MUHASEBE I

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.

Normally, companies collect account receivables in cash and remove it from the books simultaneously. However, in recent years as credit sales and receivables have grown considerably, some companies have started to sell their receivables to other companies in order to accelerate receipt of cash from receivables. The most practiced method to sell receivables is the sale to a factor, also called as factoring. Factoring arrangements vary extensively. However, factors (the buyer of the receivables) charge a fee or commission for their services. In today’s world, many businesses have reduced their investments in receivables by encouraging customers to pay via credit cards such as Visa or Master. The credit card companies pay these businesses and later bill the customers. The working of debit cards is slightly different than the working of credit cards. Using a debit card is similar to paying with cash, except that the customers will not have to carry cash with them. When debit card is swapped by retailer at the point of sale terminal (POS) or cash counter, the bank balance of the customer is automatically reduced and the amount is transferred to retailer’s account.

Receivables can be classified with respect to the nature of the transaction or with respect to their maturity structures.Trade receivables are account and notes receivables from sales transactions.Receivables are known as claims arising
from credit sales or loan transactions.

Trade discount is the reduction in the catalogue price or listed price of the goods. Trade discounts reduce the final sales price and are not affected by the date of payment. Hence, it is important to note that trade discounts are not recorded and therefore they are not reflected in the books of accounting for both buyer and seller. Only the price is recorded after a net of the trade discounts.

A company can sell it to a bank and in return can receive cash before the note’s actual maturity date. As banks purchase these notes from the companies at a “discount” from their maturity values, this process is also called discounting of notes receivable.”

However, it is more profitable to use 360 days instead of 365 because the note holder receives more interest.

Maker is the writer of a note, promises to pay.Payee is the receiver of a note, to get the payment

Th formula to find the solution is : DaystoCollect AccountsReceivable = 365days/
AccountsReceivablesTurnover

As the example suggests, higher percentages are assigned to the older receivables because the lengthier a receivable is past due, there are more chances that it will be uncollectible.

You can use the formula Accounts receivables - (minus)Allowance for doubtful debts=Cash (Net) Realizable Value of the Accounts Receivable

Income statement of a firm is also affected by the uncollectible receivable amounts. The amount of expected uncollectible receivables is reported in the income statement as an expense so that profit should not be overstated. This expense is recorded in bad debts expense account and reported as bad debts expense in the income statement.