Unit 2: accounting for receivables introduction

1.1 Definition


Accounts receivable are amounts owed by customers on account. They result from the sale of goods (merchandise) and services on account. These receivables generally expected to be collected with 30 to 60 days. They are the most significant type of claim held by company.

The three primary accounting problems associated with the accounts receivable are:

1- Recognizing accounts receivable

2- Valuing accounts receivable
3. Disposing of asset
1.2 Recognizing Accounts Receivable
Recognizing accounts receivable is relatively straight forward.
To illustrate, assume that ABC Company. On July 1, 1996, sells merchandise on account to DDC Company for Br. 1,000 terms 2/10, n/30. On July 5, merchandise worth Br. 100 is returned to ABC co. on July 11, payment is received from DDC Company for the balance due. The journal entries to record these transactions on the books ABC co. are as follows:

July 1 Accounts Receivable DDC .Co 1000

Sales 1000
(To record sales on account)

July 5 Sales Returns and allowances 100

Accounts Receivable DDC .Co 100
(To record merchandise returned)
July 11 Cash (900-18) 882
Sales Discount (900x2%) 18
Accounts Receivable DDC .Co 900
(To record collection of accounts receivable)

The opportunity to receive a cash discount usually occurs when a manufacturer sells to a whole seller or a wholesaler sells to a retailer. A discount is given in these situations either to encourage prompt payment or for competitive purpose.

On the other hand, retailers rarely grant cash discounts to customers. In these situations, most sales are either in cash or credit card sales..

To illustrate, assume that you charge on your J.C penny credit card a new outfit that costs Br. 300. J.C penny will make the following entry at the date of sale.

Account receivable 300
Sales 300
(To record sale of merchandize)