Chapter 7: Valuing Accounts Receivable

Accounts Receivable Overview Accounts receivable represent amounts due from customers resulting from credit sales. These arise when a company provides goods or services on credit, allowing customers to pay at a later date. Accounts receivable are classified as current assets on the balance sheet because they are typically collected within one year. Key Points on Receivables: 1. Receivable Types: o Accounts Receivable: Due from customers for credit sales. o Notes Receivable: Written promises to pay a specific amount at a future date. o Other Receivables: Can include interest, rent, tax refunds, and employee receivables. 2. Recording Credit Sales: o Credit sales are recorded by debiting Accounts Receivable and crediting Sales Revenue. o For each customer, the company maintains a control account in the general ledger and a subsidiary ledger that tracks individual customer balances. 3. Subsidiary Ledger Example (TechCom): o TechCom, a wholesaler, tracks its receivables through a subsidiary ledger for each customer, like CompStore and RDA Electronics. o After a credit sale of $950 to CompStore and a collection of $720 from RDA Electronics, the accounts are updated. The balance in the general ledger matches the total of the individual customer balances. Accounts Receivable Ledger vs. General Ledger • • The general ledger keeps a single Accounts Receivable account that shows the total amount owed by all customers. The accounts receivable subsidiary ledger contains separate accounts for each customer, detailing the amounts owed and paid by each. Example of Recording Transactions (Exhibit 7.3 and 7.4) • • Transaction 1: TechCom sells $950 of goods on credit to CompStore. o Journal Entry:  Debit Accounts Receivable $950  Credit Sales $950 Transaction 2: TechCom receives $720 from RDA Electronics for a prior sale. o Journal Entry:  Debit Cash $720  Credit Accounts Receivable $720 • After these transactions, the total in the general ledger and subsidiary ledger reflects the updated balances of $3,230 in total receivables. Credit Card Sales Credit card sales involve a third-party company like Visa, Mastercard, or American Express. Companies offer this option for several reasons: • • • No credit risk: The credit card company assumes the risk of customer nonpayment. Faster cash: Sellers receive payment from the credit card company quickly. Higher sales: More customers are likely to buy when offered the flexibility of credit. However, sellers must pay a fee, typically ranging from 1% to 5% of the transaction amount. For instance: • TechCom sells $100 using a credit card with a 4% fee. o Journal Entry:  Debit Cash $96  Debit Credit Card Expense $4  Credit Sales $100 Journal Entries for Credit Card Sales (Perpetual Inventory System) 1. AA Bank Card Transaction: o Sold merchandise for $1,000 (cost $600) with a 5% fee. o Journal Entry:  Debit Accounts Receivable (AA Bank) $1,000  Credit Sales $1,000  Debit Cost of Goods Sold $600  Credit Inventory $600  Debit Credit Card Expense $50 (5% of $1,000)  Credit Cash $950 2. VIZA Card Transaction: o Sold merchandise for $400 (cost $300) with a 3% fee. o Journal Entry:  Debit Accounts Receivable (VIZA) $400  Credit Sales $400  Debit Cost of Goods Sold $300  Credit Inventory $300  Debit Credit Card Expense $12 (3% of $400)  Credit Cash $388 Summary • • • Accounts receivable arise from credit sales and are recorded in both the general ledger and subsidiary ledgers. Credit sales are tracked for individual customers, and the sum of these individual accounts is reflected in the general ledger. Credit card sales offer convenience but involve fees, which are recorded as an expense or subtracted from the sales amount. This system helps companies maintain an organized record of their receivables while ensuring accurate financial tracking of credit transactions.