1.
FINANCIAL ACCOUNTING II
ACCOUNTING FOR RECEIVABLES
WEEK 4
BBA 3RD
M1 & M2
INSTRUCTOR MR. NAWAB M
AHMAD

2.
CONTENTS;
TYPES OF RECEIVABLES
ACCOUNTS RECEIVABLES
RECOGNIZING ACCOUNTS
RECEIVABLES
VALUING ACCOUNTS RECEIVABLES
DISPOSING 06 ACCOUNTS
RECEIVABLES

3.
Receivables includes all money claims against other
entities, including people, companies, and other
organizations
• Receivables that result from sales on account are
normally accounts receivable or notes receivable
• Notes and accounts receivable that result from sales
may be called trade receivable

4.
TYPES OF RECEIVABLE:
• ACCOUNTS RECEIVABLE
• NOTES RECEIVABLE
• OTHER RECEIVABLE

5.
ACCOUNTS RECEIVABLE
• ACCOUNTS RECEIVABLE ARE AMOUNTS THAT CUSTOMERS OWE
THE COMPANY FOR NORMAL CREDIT PURCHASES
• RECEIVABLES ARE RECORDED AS DEBIT TO ACCOUNTS RECEIVABLE
• ACCOUNTS RECEIVABLES ARE NORMALLY COLLECTED WITHIN A
SHORT PERIOD, SUCH AS 30 OR 60 DAYS
• THEY ARE CLASSIFIED ON BALANCE SHEET AS CURRENT ASSET

6.
NOTES RECEIVABLE
• NOTES RECEIVABLE ARE AMOUNTS OWED TO THE COMPANY BY
CUSTOMERS OR OTHERS WHO HAVE SIGNED FORMAL PROMISSORY
NOTES IN ACKNOWLEDGMENT OF THEIR DEBTS.
• NOTES RECEIVABLE EXPECTED TO BE COLLECTED WITHIN A YEAR
ARE CLASSIFIED ON BALANCE SHEET AS A CURRENT ASSET
• NOTES OFTEN USED FOR CREDIT PERIODS MORE THAN 60 DAYS

7.
Note receivable, or promissory note, is written
document containing promise to pay face amount,
usually with interest, on demand or at date in
future
• By signing a note, debtor recognizes debt and
agrees to pay it according to its terms
• A note is a stronger legal claim over an account
receivable

8.
OTHER RECEIVABLE
Other receivables include:
• Interest receivable
• Taxes receivable
• Receivables from officers or employees
Other receivables reported separately on balance sheet
• If expected to be collected within one year, classified
as current assets.
• If collection expected beyond one year, classified as
noncurrent assets and reported under the caption

9.
ACCOUNT'S
RECEIVABLES

10.
ACCOUNT'S RECEIVABLES
INTRODUCTION;
YOU MAY STILL FIND YOURSELF CONFUSED ABOUT ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE. BOTH
PROCESSES ARE PART OF THE ACCOUNTING CYCLE AND ARE REGULARLY USED BY BUSINESS THAT USE DOUBLE
ENTRY OR ACCRUAL ACCOUNTING.
WHILE ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE ARE MANAGED IN A SIMILAR WAY, THERE ARE SOME
MAJOR DIFFERENCES BETWEEN THE TWO, WITH THE SINGLE BIGGEST DIFFERENCE BEING THAT ACCOUNTS PAYABLE
IS A LIABILITY, WHILE ACCOUNTS RECEIVABLE IS AN ASSET ACCOUNT.
IF YOU RECALL , ASSETS ARE ANYTHING YOUR BUSINESS OWNS, WHILE LIABILITIES ARE ANYTHING YOUR BUSINESS
OWES. REMEMBERING THIS DISTINCTION WILL MAKE IT MUCH EASIER TO MANAGE ACCOUNTS PAYABLE AND
ACCOUNTS RECEIVABLE FOR YOUR BUSINESS, THOUGH MAKING THE CHOICE TO USE SMALL BUSINESS
ACCOUNTING SOFTWARE WILL MAKE THE PROCESS EASIER STILL

11.
OVERVIEW;
WHAT ARE ACCOUNTS RECEIVABLE:-
• ANY TIME YOU SELL GOODS OR SERVICES TO YOUR CUSTOMERS , YOU’RE INCREASING YOUR
ACCOUNTS RECEIVABLE BALANCE. ACCOUNT'S RECEIVABLE REPRESENTS THE MONEY OWNED TO
YOU BY YOUR CUSTOMERS WHO HAVE BEEN EXTENDED CREDIT TERMS.
• PROPERLY MANAGING YOUR ACCOUNTS RECEIVABLE BALANCE IS VITAL FOR ANY BUSINESS,
PARTICULARLY SMALL BUSINESSES WITH LIMITED CASH FLOW. PROPER ACCOUNTS RECEIVABLE
MANAGEMENT ACTUALLY STARTS AT THE INITIAL DECISION TO PROVIDE YOUR CUSTOMERS WITH
CREDIT AND ENDS WITH IMPLEMENTING PROPER COLLECTION ACTIVITIES FOR CUSTOMERS THAT
DON’T PAY ON TIME.
• ONE OF THE EASIEST WAYS TO DETERMINE HOW QUICKLY YOUR CUSTOMERS ARE PAYING YOU
IS TO CALCULATE YOUR ACCOUNTS RECEIVABLE RATIO , WHICH TELLS YOU HOW EFFICIENTLY YOUR
ENTIRE ACCOUNTS RECEIVABLE PROCESS IS FUNCTIONING.

12.
HOW TO RECORD
ACCOUNTS
RECEIVABLE:-
• THE JOURNAL ENTRY TO RECORD ACCOUNTS
RECEIVABLE IS SIMPLE , THOUGH YOU’LL NEED TO
REMEMBER TO SEPARATE OUT YOUR SALES TAX
,SINCE THAT WILL NEED TO BE REMITTED TO THE
CORRECT AUTHORITY WHETHER YOUR INVOICE IS
PAID BY YOUR CUSTOMER OR NOT.

13.
• REMEMBER , BECAUSE ACCOUNTS RECEIVABLE IS
AN ASSET ACCOUNT, WE’LL HEED TO DEBIT IT .
ONCE THE INVOICE HAS BEEN PAID , YOU’LL THEN
DEBIT ( INCREASE) YOUR CASH ACCOUNT WHILE
CREDITING ACCOUNTS RECEIVABLE , WHICH HAS
DECREASED.
THE ENTRY TO RECORD THE
INVOICE SENT TO JOHNSON
FABRICS IS:-

14.
DISCOUNTS ON ACCOUNTS RECEIVABLE VS ACCOUNTS PAYABLE:-
ANOTHER IMPORTANT NOTE TO MAKE IS THAT SOMETIMES COMPANIES WILL ATTACH DISCOUNTS TO THEIR
ACCOUNT RECEIVABLE ACCOUNTS TO INCENTIVES THE BORROWER TO PAY BACK THE AMOUNT EARLIER. THE
DISCOUNTS BENEFIT BOTH PARTIES BECAUSE THE BORROWER RECEIVES THEIR DISCOUNT WHILE THE COMPANY
RECEIVES THEIR CASH REPAYMENT SOONER, AS COMPANIES REQUIRE CASH FOR THEIR OPERATING ACTIVITIES.
NOTATIONS FOR DISCOUNTS:-
HERE ARE TWO NOTATIONS THAT ARE COMMONLY USED:
 X/10 OR X/20 ( WHERE “X” IS USUALLY ANY NUMBER BETWEEN 1 AND 4 )
 N/30
• FOR THE FIRST NOTATION, WE READ IT AS AN “X” PERCENTAGE DISCOUNT IF THE AMOUNT IS PAID BACK
OR RECEIVED WITHIN 10 DAYS. SOME COMPANIES MAY CHOOSE TO EVEN GIVE A DISCOUNT IF THE
AMOUNT IS PAID BACK OR RECEIVED WITHIN 20 DAYS. HERE IS WHAT AN EXAMPLE OF A 4•/• DISCOUNT
,IF PAID BACK WITHIN 15 DAYS ,WOULD LOOK LIKE 4/15.
• THE SECOND NOTATION, USUALLY USED AFTER THE DISCOUNT NOTATION, MEANS THE NET AMOUNT
MUST BE PAID WITHIN 30 DAYS OR HOW MANY DAYS YOU DECIDE. A PERFECT WAY TO DEMONSTRATE
WHAT THIS WOULD MEAN IS TO SHOW AN EXAMPLE.

15.
ACCOUNTS PAYABLE
EXAMPLE:-
• ON MARCH 31,2017 COOPERATE FINANCE INSTITUTE DECIDED TO PURCHASE $750 WORTH
OF INVENTORY ON ACCOUNT FROM FO SUPPLIES. THE TERM OF THIS TRANSACTION WERE
2/10,N/30. THIS IS WHAT IT LOOK LIKE IN THE JOURNAL ENTRY
• THIS IS WHAT THE INITIAL PURCHASE OF INVENTORY WOULD LOOK LIKE IN THE JOURNAL
ENTRY. WE EXCLUDED THE TERMS IN THE DESCRIPTION PORTION OF OUR JOURNAL ENTRY
BECAUSE IT IS OPTIONAL. IT’S UP TO YOU THE INDIVIDUAL WHETHER OR NOT THEY WISH TO
INCLUDE THE TERMS OF THE TRANSITION.
• THE NEXT PORTION IS RECORDING THE DISCOUNT IF THE ACCOUNT IS PAID BACK WITHIN
THE DISCOUNT PERIOD. IN ORDER TO DETERMINE THE DISCOUNT , WE NEED TO TAKE
THE$750 AND MULTIPLY BY 0.02(2•/•). THIS IS WHAT IT WOULD LOOK LIKE IN YOUR JOURNAL
ENTRY.
• INVENTORY. THIS IS BECAUSE WE ARE RECOGNIZING THAT WE PAID LESS FOR THE
INVENTORY THAT WE RECEIVED . THIS IS TO PREVENT OVERSTATEMENT OR
UNDERSTATEMENT OF THE INVENTORY AMOUNT AT THE END OF THE FISCAL YEAR IN OUR
FINANCIAL STATEMENTS , ESPECIALLY THE BALANCE SHEET

16.
HERE WE WILL USE TO THE SAME EXAMPLE AD ABOVE BUT INSTEAD , COOPERATE FINANCE INSTITUTE
SELLS $750 WORTH OF INVENTORY TO FO SUPPLIES. THE TERMS ARE STILL THE SAME , AT 2/10,N/30
THIS IS THE FIRST ENTRY THAT AN ACCOUNTANT WOULD RECORD TO IDENTIFY A SALE ON ACCOUNT.
AFTERWARD, IF THE RECEIVABLE ARE PAID BACK WITHIN THE DISCOUNT PERIOD,WE NEED TO RECORD THE
DISCOUNT.

17.
NOTICE THAT WE HAVE AN ACCOUNT CALLED SALES DISCOUNT AND ALLOWANCES. THIS ACCOUNT
IS CONTRA ACCOUNT THAT GOES AGAINST SALES REVENUE ON THE INCOME STATEMENT . LASTLY
IF THE RECEIVABLE ARE PAID BACK AFTER THE DISCOUNT PERIOD , WE RECORD IT AS A REGULAR
COLLECTION OF RECEIVABLES.

18.
RECOGNIZING
ACCOUNTS RECEIVABLES

19.
RECOGNIZING ACCOUNTS
RECEIVABLES
THIS IS THE SYSTEM UNDER WHICH YOU RECORD AN
ACCOUNT RECEIVABLE. ... TO RECORD A JOURNAL ENTRY FOR
A SALE ON ACCOUNT, ONE MUST DEBIT A RECEIVABLE AND
CREDIT A REVENUE ACCOUNT. WHEN THE CUSTOMER PAYS
OFF THEIR ACCOUNTS, ONE DEBITS CASH AND CREDITS THE
RECEIVABLE IN THE JOURNAL ENTRY.

20.
HOW ARE ACCOUNTS RECEIVABLE
RECOGNIZED IN THE ACCOUNTS?
• ACCOUNT'S RECEIVABLE ARE RECORDED AT INVOICE PRICE. THEY ARE REDUCED
BY SALES RETURNS AND ALLOWANCES. CASH DISCOUNTS REDUCE THE AMOUNT
RECEIVED ON ACCOUNTS RECEIVABLE. WHEN INTEREST IS CHARGED ON A PAST
DUE RECEIVABLE, THIS INTEREST IS ADDED TO THE ACCOUNTS RECEIVABLE
BALANCE AND IS RECOGNIZED AS INTEREST REVENUE.

21.
RECOGNIZING ACCOUNTS RECEIVABLES;
ASSUME THAT JORDACHE CO. ON JULY 1, 2017, SELLS MERCHANDISE ON
ACCOUNT TO POLO COMPANY FOR $1, 000 TERMS 2/10, N/30. PREPARE THE
JOURNAL ENTRY TO RECORD THIS TRANSACTION ON THE BOOKS OF JORDACHE
CO. JUL. 1 ACCOUNTS RECEIVABLE 1, 000 SALES REVENUE 9 -5 1, 000 LO 1

22.
RECOGNIZING ACCOUNTS RECEIVABLES ILLUSTRATION: ON JULY 5,
POLO RETURNS MERCHANDISE WORTH $100 TO JORDACHE CO. JUL.
5 SALES RETURNS AND ALLOWANCES ACCOUNTS RECEIVABLE 100
ILLUSTRATION: ON JULY 11, JORDACHE RECEIVES PAYMENT FROM
POLO COMPANY FOR THE BALANCE DUE. JUL. 11 CASH 882 SALES
DISCOUNTS ($900 X. 02) 18 ACCOUNTS RECEIVABLE 9 -6 900 LO 1

23.
ACCOUNTS RECEIVABLE CONCLUSION
• YOU WILL ACCOUNT FOR THE OUTSTANDING AMOUNT IN THE GENERAL
LEDGER ACCOUNT CALLED ACCOUNT RECEIVABLES. THE OUTSTANDING
BALANCE IN THE ACCOUNT IS REPORTED ON THE BALANCE SHEET OF THE
COMPANY. ACCOUNTS RECEIVABLES ARE WHEN A CUSTOMER OWES THE
COMPANY MONEY.

24.
VALUING ACCOUNTS
RECEIVABLES

25.
VALUING ACCOUNTS
RECEIVABLES
VALUING ACCOUNTS RECEIVABLES INVOLVES REPORTING THEM AT THEIR NET REALIZABLE VALUE .NET
REALIZABLE VALUE IS THE AMOUNT EXPECTED TO BE RECEIVED IN CASH. CREDIT LOSSES ARE
CONSIDERED A NORMAL AND NECESSARY RISK OF DOING BUSINESS ON A CREDIT BASIS. CREDIT
LOSSES ARE DEBITED TO BAD DEBTS EXPENSE.
THE KEY ISSUE IN VALUING ACCOUNTS RECEIVABLE IS WHEN TO RECOGNIZE THESE CREDIT LOSSES. IF
THE COMPANY WAITS UNTIL IT KNOWS FOR SURE THAT A SPECIFIC ACCOUNT WILL NOT BE
COLLECTED , IT COULD END UP RECORDING THE BAD DEBT EXPENSE IN A DIFFERENT PERIOD THAN
THE REVENUE.
IF CREDIT LOSSES ARE NOT RECORDED UNTIL THEY OCCUR, NO ATTEMPT IS MADE TO MATCH BAD
DEBTS EXPENSE WITH SALES REVENUES OR TO SHOW THE NET REALIZABLE VALUE OF THE ACCOUNTS
RECEIVABLE. THIS VIOLATES THE MATCHING PRINCIPLE.
TO AVOID A MISMATCH, WE DON’T WAIT UNTIL WE KNOW EXACTLY WHICH RECEIVABLES ARE
UNCOLLECTIBLE. INSTEAD ,WE MUST ESTIMATE THE UNCOLLECTIBLE ACCOUNTS RECEIVABLE.

26.
THERE ARE THREE METHODS OF ESTIMATE THE UNCOLLECTIBLE
ACCOUNTS RECEIVABLE:-
 ALLOWANCE METHOD:-
• THE ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS INVOLVES ESTIMATING THE UNCOLLECTIBLE
ACCOUNTS AT THE END OF EACH PERIOD.
• AS A RESULT , THE BAD DEBT EXPENSE IS RECORDED IN THE SAME PERIOD AS THE REVENUE FROM
CREDIT SALES, AND THE ACCOUNTS RECEIVABLE ARE REPORTED AT THEIR NET REALIZABLE VALUE ON THE
BALANCE SHEET .
• THE ALLOWANCE METHOD IS REQUIRED FOR FINANCIAL REPORTING PURPOSES WHEN BAD DEBTS ARE
MATERIAL ( SIGNIFICANT) IS AMOUNT .
IT HAS THREE ESSENTIAL FEATURES :-
 RECORDING ESTIMATED UNCOLLECTIBLE
 RECORDING THE WRITE- OFF AN UNCOLLECTIBLE ACCOUNTS
 RECOVERY OF AN UNCOLLECTIBLE ACCOUNTS

27.
RECORDING ESTIMATED UNCOLLECTIBLE:-
ESTIMATED UNCOLLECTIBLE ARE DEBITED TO BAD DEBTS EXPENSE AND CREDITED TO
ALLOWANCE FOR DOUBTFUL ACCOUNTS THROUGH AN ADJUSTING ENTRY AT THE END OF
EACH PERIOD.
THE ALLOWANCE FOR DOUBTFUL ACCOUNTS IS A CONTRA ASSET ACCOUNT THAT IS
DEDUCTED FROM ACCOUNTS RECEIVABLE, RESULTING IN THE NET REALIZABLE VALUE OF THE
RECEIVABLES APPEARING ON THE BALANCE SHEET

28.
ACCOUNTS RECEIVABLE – ALLOWANCE FOR DOUBTFUL ACCOUNTS=
$200,000 - $25,000.
NET REALIZABLE VALUE
$175 .000
ILLUSTRATION 8-3:-
FORMULA COLLECTING NET REALIZABLE VALUE
ESTIMATING THE ALLOWANCE:-
TWO APPROACHES ARE USED TO ESTIMATE THE AMOUNT OF UNCOLLECTIBLE:
1.PERCENTAGE OF SALES
2.PERCENTAGE OF RECEIVABLES

29.
PERCENTAGE OF SALES APPROACH:-
 THIS METHOD CALCULATES BAD DEBTS EXPENSE AS A PERCENTAGE OF NET CREDIT SALES BASED ON PAST
EXPERIENCE AND THE COMPANY’S CREDIT POLICY.
 WHEN CALCULATING THE AMOUNT IN THE ADJUSTING ENTRY ,THE EXISTING BALANCE IN THE ALLOWANCE
FOR DOUBTFUL ACCOUNTS IS IGNORED.
 IF THE WRITE- OFFS IN THE NEXT YEAR ARE VERY DIFFERENT FROM THE AMOUNT ESTIMATED THIS YEAR,
MANAGEMENT SHOULD ADJUST THE PERCENTAGE IN CALCULATING THE ADJUSTING ENTRY .
 THIS APPROACH TO ESTIMATING UNCOLLECTIBLE RESULTS IS AN EXCELLENT MATCHING OF EXPENSES WITH
REVENUES BECAUSE THE BAD DEBTS EXPENSE IS RELATED TO THE SALES RECORDED IN THE SAME PERIOD.
 THIS APPROACH IS SOMETIMES CALLED THE INCOME STATEMENT APPROACH BECAUSE AN INCOME STATEMENT
ACCOUNT,SALES,IS USED TO CALCULATE ANOTHER INCOME STATEMENT ACCOUNT, BAD DEBT EXPENSE.
TO ILLUSTRATE ,ASSUME THAT ADORABLE JUNIOR GARMENT DECIDES TO USE THE PERCENTAGE OF
SALES APPROACH . IT CONCLUDES THAT 2 PERCENTAGE OF NET CREDIT SALES WILL BECOME
UNCOLLECTIBLE. RECALL THAT NET CREDIT SALES FOR THE CALENDAR YEAR 2007 ARE $1.2 MILLION.
THE ESTIMATED BAD DEBTS EXPENSE IS $24,000(2•/• ×$1,200,000) . THE ADJUSTING ENTRY IS

30.
PERCENTAGE OF RECEIVABLES APPROACH:-
 UNDER THE PERCENTAGE OF RECEIVABLES APPROACH , MANAGEMENT USES PAST EXPERIENCE ESTIMATE THE
PERCENTAGE OF RECEIVABLES THAT WILL BECOME UNCOLLECTIBLE ACCOUNTS.
 ONE METHOD IS TO MULTIPLY THE TOTAL AMOUNT OF ACCOUNTS RECEIVABLE BY A PERCENTAGE BASED ON
OVERALL ESTIMATE OF THE TOTAL UNCOLLECTIBLE ACCOUNTS.
 A SECOND METHOD IS TO USE DIFFERENT PERCENTAGES DEPENDING ON HOW LONG THE ACCOUNTS
RECEIVABLE HAVE BEEN OUTSTANDING.
 A SCHEDULE MUST BE PREPARED, CALLED AN AGING SCHEDULE, WHICH SHOWS THE AGE OF EACH ACCOUNT
RECEIVABLE. THE LONGER A RECEIVABLE IS PAST DUE OR OUTSTANDING ,THE LESS LIKELY IT IS TO BE COLLECTED.
 AFTER THE AGES OF THE DIFFERENT ACCOUNTS RECEIVABLE ARE DETERMINED THE LOSS FROM UNCOLLECTIBLE
ACCOUNTS IS ESTIMATED.
 THIS IS DONE BY APPLYING PERCENTAGES BASED ON PAST EXPERIENCE TO THE TOTALS IN EACH CATEGORY.

31.
• BECAUSE THE BALANCE SHEET IS EMPHASIZED IN THE PERCENTAGE OF RECEIVABLES APPROACH , THE
EXISTING BALANCE IN THE ALLOWANCE ACCOUNT MUST BE CONSIDERED WHEN CALCULATING THE BAD
DEBTS EXPENSE IN THE ADJUSTING ENTRY.

32.
IF THE TRIAL BALANCE SHOWS ALLOWANCE FOR DOUBTFUL ACCOUNTS WITH A CREDIT
BALANCE OF $1,000,AN ADJUSTING ENTRY FOR $24,000($25,000- $1,000) IS NECESSARY , AS
FOLLOWS:
• AFTER THE ADJUSTING ENTRY IS POSTED , ADORABLE JUNIOR GARMENT’S ACCOUNTS WILL SHOW THE
FOLLOWING

33.
 IF THE ALLOWANCE ACCOUNT HAS A DEBT BALANCE , PRIOR TO ADJUSTING ENTRY , THE
DEBIT BALANCE IS ADDED TO THE REQUIRED BALANCE WHEN THE ADJUSTING ENTRY IS
MADE.
 THE PERCENTAGE OF RECEIVABLES APPROACH IS SOMETIMES CALLED THE BALANCE SHEET
APPROACH.
 BOTH THE PERCENTAGE OF SALES AND PERCENTAGE OF RECEIVABLES APPROACH ARE
GENERALLY ACCEPTED.
 THIS METHOD USED IS A MANAGEMENT DECISION.

34.
RECORDING THE WRITE-OFFS OF AN UNCOLLECTIBLE ACCOUNTS:-
• WHEN ALL OF THE WAYS OF COLLECTING A PAST – DUE ACCOUNT HAVE BEEN TRIED AND COLLECTION
APPEARS IMPOSSIBLE, THE ACCOUNT SHOULD BE WRITTEN OFF.
• TO ILLUSTRATE A RECEIVABLES, WRITE- OFF, ASSUME THAT THE VOICE – PRESIDENT OF FINANCE OF
ADORABLE JUNIOR GARMENT AUTHORIZES THE WRITE- OFF OF A $4,500 BALANCE OWED BY A
DELINQUENT CUSTOMER , KIDS ONLINE, ON MARCH 1,2008. THE ENTRY IS RECORD THE WRITE – OFF IS
AS FOLLOWS:
 BAD DEBTS EXPENSE IS NOT INCREASED WHEN THE WRITE- OFF OCCURS.
 UNDER THE ALLOWANCE METHOD, EVERY ACCOUNT WRITE – OFF IS DEBITED TO THE ALLOWANCE FOR
DOUBTFUL ACCOUNTS RATHER THAN TO BAD DEBTS EXPENSE.
 A DEBIT TO BAD DEBTS EXPENSE WOULD BE INCORRECT BECAUSE THE EXPENSE WAS ALREADY
RECOGNIZED WHEN THE ADJUSTING ENTRY WAS MADE FOR ESTIMATED BAD DEBTS LAST YEAR.
• A WRITE OFF AFFECTS ONLY BALANCE SHEET ACCOUNTS . THE WRITE- OFF OF THE ACCOUNT REDUCES
BOTH ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. NET REALIZABLE VALUE IN
THE BALANCE SHEET REMAIN THE SAME, AS SHOWN BELOW:
 AS MENTIONED EARLIER, THE ALLOWANCE ACCOUNT CAN SOMETIMES END UP IN A DEBIT BALANCE
POSITION AFTER THE WRITE – OFF OF AN UNCOLLECTIBLE ACCOUNT.
 THIS CAN HAPPEN IF THE WRITE OFF IN THE PERIOD ARE MORE THAN THE OPENING BALANCE. IT MEANS
THE ACTUAL CREDIT LOSSES WERE GREATER THAN THE ESTIMATED CREDIT LOSSES.
 THE BALANCE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS WILL BE CORRECTED WHEN THE ADJUSTING
ENTRY FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS IS MADE AT THE END OF PERIOD.

35.
RECOVERY OF AN UNCOLLECTIBLE:-
• OCCASIONALLY , A COMPANY WILL COLLECT ON AN ACCOUNT THAT HAS PREVIOUSLY BEEN
WRITTEN OFF.THE ENTRIES ARE REQUIRED TO RECORD THE RECOVERY OF THE BAD DEBT:
REVERSE THE ENTRY THAT ORIGINALLY WROTE OFF THE CUSTOMER’S ACCOUNT AND THEN RECORD
THE RECEIPT OF THE CASH FOR THE DEBT.
• TO ILLUSTRATE , ASSUME THAT ON JULY1,2008 KIDS ONLINE PAYS THE $4,500 AMOUNT THAT HAD
BEEN WRITTEN OFF ON MARCH 1. THE ENTRIES ARE AS FOLLOWS:
• IT IS NECESSARY TO BOTH DEBIT AND CREDIT AR SO THAT THE TRANSACTION GOES THROUGH THE
CUSTOMERS SUB- LEDGER ACCOUNT AND SHOWS THAT THE CUSTOMER DID PAY OFF THE BALANCE
OWING.

36.
DISPOSING 06 ACCOUNTS
RECEIVABLES

37.
DISPOSING OF ACCOUNTS RECEIVABLE
TO ACCELERATE THE RECEIPT OF CASH FROM RECEIVABLES, OWNERS FREQUENTLY
1. SELL TO A FACTOR, SUCH AS A FINANCE COMPANY OR A BANK
2. MAKE CREDIT CARD SALES

38.
DISPOSING OF ACCOUNTS RECEIVABLE
(CONT.)
A FACTOR BUYS RECEIVABLES FROM BUSINESSES FOR A FEE AND COLLECTS THE
PAYMENTS DIRECTLY FROM CUSTOMERS.
CREDIT CARDS ARE FREQUENTLY USED BY RETAILERS WHO WISH TO AVOID THE
PAPERWORK OF ISSUING CREDIT.
RETAILERS CAN RECEIVE CASH MORE QUICKLY FROM THE CREDIT CARD ISSUER.

39.
CREDIT CARD SALES
THREE PARTIES ARE INVOLVED WHEN CREDIT CARDS ARE USED IN MAKING RETAIL
SALES
THE CREDIT CARD ISSUER
THE RETAILER
THE CUSTOMER
THE RETAILER PAYS THE CREDIT CARD ISSUER A PERCENTAGE FEE OF THE INVOICE
PRICE FOR ITS SERVICES.

40.
BANK CARD SALES
• SALES RESULTING FROM THE USE OF VISA AND MASTERCARD ARE CONSIDERED
CASH SALES BY THE RETAILER.
THESE CARDS ARE ISSUED BY BANKS.
UPON RECEIPT OF CREDIT CARD SALES SLIPS FROM A RETAILER, THE BANK
IMMEDIATELY ADDS THE AMOUNT TO THE SELLER'S BANK BALANCE.