Receivables

Refers to amounts that are due to a business from its customers or other entities.Claims that are expected to be collected in cash.Classification:

Accounts receivableamounts owed by customers on accountresult from the sale of goods and services(credit card transactions using visa/mastercard/amex are considered as cash transactions but) if company sponsors its own credit cards, amounts owed by customers on these cards are includedcurrent asset

Notes receivableclaims where formal instruments of credit— written promissory notes— are issued as evidence of debtusually requires debtor to pay interestfor time periods of 30 days or longercan both be a current or non-current asset

Other receivablesincludes interest receivables, loans to company officers, advances to employees, recoverable sales tax, income tax

Recognizing Accounts Receivable

For a service company, a receivable is recorded when a service is provided on account; merchandising company, a receivable is recorded at the point of sale of merchandise on account.Should be recognized when the sales effort is substantially complete— service is performed, or goods are delivered at point of sale.

Subsidiary Ledger

Group of accounts that share a common characteristic.Provides supporting detail to the general ledger, freeing it from excessive detail:

For Accounts Receivables,Has a receivable account for each customerTotal of balances in the customer accounts in the subsidiary ledger should equal the total balance in the general ledger receivable account

occurs because when receivables transactions are recorded in the subsidiary ledgers on a customer-by-customer basis, summaries of these transactions are recorded in the general ledger

Example: used by companies sponsoring a credit card of their own; recording credit card receivables for each of the customers in the general ledger accounts would make it difficult to determine the balance owed by any one customer at a specific point in time.

at the end of each month, can be used to easily determine the transactions in each consumer's account and then send the customer a statement of transactions that occurred that month; therefore, can be used to determine interest revenue if the customer doesn't pay in full within a specific period of time

Other usageinventory (to track inventory quantities and balances)accounts payable (to track individual creditor balances)payroll (to track individual employee pay records)

Summarized in the general ledger through a control account; must equal the total of the respective subsidiary ledgers at all times.Due to this, each journal entry that affects the control account is posted twice— to the subsidiary ledger, and to the general ledger control account.

Valuing Accounts ReceivableAllowance method

estimates the uncollectible accounts at the end of each period and shows this estimate in Allowance for Doubtful Accounts, which is a contra asset account with a credit balance that is shown below Accounts Receivableestimate of the amount of receivables that are expected to become uncollectible in the futureNet realizable value = Accounts Receivable - Allowance for Doubtful AccountsFeatures

recording estimated uncollectible accountsrecording the write-off of an uncollectible accountrecording the recovery of an uncollectible account

Dishonouring Notes ReceivableDishonoured note

note that is not paid in full at maturityno longer negotiable, however, payee still has a claim against the maker of the note for both the principal and any unpaid interesttransfers the Notes Receivable balance and related interest to an Account Receivable

dr to AR for principal + interestwritten off if there is no hope of collection

dr to ADA

Valuing Notes ReceivableNotes receivable are reported at net realizable value.If eventual collection is in doubt, must be recorded in the same way as AR.

Statement Presentation of ReceivablesStatement of Financial Position

short-term receivables are reported in the current assets section; followed by cash and then short-term investments

Income Statementincludes the revenue generated from sales or services on account; plus bad debts expense (operating expense section) and interest revenue (non-operating section)

Managing Receivables

Determine who to extend credit to.Establish a payment period.Monitor collections.

concentration of credit riskrequired to be discussed in the notes to a company’s financial statements

Evaluate the liquidity of receivables.uses receivables turnover ratio

measures the number of times, on average, that receivables are collected during the yearReceivables turnover ratio = Net credit sales / Average gross accounts receivableconverted to Average collection period = 365 / Receivables turnover ratio

alternatively, Average collection period = AR / Average amount of net credit sales per day

Accelerate cash receipts from receivables when necessary.loans secured by receivables

borrowing of money from the bank using receivables as collateralgenerally, banks are willing to provide financing for up to 75% of receivables less than 90 days old

sale of receivablesreasons

establish a financing subsidiary that buys AR from the company to make the statement of financial position more liquidprovides source of immediate cash flowallows company to save costs relating to the monitoring and collection of receivables

typessecuritization

transfer of receivables to investors in return for cashtreated as a sales of receivables, but may also be treated as a secured loaninvolves many investors; lower costs; higher quality of receivables

factoringsale to a finance company that buys receivables for a feecompany is responsible for reimbursing the factor for uncollected amountshigher costs; lower quality of receivables