Life Is What We Make It

A receivable represents a company’s claim on the assets of another receivable. Account Receivable: is an amount owed by a customer, who has purchased the company’s product or service. Receivables are recorded at the time of the sale. Net Realizable Value: the amount of cash that a company expects to collect from its total or gross accounts receivable balance. It is calculated by subtracting from gross receivables the amount that a company does not expect to collect. ALLOWANCE: the amount that a company does not expect to collect is usually called an allowance. Recording BAD DEBT EXPENSE:

Recording a Write-off: regardless of the method used to account for uncollectible receivable, a company must write off a receivable when it is deemed to be uncollectible. Under the direct write off method the company writes off the receivable and records bad debt expense. However under the allowance method the company writes off the receivable and reduces the balance in the allowance account that was created when bad debt expense was recorded. Recording the Recovery of a Write-off :Occasionally, a company will collect a receivable that it had previously written off. *When estimating bad debt expense companies may use one of two difference approaches.

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** 1) percentage-of-sale approach 2) percentage-of-receivable approach. … Percentage of sale approach: bad debt expense is a function of a company’s sale. It is calculated by multiplying sales for the period by some percentage set by the company. It’s the method that estimates bad debt expense as a percentage of sales. The advantages of this approach are its simplicity and the fact that it results in very good matching. The main disadvantage is that no consideration is given to the results balance in the allowance for bad debts account.

It is simply the existing balance plus the current estimate. Percentage of receivables approach: method that estimates bad debt expense as a percentage of receivables. The major advantage is that it results in a very meaningful net realizable value. The disadvantage is that it does not match expenses as well as percentage of sale approach. It is calculated in 2 steps. 1) To calculate what the balance in the allowance for bad debt account should be. This is accomplished by multiplying accounts receivables by a percentage set by the company. 2) Adjust the allowance account to that calculated balance.

The amount of the adjustment is bad debt expense for the period. A debit balance means that the company has experienced greater write-off during the year than expected. A credit balance indicates that write-off have been less than expected. AGING SCHEDULE : is a listing and summation of accounts receivable by their ages. Normally receivables that are outstanding for 30 days or less are considered current and grouped together. Receivables outstanding longer than 30 days are considered past due and are grouped together in 30-day increment.

Companies then apply increasing uncollectible percentages to older receivables. Aging schedule provides more accurate estimate of the allowance for bad debts and therefore a better estimate of bad debt expense. Another benefit is a good internal control activity. (An aging schedule provides information a company needs to pursue its receivables effectively. It also provides information for future cred decisions. ) HORIZTONAL AND VERTICAL ANALYSIS Horizontal analysis: calculates the dollar change in an account balance, defined as the current year balance by the prior year balance and divides that change by the prior year balance to yield % change.

Vertical analysis: Divides each account balance by a base account, yielding percentage. The base account is total assets for balance sheet accounts and net sales or total revenues for income statement accounts. RECEIVABLES TURNOVER RATIO: (a comparison of credit sales to rece. That measures a comp. Ability to generate and collect receivables).. it compares a company’s credit sales during a period to its average receivable balance during that period. It is calculated: Receivables Turnover Ratio = credit sales /average receivables … Where average receivables is: beginning receivables +ending receivables /2.

DAYS IN RECEIVABLE RATIO: a conversion of the receivable turnover ratio that expresses a company’s ability to generate and collect receivable in days. . IT DIVIDES the receivables turnover ratio into 360 days to express, in days how long it takes a company to generate and collect its receivables. (365/receivables turnover ratio) (365/9. 6=38. 8 indicates that it takes Colgate 38 days to generate and collect the average receivable) ALLOWANCE RATIO: a comparison of the allowance account to receivables that measures the % of receivables that are expected to be uncollectible in the future.

ALLOWANCE RATIO: ALLOWANCE FOR BAD DEBIT/GROSS ACCOUNTS RECEIVABLE Where gross accounts receivable is: NET ACCOUNTS RECEIVABLE+ALLOWANCE FOR BAD DEBTS. Promissory Note: a written promise to pay a specific sum of money on demand or at some specific date in the future. Promissory note can be used to formalize a receivable or to lean money to another entity. In most cases promissory note require the payment of both principle and interest. The company that will receive the principle and interest is called the payee. The customer or borrower who will pay the interest and principal is called the maker of the note.

Note RECIEVABLE: an Asset created when a company accepts a promissory note. Like other assets, a note receivable is reported on the balance sheet. However its classification depends on its terms. If the note is due within a year of the balance sheet date it is classified as a current asset. Otherwise it is a non-current asset. **ACOUNTING for a note receivable usually requires entries to record the following: ISSUEANCE OF THE NOTE, INTEREST EARNED ON THE NOTE, COLLECTION OF THE NOTE. Recording the Note: a note receivable is recorded at its face value.

Recording interest: most promissory notes require that the maker pay interest to the payee. The amount of interest is a function of 1) THE PRINCIPLE OR FACE VALUE OF THE NOTE, 2) THE ANNUAL RATE, AND 3) THE LENGTH OF TIME THE NOTE IS OUTSTANDING. The calculation: Interest= principle X Annual Rate of interest X TIME OUTSTANDING. . Collecting the note: when a note is collected the note receivable is decreased and cash is increased. However when a note receivable requires interest to be paid, the collection of the note often includes the collection of interest as well.

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