What is a receivable?

A claim to cash the company expects to collect — from customers, borrowers, or others.

What are accounts receivable?

Amounts customers owe from buying goods or services on credit, usually collected in 30–60 days. A current asset.

What are notes receivable?

A written promissory note in which a customer promises to pay a set amount plus interest by a specified date.

How is a normal credit sale recorded?

Debit Accounts Receivable, credit Sales Revenue; later collection debits Cash and credits Accounts Receivable (no new revenue).

Company (in-house) credit card — interest on unpaid balances?

Debit Accounts Receivable, credit Interest Revenue. The company carries its own receivable.

National bank card sale (Visa/MasterCard)?

Treated like a cash sale minus a processor fee: debit Cash and Service Charge Expense, credit Sales Revenue.

Bank-card example — $4,500 sale, 2% fee?

Fee = 4,500 × 2% = 90. Debit Cash 4,410 and Service Charge Expense 90; credit Sales Revenue 4,500.

Why do uncollectible accounts arise?

Selling on credit means some customers will never pay; the company must record that cost.

Direct write-off method?

Record Bad Debt Expense only when a specific account is judged worthless. Simple, but violates matching; allowed only when bad debts are immaterial.

Estimate uncollectibles each period and match the expense to the period of the sales. Required by GAAP when bad debts are material.

What is the Allowance for Doubtful Accounts?

A contra-asset account whose credit balance is the portion of receivables not expected to be collected.

What is net realizable value?

Accounts Receivable − Allowance for Doubtful Accounts — the amount actually expected to be collected.

The estimating (adjusting) entry for bad debts?

Debit Bad Debt Expense; credit Allowance for Doubtful Accounts. Always this form.

Percentage-of-sales method — the idea?

Income-statement approach: Bad Debt Expense = net credit sales × estimated %. The existing allowance balance is ignored.

Percentage-of-sales example — $800,000 sales, 1%?

Bad Debt Expense = 800,000 × 1% = 8,000 (debit Bad Debt Expense, credit Allowance 8,000).

Percentage-of-receivables (aging) method — the idea?

Balance-sheet approach: estimate the TARGET ending allowance balance, then adjust the allowance to that amount.

Under aging, how do you get bad debt expense?

Expense = target allowance − existing credit balance (or + an existing debit balance).

Aging with a $1,500 credit balance and $10,000 target?

Expense = 10,000 − 1,500 = 8,500, bringing the allowance up to 10,000.

Aging with a $500 DEBIT balance and $10,000 target?

Expense = 10,000 + 500 = 10,500 (you must cover the debit balance and reach the target).

What does an aging schedule do?

Sorts receivables by how overdue they are and applies a higher uncollectible % to older buckets.

Journal entry to WRITE OFF an account?

Debit Allowance for Doubtful Accounts, credit Accounts Receivable — not to expense.

Does a write-off change net realizable value?

No. Accounts Receivable and the Allowance both fall by the same amount, so NRV is unchanged.

Does a write-off affect net income?

No — the expense was already recorded when the allowance was estimated.

How do you record a RECOVERY of a written-off account?

First reverse the write-off (debit Accounts Receivable, credit Allowance); then record the collection (debit Cash, credit Accounts Receivable).

The parts of a promissory note?

Maker (promises to pay), payee (receives), face value (principal), interest rate, and term (time).

The interest formula?

Interest = Face value × annual Rate × Time (time as a fraction of a year: months/12 or days/360).

How do you accrue interest at period-end?

Debit Interest Receivable, credit Interest Revenue for the interest earned so far.

Accrued interest — $9,000, 10% note, 2 months earned?

9,000 × 10% × 2/12 = 150: debit Interest Receivable 150, credit Interest Revenue 150.

Entry when a note is HONORED at maturity?

Debit Cash for face + interest; credit Notes Receivable (face) and Interest Revenue (interest).

Honored note — $6,000, 3-month, 8% note paid?

Interest 120: debit Cash 6,120; credit Notes Receivable 6,000 and Interest Revenue 120.

What is a dishonored note?

A note not paid in full at maturity.

Entry for a dishonored note when collection is still expected?

Transfer to Accounts Receivable: debit Accounts Receivable for face + interest; credit Notes Receivable and Interest Revenue. The claim survives.

Why transfer a dishonored note to Accounts Receivable?

The company still expects to collect; it's just no longer a formal note, so it belongs with ordinary receivables.

Accounts receivable turnover?

Net credit sales ÷ average net accounts receivable — how many times receivables are collected in the period.

Average collection period?

365 ÷ accounts receivable turnover — the average number of days to collect a receivable.

Where are receivables reported?

As current assets, at net realizable value (Accounts Receivable less the Allowance for Doubtful Accounts).

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Accounting 1 · Chapter 9 · Free

Chapter 9 — Accounting for Receivables

Receivables — accounts receivable and the allowance method, bad debt expense and aging, then notes receivable: interest, maturity dates, and honored vs dishonored notes.

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What you'll learn

Account for accounts receivable and estimate bad debts using the allowance method (percentage-of-receivables and aging)
Record write-offs and recoveries of uncollectible accounts
Compute interest and maturity dates on notes receivable and record honored and dishonored notes

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Part 1 — Bad Debt Expense & the Allowance Method

Part 2 — Notes Receivable: Interest, Maturity & Dishonored Notes

Part 3 — Factoring & Credit Card Sales: How Companies Turn Receivables Into Instant Cash

Focus — Exam Cram — Allowance Method, Notes Receivable & Factoring in 15 Minutes

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Chapter 9 — Accounting for Receivables

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