Account receivable.ppt

Receivables Chapter 9 Receivables Objective 1 Establishing Internal Control What are some controls over accounts receivable? Objective 2 The Credit Department Companies grant credit to customers in order to increase sales. The credit department evaluates customers who apply for credit cards. Uncollectible Accounts Expense Methods for Estimating Uncollectible Expense Percentage of Sales This is also called the income statement approach. It is based on prior experience of the business. It is computed as a percentage of credit sales. It ignores the current balance of the allowance account. The percentage used is adjusted as needed to reflect collection experience. Percentage of Sales Example The credit department of Ana’s Boutique estimates (based on prior experience) that 1% of net credit sales are uncollectible. Net credit sales for the year just ended were $500,000. What is the adjusting entry? $500,000 × 1% = $5,000 Percentage of Sales Example Dec 31, 20xx Uncollectible Account Expense 5,000 Allowance for Uncollectible Accounts 5,000 Recorded expense for the year Percentage of Sales Example Aging of Accounts Receivable This approach is also called the balance sheet approach because it focuses on accounts receivable. Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding. Aging of Receivables Example Assume that International Hospital’s past collection experience indicates the following: Length of time % uncollectible 1-30 days 2.0 31-60 days 3.0 61-90 days 5.0 90 + days 8.0 Aging of Receivables Example Aging of Receivables Example The allowance account is adjusted to this $143,000 balance: Assume that the account currently has a credit balance of $100,000. What is the adjustment? Aging of Receivables Aging of Receivables Comparing t