle with interest on due date)

2) When it is dishonored (unpaid)

11.07.2019 Accounts receivable account Dr 40,400
Notes receivable account 40,000
Interest revenue account 4,00
(For the recording of dishonored of the notes receivable)
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Methods of accounting for
uncollectible accounts:
1. Direct write-off method
a) Under the direct write-off method, bad debt losses are
not anticipated and no allowance account is used.
b) No entries are made for bad debts until an account is
determined to be uncollectible at which time the loss
is charged to Bad Debts Expense.
c) No attempt is made to match bad debts to sales
revenues or to show cash realizable value of
accounts receivable on the balance sheet.
d) Consequently, unless bad debt losses are
insignificant, this method is not acceptable for
financial reporting purposes.
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2. Allowance method
• The allowance method is required when bad debts
are deemed to be material in amount.
• Uncollectible accounts are estimated and the
expense for the uncollectible accounts is matched
against sales in the same accounting period in
which the sales occurred.

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Allowance method
1. Percentage of sale
2. Aging method
 When we adjust ( estimated)
Bad debt xxxx
Allowance for bad debt xxx
 When we write off (decided)
Allowance for bad debt xxxx
Accounts receivable xxxx

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RECORDING ESTIMATED UNCOLLECTIBLES
• To illustrate the allowance method, assume
that Hampson Furniture has credit sales of
$1,200,000 in 2017. Of this amount, $200,000
remains uncollected at December 31.
• The credit manager estimates that $12,000 of
these sales will be uncollectible.
• Record the estimated uncollectible

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 Example
The ledger of J.C. Cobb Company at the end of the current year
shows Accounts Receivable $150,000, Sales Revenue $850,000,
and Sales Returns and Allowances $30,000. Instructions
a) If J.C. Cobb uses the direct write-off method to account for
uncollectible accounts, journalize the adjusting entry at
December 31, assuming J.C. Cobb determines that M. Jack’s
$1,500 balance is uncollectible.
b) If Allowance for Doubtful Accounts has a credit balance of
$2,400 in the trial balance, journalize the adjusting entry at
December 31, assuming bad debts are expected to be (1)
1.5% of net sales, and (2) 10% of accounts receivable.
c) If Allowance for Doubtful Accounts has a debit balance of $200
in the trial balance, journalize the adjusting entry at December
31, assuming bad debts are expected to be (1) 0.75% of net
sales and (2) 6% of accounts receivable.

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Allowance for doubtful accounts:
i. The Allowance for doubtful accounts shows the estimated amount of claims on
customers that are expected to become uncollectible in the future.
ii. This contra account is used instead of direct credit to Accounts Receivable
because we do not know which customers will not pay.
iii. The amount of the $188,000 represents the expected cash realizable value of the
accounts receivable at the statement date.
iv. Allowance for Doubtful Accounts is not closed at the end of the fiscal year.

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