MUHASEBE I - Deneme Sınavı - 2

Promissory note is a written agreement or a commitment to pay a particular amount of promised money at a particular period of time.

Receivable is an accounting term associated with the amounts that are owed to the business by other parties, mainly its customers. These are basically the claims that are likely to be acquired in future. These claims stem from selling goods or services on credit. Receivables can also arise when someone lends money to another person. Generally, receivables are classified into three main categories: (1) accounts receivables, (2) notes receivables, and (3) other receivables. Accounts receivables and notes receivables arise from main operating activities of companies and they are known as trade receivables. Receivables can be also classified as current (short-term) and non-current (long-term) receivables with respect to their maturity structures.

There are three main accounting issues with respect to the accounting of
receivables. They are:
1. Recognition of accounts receivable
2. Valuation of accounts receivable
3. Disposition of accounts receivable

When the company sells its goods or services on cash basis, there would be no need to consider for accounts receivables. In such a case, cash account is debited; the sales revenue account is credited. As we have mentioned before, if the company sells its goods and services on credit, then it has to debit accounts receivables.Cash account is debited and sales revenue is credited. This basic sales transaction has cash and income increasing effect.

Return facility is often part of a company’s marketing program that enables it to maintain competitiveness. It is basically a contra sales account that records (1) any goods returned by the customers and (2) any allowance given to a customer because the company delivered defective or improper goods. As a result, this will reduce the company’s account receivable.Sales returns and allowances reduce the amount of accounts receivables since the customer delivers back the goods or the company waives a portion of its claim due to product defects.

Companies often offer a cash discount to its customers if they agree to pay within a designated period. In other words, the opportunity to get a cash discount usually arises for a customer when a company either wants to encourage prompt payment or because of competitive reasons and also to increase the chances of collection. Cash discounts are intended to encourage
the customer to make their payment earlier.

Bad debt expense is an income statement account that shows the losses incurred due to uncollectible receivables. It is also important to be aware of that the amount to be reflected as an asset on the balance sheet because some receivables might become bad or will be uncollectible. Hence, in order to ensure that account receivables are not overstated on the balance sheet, they are reported in their cash (net) realizable value. As mentioned before, this value deducts the amounts that the business expects it might not be able to get from its receivables. Therefore, out of receivables, the estimated uncollectible amounts are reduced and then reported on the balance sheet.

Under allowance method, the company should make necessary adjustments at the end of its accounting year for the amount of losses it predicts as a result of making sales on credit to its customers. This allowance method has three basic yet important features:
1. The uncollectible amounts are anticipated and the expense for the uncollectible account is matched
against sales in the same period in which sales were made.
2. Through an adjusting entry at the last of accounting year, forecasted uncollectible receivables are
credited to Allowance for Doubtful Debts Account and debited to Bad Debts Expense account.
3. Recognized uncollectible receivables are debited to Allowance for Doubtful Debts Account and credited to Account Receivable account at the time when specific amount is written.

Percentage of sales basis is the percentage relationship between the amount of credit sales and estimated losses from uncollectible accounts. In a situation where a company has been in a business for a long time, it might be able to use historical relationships between bad debts and net credit sales to estimate bad debts amount. This approach is based on historical or past experience and forecasted credit policies. This approach is also called an “income statement approach” because of its focus on the size and amount of expense. Usually a percentage is applied to either total credit sales or credit sales (net) of the current accounting year.

Firms often believe that they are able to forecast bad debts if they relate them to the balance in the Account Receivable account at the end of the period instead of the sales of that period. Under the percentage of Account receivable approach, companies establish a percentage relationship between the amount of account receivables and forecasted losses from bad debts accounts. Although this method is using account receivable rather than sales, the objective of both the approaches remain the same, i.e. the company uses past experience with bad debts to determine future amounts.

The other way in which uncollectible receivables can be calculated is through Direct Write-off Method, which is mainly used by relatively small and private companies. Under this method, a company does not estimate bad debts losses and does not use allowance account for the expenses based on estimates. Instead, when a specific receivable is considered to be uncollectible or worthless, the loss amount is charged directly to the uncollectible account expense.
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Sales returns and allowances reduce the amount of accounts receivables since the customer delivers back the goods or the company waives a portion of its claim due to product defects.

Bad debt expense is an income statement account that shows the losses incurred due to uncollectible receivables.

Percentage of sales basis is the percentage relationship between the amount of credit sales and estimated losses from uncollectible accounts.

Factoring is the business of purchasing receivables from companies upon a fee for the services performed to manage and collect receivables.

To evaluate a company’s ability to analyze its account receivables, accounts receivable turnover ratio is used. This accounting ratio is calculated by simply dividing Net credit sales by Average Accounts Receivable for the duration during which the sales were made by the company. Not only the turnover but also receivable levels are also assessed based on how long it takes to collect the receivable. This can be taken as an alternative to the accounts receivable turnover ratio with more direct interpretation. The ratio called days to collect account receivable is calculated by dividing total or 365 days by accounts receivable turnover.

This ratio is calculated by simply dividing Net credit sales by Average Accounts Receivable for the duration during which the sales were made by the company.

the disposition of notes receivable is divided into three alternatives:

1. Honor of Notes Receivable

2. Dishonor of Notes Receivable

3. Sale of Notes Receivable

Receivable is an accounting term associated with the amounts that are owed to the business by other parties, mainly its customers.

First entry above shows that ABC Co. sells its goods at 2,000 TL on credit. Hence, accounts receivables account is debited and sales revenue account is credited at the same amount of 2,000 TL. In the second entry, however, the accounting impact of customer returns, which is 200 TL worth, is reported. In this case, as it returns the goods, the customer will pay less in the future. For this reason, accounts receivable is credited by 200 TL to account for such a decrease. Sales returns and allowances account is debited to Cash discounts are intended to encourage the customer to make their payment earlier. Date June 1 Accounts Receivable Account Titles and Short Explanation Debit Credit 2,000 Sales Revenue 2,000 To record sales on account Date June 5 Sales Returns and Allowances Account Titles and Short Explanation Debit Credit 200 Accounts Receivable 200 To record goods returned Date June 11 Account Titles and Short Explanation Debit Credit Cash (1,800 TL - 36 TL) Sales Discounts (1,800 TL x 0.02) 1,764 36 Accounts Receivable 1,800 To record collection of accounts receivable in a discount period 225 Accounting I record for customer returns. Third entry presents the records pertaining to the collection of receivables before the maturity predetermined as 30 days. Since the customer makes an early payment, ABC Co. applies a discount of 2% on the remaining receivable balance of 1,800 TL. This 36 TL discount is debited as sales discount. Cash is also debited to stand for the collection of receivables after discount. Ultimately, accounts receivable is credited as a whole in order to close the open balance.