2024-05-28

📅 Tuesday, May 28th, 2024

To accomplish great things, we must not only act, but also dream; not only plan, but also believe.

— Anatole France

MGT011A Lecture: accounts receivable

We need to anticipate for credit loss, i.e., the portion of accounts receivable that will likely not be received (e.g., company expects 3% of accounts receivable to not be actually received by deadline):

• Ways to calculate credit loss
  • Percentage of sales method
    • First calculate the bad debt expense journal entry by multiplying total credit sales by the risk percentage, i.e., percentage of accounts receivable not collected in previous accounting periods
    • Then use T-account to calculate the ending balance for allowance of doubtful accounts, add the bad debt expense to Alloawance of doubtful accounts and subtract by any write-offs.
  • Accounts receivable (AR) aging method
    • First calculate the ending balance of allowance for doubtful accounts: bin accounts receivable entries by how long they’ve been unpaid into buckets (0-30d, 31-60d, etc), apply a different risk percentage to each bucket, then sum risk * bucket balance for each bucket
    • Then use the T-account to reverse engineer the adjusting journal entry for bad debt expense & allowance for doubtful accounts.
• Journalizing credit loss
  • Add a journal entry to recognize a decrease to revenue and accounts receivable:
    • debit to an account called “bad debt expense”
    • credit to a countra-asset account called “allowance for doubtful accounts.”
  • This is required by GAAP and is usually done quarterly or annually.
  • On balance sheet:
    • Accounts receivable
    • (Allowance for doubtful accounts)
    • Accounts receivable, net
• Once we determine a transaction is truly uncollectible in a future accounting period, we can write it off:
  • journal entry
    • debit allowance for doubtful accounts
    • credit accounts receivable
  • We already anticipated it in last accounting period, so this has no net effect on the balance sheet.
• But what if the customer pays after we wrote them off? Then we need to:
  • Reverse the write off and record cash collected
    • Debit accounts receivable
    • Credit allowance for doubtful accounts
  • Record cash collected
    • Debit cash
    • Credit accounts receivable

Ratios

• accounts receivable turnover = net sales / average accounts receivable
  • rates of collecting accounts receivable
• average collection period = 365 / accounts receivable turnover
  • average number of days to collect each accounts receivable

Notes receivable: charging interest for long-term collection; it is possible to turn accounts receivable to notes receivable when the original payment date expires