Chapter 8 Receivables
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Other Receivables
Other receivables include interest receivable, taxes receivable, and receivables from
officers or employees. Other receivables are normally reported separately on the bal- ance sheet. If they are expected to be collected within one year, they are classified
as current assets. If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption Investments.
Uncollectible Receivables
In prior chapters, the accounting for sales of merchandise or services on account on credit was described and illustrated. A major issue that has not yet been discussed
is that some customers will not pay their accounts. That is, some accounts receivable will be uncollectible.
Companies may shift the risk of uncollectible receivables to other companies. For example, some retailers do not accept sales on account, but will only accept cash or
credit cards. Such policies shift the risk to the credit card companies. Companies may also sell their receivables. This is often the case when a company
issues its own credit card. For example,
Macy’s
and
JCPenney
issue their own credit cards. Selling receivables is called factoring the receivables. The buyer of the receivables is called
a factor. An advantage of factoring is that the company selling its receivables immediately receives cash for operating and other needs. Also, depending on the factoring agreement,
some of the risk of uncollectible accounts is shifted to the factor.
Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense recorded from uncollectible receivables is called
bad debt expense
, uncollectible accounts expense, or doubtful accounts expense. There is no general rule for when an account becomes uncollectible. Some indica-
tions that an account may be uncollectible include the following:
1. The receivable is past due. 2. The customer does not respond to the company’s attempts to collect.
3. The customer files for bankruptcy. 4. The customer closes its business.
5. The company cannot locate the customer.
If a customer doesn’t pay, a company may turn the account over to a collection agency. After the collection agency attempts to collect payment, any remaining bal-
ance in the account is considered worthless. The two methods of accounting for uncollectible receivables are as follows:
1. The direct write-off method records bad debt expense only when an account is determined to be worthless.
2. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.
The direct write-off method is often used by small companies and companies with few receivables.
1
Generally accepted accounting principles GAAP, however, require compa- nies with a large amount of receivables to use the allowance method. As a result, most well-
known companies such as
General Electric
,
Pepsi
,
Intel
, and
FedEx
use the allowance method.
Direct Write-Off Method for Uncollectible Accounts
Under the direct write-off method, Bad Debt Expense is not recorded until the cus- tomer’s account is determined to be worthless. At that time, the customer’s account
receivable is written off.
Describe the accounting for
uncollectible receivables.
Adams, Stevens Bradley, Ltd.
is a collection agency that operates on a
contingency basis. That is, its fees are based on
what it collects.
Describe the direct write-off method of
accounting for uncollectible receivables.
1 The direct write-of method is also required for federal income tax purposes.
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Chapter 8 Receivables
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