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Samenvatting Financial Accounting (EBP802B05)
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Chapter 7As we have indicated, accounts receivable are short-term financial assets that arise from credit sales
made in the ordinary course of business.
Credit sales or loans not made in the ordinary course of business, such as those made to employees,
officers, or owners, should appear separately on the balance sheet under asset titles like receivables
from employees. Also, when accounts have credit balances due to overpayment and purchase
returns, the company should show the total credits on its balance sheet as a current liability because
it may have to grant refunds.
Because grocery stores have few receivables, they have a very quick turnover. The turnover in
interstate trucking is 10.5 times a year because the typical credit terms in that industry are 30 days.
The turnover in the machinery industry is lower because that industry tends to have longer credit
terms. HP’s receivable turnover of 6.8 times is not unusual among computer companies because
their credit terms typically allow customers 30 to 60 days to pay.
The allowance method relies on an estimate of uncollectible accounts, but unlike the direct
chargeoff method, it is in accord with the matching rule.
Of course, at the time a company makes credit sales, management cannot identify which customers
will not pay their debts, nor can it predict the exact amount of money the company will lose.
Therefore, to observe the matching rule, losses from uncollectible accounts must be estimated, and
the estimate becomes an expense in the period in which the sales are made.
Uncollectible Accounts Expense appears on the income statement as an operating expense.
Allowance for Uncollectible Accounts appears on the balance sheet as a contra account that is
deducted from accounts receivable. It reduces the accounts receivable to the amount of cash
estimated to be collectible (net realizable value).
Unlike the direct chargeoff method, the percentage of net sales method matches revenues with
expenses.
Two common methods of estimating uncollectible accounts expense are the percentage of net sales
method and the accounts receivable aging method.
- The percentage of net sales method asks how much of this year’s net sales will not be
collected. The answer determines the amount of uncollectible accounts expense for the year.
- The accounts receivable aging method asks how much of the ending balance of accounts
receivable will not be collected. With this method, the ending balance of Allowance for
Uncollectible Accounts is determined directly through an analysis of accounts receivable. The
difference between the amount determined to be uncollectible and the actual balance of
Allowance for Uncollectible Accounts is the expense for the period.
The aging of accounts receivable is the process of listing each customer’s receivable account
according to the due date of the account. If the customer’s account is past due, there is a possibility
that the account will not be paid.
An aging of accounts receivable is an important tool in cash management because it helps to
determine what amounts are likely to be collected in the months ahead.
,When the write-offs (afschrijving) in an accounting period exceed the amount of the allowance
(vergoeding), a debit balance in Allowance for Uncollectible Accounts results.
The percentage of net sales method is an income statement approach. It assumes that a certain
proportion of sales will not be collected, and this proportion is the amount of Uncollectible Accounts
Expense for the period.
The accounts receivable aging method is a balance sheet approach. It assumes that a certain
proportion of accounts receivable outstanding will not be collected. This proportion is the targeted
balance of the Allowance for Uncollectible Accounts account. The expense for the accounting period
is the difference between the targeted balance and the current balance of the allowance account.
Describing the aging method as the balance sheet method emphasizes that the computation is based
on ending accounts receivable rather than on net sales for the period.
When writing off an individual account, debit Allowance for Uncollectible Accounts, not Uncollectible
Accounts Expense.
Regardless of the method used to estimate uncollectible accounts, the total of accounts receivable
written off in an accounting period will rarely equal the estimated uncollectible amount. The
allowance account will show a credit balance when the total of accounts written off is less than the
estimated uncollectible amount. It will show a debit balance when the total of accounts written off is
greater than the estimated uncollectible amount. When it becomes clear that a specific account
receivable will not be collected, the amount should be written off to Allowance for Uncollectible
Accounts. Remember that the uncollectible amount was already accounted for as an expense when
the allowance was established
A promissory note is an unconditional promise to pay a definite sum of money on demand or at a
future date. The person or company that signs the note and thereby promises to pay is the maker of
the note. The entity to whom payment is to be made is the payee.
A payee includes all the promissory notes it holds that are due in less than one year in notes
receivable in the current assets section of its balance sheet. A makervincludes them in notes payable
in the current liabilities section of its balance sheet.
Notes receivable and notes payable are distinguished from accounts receivable and accounts payable
because the latter were not created by a formal promissory note.
Among the advantages of these notes are that they produce interest income and represent a
stronger legal claim against a debtor than accounts receivable do. In addition, selling—or
,discounting— promissory notes to banks is a common financing method. Almost all companies
occasionally accept promissory notes, and many companies obtain them in settlement of past-due
accounts.
The maturity date is the date on which a promissory note must be paid.
The duration of a note is the time between a promissory note’s issue date and its maturity date.
Knowing the exact number of days in the duration of a note is important because interest is
calculated on that basis.
Interest is the cost of borrowing money or the return on lending money, depending on whether one
is the borrower or the lender. The amount of interest is based on three factors:
• Principal (the amount of money borrowed or lent)
• Rate of interest
• Loan’s length of time
The formula used in computing interest is as follows: Principal * Rate of Interest * Time = Interest
The maturity value is the total proceeds of a promissory note—face value plus interest—at the
maturity date.
Maturity Value = Principal + Interest
The matching rule requires that the accrued interest be apportioned to the periods in which it
belongs. For example, assume that the $1,000, 90-day, 8 percent note discussed above was received
on August 31 and that the fiscal year ended on September 30. In this case, 30 days’ interest would be
$6.58, calculated as follows: Principal * Rate of Interest * Time = Interest
$1,000 * 8/100 * 30/365 = $6.58
A note not paid at maturity is called a dishonored note. The holder, or payee, of a dishonored note
should transfer the total amount due (including interest income) from Notes Receivable to an
individual account receivable for the debtor. Doing so accomplishes two things:
- It leaves only notes that have not matured and are presumably collectible in the Notes
Receivable account.
- It establishes a record showing that the customer has dishonored a note receivable, which
may be helpful in deciding whether to extend credit to that customer in the future.
Chapter 8
The primary reason a company incurs current liabilities is to meet its needs for cash during the
operating cycle. The operating cycle is the length of time it takes to purchase inventory, sell the
inventory, and collect payment.
Working Capital = Current Assets – Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Payables turnover is the number of times, on average, that a company pays its accounts payable in
an accounting period.
, Payables Turnover = (Cost of Goods Sold +- Change in Merchandise Inventory) / Average Accounts
Payable
Cost of Goods Sold is soms taxes payable
Days’ payable shows how long, on average, a company takes to pay its accounts payable. It is
computed by dividing the number of days in a year by the payables turnover.
Days’ Payable = 365 Days / Payables Turnover
Disclosure of the fair value and the bases for estimating the fair value of short-term notes payable,
loans payable, and other short-term debt are required unless it is not practical to estimate the value.
On the balance sheet, the order of presentation for current liabilities is not as strict as for current
assets. Generally, accounts payable or notes payable appear first, and the rest of current liabilities
follow.
Accounts Payable Accounts payable are short-term obligations to suppliers for goods and services.
Notes Payable Short-term notes payable are obligations represented by promissory notes. A
company may sign promissory notes to obtain bank loans, pay suppliers for goods and services, or
secure credit from other sources. The interest rate is usually stated on the face of the note.
Commercial paper refers to unsecured loans (i.e., loans not backed by any specific assets) that are
sold to the public, usually through professionally managed investment firms.
The employee pays all federal, state, and local taxes on income. The employer and employee share
FICA and Medicare taxes. The employer bears FUTA and state unemployment taxes.
Estimated liabilities are definite debts or obligations whose exact dollar amount cannot be known
until a later date. Because there is no doubt that a legal obligation exists, the primary accounting
problem is to estimate and record the amount of the liability
Estimated liabilities are recorded and presented in the financial statements in the same way as
definitely determinable liabilities. The only difference is that the computation of estimated liabilities
involves some uncertainty.
Product Warranty Liability When a company sells a product or service with a warranty, it has a
liability for the length of the warranty (garantie). The warranty is a feature of the product and is
included in the selling price; its cost should therefore be debited to an expense account in the period
of the sale.
Recording a product warranty expense in the period of the sale is an application of the matching rule.
In most companies, employees accrue paid vacation as they work during the year. For example, an
employee may earn two weeks of paid vacation for each 50 weeks of work. Thus, the employee is
paid 52 weeks’ salary for 50 weeks’ work. The cost of the two weeks’ vacation should be allocated as
an expense over the year so that month-to-month costs will not be distorted. The vacation pay
represents 4 percent (two weeks’ vacation divided by 50 weeks) of the employee’s pay. Every week
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