Training, Teaching and Learning Materials

NEFAS SILK POLY TECHNIC COLLEGE

Accounts & Budget Support LEVEL III

Learning Guide
Unit of CompetenceAdminister Subsidiary Accounts and Ledgers
Module TitleAdminister Subsidiary Accounts and Ledgers
LG Code: BUF ACB3 02 09 21
TTLM Code: BUF ACB3M 02 0921

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INTRODUCTION

Welcome to the module “Administer Subsidiary Accounts and Ledgers”.

This learner’s guide was prepared to help you achieve the required competence in
“Accounts and Budget Support Level III ”. This will be the source of
information for you to acquire knowledge attitude and skills in this particular
occupation with minimum supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- Review accounts receivable process
Lo2:- Identify bad and doubtful debts
Lo3:- Review compliance with terms and conditions and plan recovery
action
Lo4:- Prepare reports and file documentation
Lo5:- Distribute creditors invoices for authorization
Lo6:- Remit payments to creditors
Lo7:- Prepare accounts paid report and reconcile balances outstanding
How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections

that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

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Lo1:- Review accounts receivable process

Receivables usually composed substantial components of a firms current assets,
thus considered as important factor in evaluating the financial position of a firm. In
common they are resulted from events such as sale of goods or services, loans
made, subscriptions obtained from investors for capital stock or bonds, claims for
income tax refunds, claims resulting from litigation, etc. Receivables from
customers frequently represent a substantial part of a business enterprise's current
assets. Poor screening of applicants for credit or an inefficient collection policy
may result in large loses. Consequently, strong accounting controls and effective
management of receivables are typical characteristics of most profitable
enterprises.
Receivables may be classified in different manner, such as:
Trade Receivables: they are also called receivables from sales of goods and
services. They result from ordinary revenue-producing activities and they include
accounts receivables, installment receivables, or notes receivables.
Non-Trade Receivables:- These are receivables from miscellaneous sources.
These are receivables resulting from services which are non-recurring or unusual
Classification of receivables
transactions.
Examples include:
 Claims against insurance companies, legal suit for damages.
 Prospective retuning
 Deposits to cover damages, as guarantee
 Receivables from employees or officers
 Receivables from sale of other assets such as from disposal of plant assets
 Accrual of interest, dividend, rent, royalties
 Overpayment of trade accounts payable, etc.

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Receivables may also be classified as open account (a non-written promise to pay)

or a note (a written promise to pay). Open accounts are less formal, mostly non-
interest bearing and used for a shorter period, involve loser amount. On the other
hand, notes receivables are represented by promissory notes that give them a
stronger status than ordinary open accounts
Accounting System and Internal Control
Effective internal control over sale of goods and related cash collections are
integral parts of the system for handling trade accounts receivable. For effective
handling of receivables the following mechanisms should be applied in a business
organization:
Segregation of duties: This means separation of responsibilities in a business
firm. An individual who is assigned for recording sales and collection of trade
receivables should not be assigned in handling cash receipts or in preparing bank
deposit slips.
Cycle billing:- It is a procedures that insures timely collection of receivables and it
involves billing customer as different time schedules after getting customers
classified on different basis such as geographic location or type of customer.
Accounting Activities for Trade Receivables
In trade receivables the following major activities are treated:
 Recognition of receivables
 Valuation of receivables
 Disposition of receivables
Recognition of receivables: In recording trade accounts receivables the following
two questions should be answered.
1. At what point in the earning process should a trade accounts receivable be
recorded? And

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2. How should the net amount of a trade accounts receivable be measured so

that related asset, revenue and expense accounts will be accounted
accurately?
The answer for question No. 1 is: Trade accounts receivable is recorded when sales
are made and title to the goods is transferred to the buyer, i.e., at the point of sale.
It should be noted hat when customer order is received, goods are produced or
when goods are shipped on consignment receivables should not be recorded or
recognized. However, receivables may be recorded for work completed on
construction type contracts. This is congruent with revenue recognition for long-
term project under percentage completion method.
In recording/ recognizing receivables the following factors should be taken into
consideration.
 Trade discount
 Cash/sales discount
 Estimated collection costs for receivables
 Sales returns and allowance
 Allowance for fright-out (Transportation costs)
 Sales tax
 Container deposits (Cash Debit and Credit container deposit liabilities)
Valuation of receivables: It involves determining the net realizable value (present
value) of claims from customers considering the amount due and the estimate of
the probability that the receivable will be collected. This process recognizes
doubtful account expense or bad debt expense related to non-collectiblity of
receivable. Receivables that will never be collected have a zero value, and the
related revenue will not be realized. Thus, the major objective of estimating this
doubtful account is to prevent an overestimate of assets and revenue in the
accounting period in which the sale is made.
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Two accounting methods may be adopted to account for doubtful accounts.

a. Allowance method or reserve method
b. Direct-write-off method or direct charge of method.
a. Allowance method: Under this method, adjustments are made at the end of
each accounting period in order to estimate the amount of receivable that is
probable to be unelectable. An account called allowance for doubtful
account is used and the adjusting entry at the end of the year for this method
is presented as follows:
Doubtful account expense -------------- xxx
Allowance for doubtful account -------------- xxx
The objective of this adjustment is to prevent overstatement of assets and revenues
in the period in which the sales is made.
The net realizable value (carrying amount) of trade accounts receivable which is
reported on the balance sheet is calculated as follows:
NRV of A/R = Accounts - Balance of valuation
(carrying amount) receivable (gross) allowance accounts
(after adjustment)
The doubtful account expense recorded may be reported in the income statement as
operating expense (most commonly used practice) or as other non-operating
expense or as a deduction from sales.
Illustration: Account balance of accounts receivable for pear trading at
December 31, year 6 is determined to be a positive balance of $60,000. On the
other hand, allowance for doubtful accounts has a credit balance of $ 2,000 before
adjustment and 5% of accounts receivable is estimated to be uncollectible.
Required:
 Compute the total amount of the allowance for doubtful account
 Compute the net realizable value of the receivable

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 Record the adjusting entry

Solution: Current provision for doubtful account = (5%) (60000) = 3000
Adjustment amount bad debt expense is: 3000-2000 = 1000
- The net realizable value of the account receivable at the end of the year
(December 31, year 6) is $60,000 - $3,000 = $57,000
- The adjusting entry on December 31, year 6 is:
Doubtful account expense (bad debt expense) ------ 1000
Allowance for doubtful account --------- 1000
Note that when a given customer’s receivable is manifested uncollectible due to
various reasons the account will be written-off as uncollectible and the entry would
be:
Allowance for uncollectible account ------- xxx
Accounts receivable (specific customer) ------ xxx
This entry has no effect on the net income of the accounting period, on the
receivables account and allowance for uncollectible account.
After accounts receivable is written-off, it is possible for organizations to collect
the mount written-off either in full or partially. This is called recovery or
reinstatement of accounts receivable written-off and the entry would be:
Accounts receivable ----- xxx
Allowance for doubtful account ---- xxx
This is to reverse the written of entry
Cash ---- xxx
Accounts receivable xxx
This is to record the collection of cash
Illustration: Assume that Pear Trading, in the above illustration, write off a
customer’s account that is considered to be uncollectible for $ 670. Assume,

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further that $450 cash is collected from the customer whole account had been
written of (670)
Required: Record the necessary entries
Solution: Allowance for doubtful account ---- 670
Accounts receivable ---- 670
This is to record the written-off accounts receivable
Accounts receivable --------- 450
Allowance for accounts receivable -------- 450
To reinstate the customers account
Cash ----------- 450
A/R ----------- 450
To record the collection
b. Direct written-off method: This is another method of recognizing doubtful
account expense. Under this method there is no provision or estimation of
uncollectibles for receivables and does not record doubtful accounts
beforehand unless specific accounts are identified to be uncollectible. This
method is sometimes called specific write-off method.
It is only upon discovery of specific receivable determined to be uncollectible,
specific customer defaulting, a write-off entry performed to record doubtful
account expense and cancel the balance from accounts receivable account with
the related account in the subsidiary ledger, i.e., the entry to record when a
special customer is found defauted would be:
Doubtful account expense ------ xxxx
Accounts receivable ------ xxxx
Under this method, no adjusting entry is required at the end of he period and a
valuation allowance account is not maintained for doubtful accounts.

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Recover of written-off Accounts Receivable

Under the direct-written-off method, similar to the case in the allowance method,
when an amount is, either partially or in full, collected there are two entries
recorded.

i) when the amount is recovered in the same period in which it is

written-off; where the doubtful account is not yet closed the entry
would be:
Account receivable ------- xxx
Doubtful account expense ------ xxx
To record the reversal entry
Cash ------- xxx
A/R ------ xxx
To record the collection of cash
ii) When the amount is recovered in subsequent periods after it is
written-off it is common to credit “doubtful account recovered”
account for the balance recovered. This accounts is reported
separatly in the income statement as other revenue. The journal
entry follows are:
Account receivable ------- xxx
Doubtful account recovered ------ xxx
This is to record the recovered amount after it was written-off in one period and
recovered in another period.
Cash ------- xxx
Account receivable ------ xxx
This is to record the collection.

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Even if the direct write-off method appears simple and convenient, it has the
following limitations
 It makes no matching of doubtful account expense with current period
revenue.
 It overstates the carrying amount of receivables.

Disposition of receivables
Disposition of receivables are financing transactions that are commonly used as a
source of cash. It shortens the operating cycle and avoids short-run cash flow
problems instead of waiting until customers pay their accounts. Conversation of
accounts receivables into cash may be facilitated through three means:
 Selling receivable
 Pledging receivables as collateral for loans
 Assigning receivables
Enterprises engaged in the buying of receivables are known as factors, and the
process of selling receivables is called factoring. Factors generally buy receivables
outright, that is, without recourse. Alternatively, factors or other lending
institutions may buy receivables with recourse, or may lend money to the owner of
the receivables under a legal arrangement known as assignment. In such cases
customers generally are instructed to make payments directly to the factors or other
lenders. Factoring is san important source of ready cash in different types of
business enterprises.
A pledge of accounts receivable as a collateral for a loan involves no special
accounting problems. Accounting for the sale and the assignment of account
receivable is described in the following sections.

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Sale of Receivables
Factoring of receivables involves selling receivables to a third party. Two parties
are involved with the transactions: Transferor (one who transfers the receivables)
and Transferee (the factor or lending institution).
Sale of receivables can happen in two ways:
Without recourse: This involves the shifting of the risk of credit losses, the effort
of collection and the waiting period that result from the granting of credit to the
purchaser of the receivables. But, sales returns and sales discount, issues are to be
considered by the transferor.
With recourse basis: when receivables are sold with recourse, the seller
(transferor) in effect guarantees the receivables, and the purchaser (transferee) is
reimbursed for failure of debtors to pay the full amount anticipated at the time of
sale.
This type of transfer is accounted and reported as sale of accounts receivable only
when all of the following three conditions are met:
 The transferor surrenders control of the future economic benefits of the
receivables; i.e., the transferor does not retain the option to purchases the
receivable later.
 The transferor can estimate the collectibility of receivables in the future.
 The transferee cannot require the transferor to purchase the receivables.
If any of the above condition is not met, the transferor is considered as a secured
loan; i.e., borrowing using receivables as a collateral. Hence, the amount of the
proceeds from the transferor is reported as a liability resulting from a borrowing
transaction. In which case, the receivable account remains on the transferor’s
record. Thus, the only accounting entry required is to record the liability and
interest expense involved.

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Accounting treatment: when receivables transferred are considered as sales

transaction, the following accounts treatments, using the illustration given, are
occur.
Illustration: Assume that account receivable with a carrying amount of $16,800 is
sold for $22,600. If the face amount of the receivable is $23,000, the transaction
would be recorded as follows:
Cash ----- 22600
Allowance for doubtful account (23000-16800) ---- 6200
Accounts receivable ------------
23000
Gain on sale of A/R (22600-16800) -----
5800
Associated bad debt expenses in subsequent periods are to be recorded by the
factor. The proceeds received from sale of receivables and the amount of
transferred receivables that remain uncollected at the end of the accounting period
should be disclosed in notes to the transferor’s financial statements.
Assignment of receivables: This involves using receivables and collateral for
borrowing. The assignor is the borrower whereas the assignee is the lender.
Assignment of accounts receivables requires executing the following accounting
activities into the assignor’s records:
i) Amount of assigned accounts receivable would be recorded as “assigned
accounts receivable” being removed from “accounts receivable”
account
ii) Liability is recorded for the principal amount of promissory note singed
and cash is recorded for the amount of net proceeds received after the
initial interest charge is deducted. The interest fee deducted is to be
recorded as interest expense.
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iii) Periodical cash collections from assigned accounts receivable are

recorded. These are immediately accompanied with payment to the
assignee for periodical interest charges on the unpaid balance and the
principal amount of the notes payable.
iv) Upon settlement of the note in full, when notes payable has zero balance,
balance outstanding on “assignee accounts receivable” is converted into
“accounts receivable”
To illustrate, assume that on January 2, year 1, Admas Company
assigned receivables of $50,000 to Finco, Inc… and received $45,000,
less a fee of 2% on the amount advanced. Interest at 1% of the unpaid
balance of the loan was to be paid monthly.
The journal entries required in the assignor’s accounting records for the problem
given above are summarized as follows.
January 1, Year1: Assigned account receivable ----- 50,000
Accounts receivable ----- 50,000
Cash (45,000-900) ------ 44,100
Interest expense ------- 900
Notes payable to FincoInc 45,000
The above entry is for the assignment of accounts receivable by the company
(50,000) remitted 90% (45000X100%) of receivables, less 2% fee ($45,000X
0.02= $900)
50.000
Assume further that on January 31, year 1, the company received $30150 from
customers and paid the amount to Finco Inc including interest charges.
January 31, year1” Cash ------ 30150
Assigned account receivable ---- 30150
To record cash collection from assigned A/R

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Notes payable to Finco, Inc 29700

Interest expense ($45,000X0.01) 450
Cash ----- 30150
This entry is to record payment to the assignee interest expense and retirement of
the loan.
Finally assuming that Adams Company collected 17,000 on February 28 from the
assigned accounts receivables and paid the balance owed to FincoInc 1% interest
on153000 unpaid loan all the related records, are shown below
Cash ------ 17,000
Assigned accounts receivable ---- 17,000

This is to record cash collection from assigned accounts receivable

Computations

Balance due on N/P ---- $45,000

Interest exp (1%X45,000) 450

Collection from assigned N/R 30150

Less: Interest expense 450
Remaining amount to settle

Principal amount of N/P 297000

2nd month
Computations:

Balance due on N/P (45,000-30150) = 15300

Interested exp (1%X15300) 153

Amount collected from assigned receivables 17000

Interest expense 153
Full settlement of notes payable 15453

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Notes payable –FincoInc 15300

Interest expense 153
Cash 15453
This is to record payment to the assignee: Interest expense and full retirement of
the loan.
On February 28, year1, the balance of ‘notes payable’ is null, thus, journal entry is
required to covert or transfer balance in ‘assigned accounts receivable’ to account
receivable as is show (T/account)-the remaining balance is $28/50 Hence the last
entry would be from the ledger
Accounts receivable ------ 2,850
Assigned accounts receivable 2850
Assigned A/R
Jan 1. 50,000 30150 Jan 31
17000 Feb 28
2850

Notes Receivables Recognition, Valuation And Disposition

Self Test
1. What is meant by valuation of receivables?
2. Describe a cycle billing system and state its advantage.
3. At what point are trade receivables recorded? Are shipments to consignees
recorded as receivables?
4. What meant by disposition of receivable?
5. Explain the disadvantages of the direct written – off method.

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Lo2:- Identify bad and doubtful debts

Authorised personnel may include: dispute resolution officer

 employees
 supervisors and managers

Information Sheet – 1 services on account

Business organizations sell their items or services on cash or on account. It is
common for these organizations to sell their items or services on account to
increase sales volume. In this case receivables are created. The term receivables
include all money claims against people, organizations, or other debtors.
Receivables are required by a business enterprise in a various kinds of transactions,
the most common being the sale of merchandise or services on a credit sale.
Classification of Receivables
Receivables can be classified broadly as trade receivables and other receivables.
Trade Receivables: are resulted from revenue producing activities such as sale of
goods or services. Under this classification examples included are
accounts receivable & notes receivable. A promissory note
frequently referred to, as a notes receivable, is a written promise
to pay a sum of money on demand or at a definite time. Notes are
more secured than accounts receivables. It is also more liquid
(easily changed into cash) than accounts receivable.
Other receivables: are resulted from transactions not directly related to sales. Here
included are interest receivables, loans to employees or loans to
companies.
Note: that all receivable that are to be collected within a year are presented in the
current asset section of the balance sheet. Others such as long-term loans
are to be listed under investment account below the current asset section of
the balance sheet.

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Controls over Receivables

The control procedures over the receivables include two broad mechanisms:
a) Separation of the business operations adjustments, such as credit
approval, credit collection, credit handling of receivables etc. and the
accounting for receivables such as handling of the accounts receivable
subsidiary ledger and general ledger; and
b) Separation of duties for related functions.
Notes Receivable. (A note)
Definition: A note is a written promise to pay a sum of money on demand or at a
definite time.

Characteristics: a note has different characteristics that have accounting

implications, which are explained in the following ways:
Parties: In notes receivable there are two parties involved. The one to whose order
the note is payable (the holder or the receiver of the note) is called the
payee (the seller); and the one making the promise/ issuer of the note or
the buyer is called the maker.
Due Date: is the date at which the note is retired or paid. It is also called the
maturity date.
Issuance date: is the date at which the note is written or issued.
Maturity value: is the amount that is due at the maturity or due date.
Maturity value = Principal + interest

Types: There are two types of notes. Interest bearing (Interest = Principal * Rate
of interest *Time) the time period can be expressed in terms of days, months or
weeks; and non-interest bearing which has no interest on it but other indirect
charges may be there.
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To illustrate the above characteristics consider the following examples:

a) Br.10,000, 10% interest, 120 days note dated March 16.
b) Br.12,000, 10% interest, 4 months note dated June 5.
Required: calculate the interest, the maturity value and determine the due date of
each note.
Solution: a) Interest = Principal * Rate * Time
= Br.10,000 *10% * 120 days = Br.333.30
360 days
Maturity value = Principal + Interest
= Br.10,000 + 333.33 = Br.10,333.33
Due date: Term of the note............................................... 120
days
Days in March ........................ 31
Less: Term date (issuance date) 16 15
105 days
Days in April.......................... 30
Days in May ........................... 31
Days in June ........................... 30
Total 91 days
The due date is July 14
Remark:
January is a month of 31 days
February is a month of 28 days
March is a month of 31 days
April is a month of 30 days
May is a month of 31 days
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June is a month of 30 days

July is a month of 31 days
August is a month of 31 days
September is a month of 30 days
October is a month of 31 days
November is a month of 30 days
December is a month of 31 day
b) I = P * R * T
= 12,000 * 12 *4 months = Br. 480
100 12 months
Maturity value = P + I
= Br.12,000 + Br. 480 = Br.12,480
Due date: June6 – July5 = 1 month
July 6 – Augusts = 1 month
August 6 – September 5 = 1 month
September 6 – October 5 = 1 month
4 month
Therefore, the due date is October 5.

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Lo3: Review compliance with terms and

conditions and plan recovery action

 Information required for opening accounts may include: amount of initial

deposit
 other signatories to the account
 primary account holder's:
 name
address Lo3:- Review compliance with terms and conditions and plan
recovery action

 contact details
 purpose for which the account will be used
required links to other accounts held.
Discounting Notes Receivable
If the holder of the note is in need of more funds/ cash for current operation, it may
be endorsed or transferred to a bank or any financial agency. This process if called
discounting notes receivable.
When a note is discounted at bank, the bank charges an interest on the maturity
value of the note. This interest is called discount and it is computed using the
following formula.
Discount = Maturity value * Discounting rate * Discounting period/time
The amount of money paid to the endorser/ holder of the note who transfers it to
the bank because of high need of cash, is called proceeds/ balance. It is the excess
of the maturity value over the discount, i.e., Proceeds = Maturity value –
Discount.
To illustrate a discounting notes receivable, assume that a 90-day, 12% notes
receivable for Br.1800, dated November 8, 2001, is discounted at the bank on
December 31, 2001 at the discounting rate of 14%. Assume a 360-days year.

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Required:
1) Determine the due date, discounting period, Interest, the discount,
maturity value, and proceeds.
2) Prepare entries to record discounting of the note.

Solution:
1) Interest = Principal * Rate * Time
= Br. 1800 * 12% * 90 days = Br. 54
360
Maturity value = Principal + interest
= Br.1800 + Br.54 = Br. 1854
Due date = Terms ........................................ 90 days
Days in November (30-8) 22
Days in December 31
Days in January 31 84
Due date is February 6
Discount period:
December (31-3) 28
January 31
February 6
65 days

November 8 December 3 February 6

(Issuance date) (Discounting date) (Due date)
Discount = Maturity value * Discounting rate * Discounting period
= Br. 1854 * 14% * 65/360 = Br. 46.87 this is the amount to the
bank as an interest.
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Proceeds = Maturity value – Discount

= Br. 1854 - Br. 46.87 = Br. 1807.13 this is the amount the
holder of the note will receive from the bank in exchange of the
note.
2) Entries on December 3, when the note is endorsed to the bank is (to record the
proceeds)
Cash ..................................... Br. 1807.13
Notes Receivable ............................. 1800
Interest income (Br.54 - Br. 46.87) ... 7.13
Note that if the proceeds are greater than the face value of the note, there will be
an interest income to the organization. Otherwise, there will be interest
expense. Or if the interest is greater than the discount the difference is interest
income to the discounting notes but if the interest is less than the discount the
difference is charged to interest expense account to the organization, which
discounts the note at bank.
Dishonored notes
In business organizations, the maker of the note may fail to pay the debt on the due
date. Here, in this case, the note is said dishonored, which is not longer negotiable
or transferable. For this reason the holder usually transfers the claim, including any
interest due, to the accounts receivable. To illustrate this fact, assume a Br. 12,000,
30-days, 12% notes receivable on December 31, 2001, had been dishonored at the
due date (January 20, 2002
Required: 1)Calculate the maturity value.
2)Record entries occurred on the issuance date and maturity date?
Solutions:
1) Interest = Br.12,000 * 12% * 30/360 = Br.120
Maturity value = Br.12,000 + Br.120 = Br.12,120

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2) Entries on the issuance date (December 21, 2001)

Notes Receivable ......................... Br. 12,000
Accounts Receivable ................................... Br. 12,000
Entries on the maturity Date (January 20, 2002)
Accounts Receivable ............................. Br. 12,120
Notes Receivable ...................................... 12,000
Interest income .......................................... 120
Dishonored Discounted notes
When a discounted note receivable is dishonored, the holder usually notifies the
endorser of such fact and asks for payment. If the request for payment and
notification of dishonor are timely, the endorser is legally obligated to pay the
amount due on the note. The entire amount paid to the holder by the endorser,
including interest, should be debited to the account receivable of the maker.

To illustrate this fact assume that a 60-day, 12% Br. 42,00 note dated November
8, 2001, discounted on December 3, 2001 at 14% discounting rate is dishonored at
maturity by the maker. Assume, the bank charged Br.50 as penalty for the failure
(called protest fee). Assume further a 360-days accounting year ending on
December.
Required: Record all the necessary transactions & compute all the amounts
required.
Due date:
Solutions: Term period .......................................................... 60 days
Days in November (30-8) .................................... 22
38
Days in December ................................................ 31
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January 7 is the due date ....................................... 7

Discounting period:
Days in December (31-3) ..................................... 28
January ................................................................. 7
35 day
Interest = Br. 42,000 *12% * 60/360 = Br. 840
Maturity value = Br. 42,000 + Br. 840 = Br. 42,840
Discount = Br. 42, 840 * 14% * 35/360 = Br. 583.10
Proceeds = Br. 42,840 - Br. 583.10 = Br. 42,256.90
Entries: On November 8 (issuance date:
Notes Receivable .............................. Br. 42,000
Accounts Receivable .......................... Br. 42,000
On December 3, 2001 to record the proceeds.
Cash ...................................... Br. 42,256.90
Notes Receivable ..................... Br. 42,000
Interest income ......................... 256.90
On January 7,2002, to record the dishonored discounted note.
Accounts Receivable (42,840 + 50) ................. 42,890
Notes Receivable ............................................. 42,890

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Information Sheet

Organisational  conducting the 100 point check of personal identification

procedures for  Identifying and matching customer with existing accounts
customer held within own financial institution.
identification may
include:

Uncollectible Receivables
Regardless of the care used in granting credit and the effectiveness of collection
procedures used, a part of the claims against customers usually proved to be
uncollectible. This could be because of bankruptcy, closing of the debtors business
of failure of repeated attempts to collect. In any way, the operating expense
incurred because of the failure to collect receivables is called an expense /a loss
from uncollectible accounts/ doubtful accounts or bad debt Expense.
There are two methods of accounting for receivables that are believed to be
uncollectible.
a) The allowance method (reserve method)
b) The direct write-off (direct charge-off method)
A) The allowance method: This method provides in advance for uncollectible
receivables. The advance provision or estimation for future uncollectibility is
made by an adjusting entry at the end of the fiscal year. It reduces the value of
receivables to the amount of cash expected to be realizable from customers in
future. It matches current expense with current revenue.
Example: ABC-company started its operation on January 1, 2001 and chooses to
use the calendar year as its fiscal year. The accounts receivable, has a
balance of Br. 200,000 at the end of the period in total.

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At this period no specific accounts are believed to be wholly uncollectible. But it

seems likely that some will be collected only in part and that others are likely to
become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will
eventually proved to be uncollectible. Then,
i) What is the expected realizable accounts Receivable.
ii) Journalize the entry to record the estimated bad debt expense
iii) what do you think will be the effect of not recording such corrections?
Solution:
i) Net realizable value = Br. 200,000 - Br. 8000 = Br. 192,000
ii) Bad debt expense ........................ Br. 8000
Allowance for uncollectible.................... Br. 8000
The bad debt expense is reported on the income statement but the
allowance for uncollectible is reported on the balance sheet as contra of
accounts receivable.
iii) The effect is understating expenses and overstatement of net income,
capital and asset amounts.
Note that the Br. 8000 reduction in accounts receivable cannot yet be identified
with a specific customer accounts in the subsidiary ledger and should, therefore,
not be credited to accounts receivable but to allowance for doubtful account, which
is a contra asset account.
Write-offs to the allowance account.
When an account is believed to be uncollectible, the amount is transferred from the
allowance for doubtful account to the accounts receivable.

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Self check
1., assume Br. 2000 of the accounts receivable of customer – x of ABC company
has been determined to be uncollectible during 2002. The adjusting entry to write-
off the allowance would be:
2. If an accounts receivable that has been written-off against the allowance account
is later collected, the account should be re-instated by an entry that is exact reverse
of the write-offs entry:
Assume that ABC company’s customer-x has paid the Br.2000. Record the
entry.

Lo4: Prepare reports and file documentation

This is entry to record collection of cash

The accuracy and  authenticity of signatures
sufficiency of  checks against or links to existing customer account
information information
provided includes  completeness of documentation
ensuring:  provision of sufficient documentary evidence (points) to
meet the requirements for establishing a new account

Estimating uncollectibles
The estimates of uncollectibles at the end of the fiscal period is based on past
experiences and forecasts of future business activities. It is based on either:
a) The amount of sales for the entire period (called an income statement
approach) or
b) The amount and age of receivables account at the end of the fiscal period.
(called balancesheet approach).
a) Income statement approach:
Formula:
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Estimated = Net credit sales * Percentage of estimated

Bad debt expense to be uncollectible.
- The amount of this estimate is added to whatever balance exists in the
allowance for doubtful account.
Examples: Assume net credit sales on December 31, 2001 for ABC organization
is Br.200, 000, estimated uncollectible ..................................... 1.5%
Required: Record the entry
Bad debt expenses (200,000 * 1.5%) ............... 3000
Allowance for uncollectible ............................. 3000
c) Balance sheet approach: The process of analyzing the receivable accounts
in terms of the length of time past due is sometimes called aging of the
receivable. The due date of the account is the base point for determining
age. In this method accounts are categorized individually based on the length
of time they have been outstanding and apply the expected percentage of
uncollectible.

Example: At the end of 2001 accounts receivable ledger of ABC company has the
balance of Br.200,000 which can be categorized as follows:
Age group amount Estimated percentage Estimated
amount of
(a) of uncollectible uncollectible
(b) C=a*b

Not yet due Br. 80,000 0.5% Br. 400

1-30 days past due 25,000 1% 250
31-60 days past due 20,000 2% 400
61-120 days past due 60,000 5% 3000

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More than 120 days

past due 15,000 20% 3000
Br.200,000 Br.7050

The Br.7050 amount is the desired balance of allowance account after adjustment;
and to be deducted from accounts receivable to determine the net realizable value.
Assuming that the allowance for uncollectible account had no balance, the entry to
record this new amount is:
Bad debt expense .............................. Br.7050
Allowance for uncollectible ...................... Br.7050
Note that if the allowance account has a debit or credit balance before adjustment,
it must be considered accordingly when the base of the estimation is the balance
sheet approach.
B) Direct write off, method
Under this method of accounting for receivables no valuation of allowance for
accounts receivable is used. The business recognizes no uncollectible account
expense until specific receivables are determined to be worthless. Thus,
receivables are not stated at net realizable value. This method lacks to follow the
matching principle.
The entry to record the write-off the uncollectible account is:
Bad debt expense .............................. xxx
Accounts receivable ............................ xxx
To record the recovery of accounts previously written-off is:
Accounting receivable ............................ xxx
Bad debt expense ...................................xxx and
Cash .........................................xxx
Accounts receivable .......................xxx

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Transaction  manual or electronic and may involve:

processing may be:  accurate data entry of transactions into relevant
database
 accurate completion of customer application forms and
transaction receipts
Customer account details may include Electronic Fund Transfer disputes
 electronic bill and other payments
 fees charged
 insurance
 investment, retirement savings
 payroll:
 member chequeing
 direct debit
 periodical payments
 transfers from other accounts
 visas and other plastic cards.

Required  account details to enable transfer of remaining funds

information to  details of possible complaints relating to the account
transfer or close an  reasons for transfer or closure of accounts
account may
include:
Self check
1) assume Br. 2000 of the accounts receivable of customer – x of ABC
company has been determined to be uncollectible during 2002.

Required : The adjusting entry to write-off the allowance would be:

2) Assume that ABC company’s customer-x has paid the Br.2000. Record the
entry.

Required: prepare the necessary journal entries

3) ABC-company started its operation on January 1, 2001 and chooses to use
the calendar year as its fiscal year. The accounts receivable, has a balance of
Br. 200,000 at the end of the period in total.

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At this period no specific accounts are believed to be wholly uncollectible. But it

seems likely that some will be collected only in part and that others are likely to
become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will
eventually proved to be uncollectible. Then,
i) What are the expected realizable accounts Receivable.
ii) Journalize the entry to record the estimated bad debt expense
iii) what do you think will be the effect of not recording such corrections?
Lo5:- Distribute creditor’s invoices for authorization

Information Sheet: - Accounting System and Internal Control

Effective internal control over sale of goods and related cash collections are
integral parts of the system for handling trade accounts receivable. For effective
handling of receivables the following mechanisms should be applied in a business
organization:
Segregation of duties: This means separation of responsibilities in a business
firm. An individual who is assigned for recording sales and collection of trade
receivables should not be assigned in handling cash receipts or in preparing bank
deposit slips.
Cycle billing:- It is a procedures that insures timely collection of receivables and it
involves billing customer as different time schedules after getting customers
classified on different basis such as geographic location or type of customer.
Accounting Activities for Trade Receivables
In trade receivables the following major activities are treated:
 Recognition of receivables
 Valuation of receivables

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 Disposition of receivables
Recognition of receivables: In recording trade accounts receivables the following
two questions should be answered.
1. At what point in the earning process should a trade accounts receivable be
recorded? And
2, How should the net amount of a trade accounts receivable be measured so
that related asset, revenue and expense accounts will be accounted accurately?

The answer for question No. 1 is: Trade accounts receivable is recorded when sales
are made and title to the goods is transferred to the buyer, i.e., at the point of sale.
It should be noted hat when customer order is received, goods are produced or
when goods are shipped on consignment receivables should not be recorded or
recognized. However, receivables may be recorded for work completed on
construction type contracts. This is congruent with revenue recognition for long-
term project under percentage completion method.

In recording/ recognizing receivables the following factors should be taken into

consideration.
 Trade discount
 Cash/sales discount
 Estimated collection costs for receivables
 Sales returns and allowance
 Allowance for fright-out (Transportation costs)
 Sales tax
 Container deposits (Cash Debit and Credit container deposit liabilities)
Valuation of receivables: It involves determining the net realizable value (present
value) of claims from customers considering the amount due and the estimate of
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the probability that the receivable will be collected. This process recognizes
doubtful account expense or bad debt expense related to non-collectiblity of
receivable. Receivables that will never be collected have a zero value, and the
related revenue will not be realized. Thus, the major objective of estimating this
doubtful account is to prevent an overestimate of assets and revenue in the
accounting period in which the sales is made.

Two accounting methods may be adopted to account for doubtful accounts.

a. Allowance method or reserve method
b. Direct-write-off method or direct charge of method.
c. Allowance method: Under this method, adjustments are made at the end of
each accounting period in order to estimate the amount of receivable that is
probable to be unelectable. An account called allowance for doubtful
account is used and the adjusting entry at the end of the year for this method
is presented as follows:
Doubtful account expense -------------- xxx
Allowance for doubtful account -------------- xxx

The objective of this adjustment is to prevent overstatement of assets and revenues

in the period in which the sales is made.
The net realizable value (carrying amount) of trade accounts receivable which is
reported on the balance sheet is calculated as follows:
NRV of A/R = Accounts - Balance of valuation
(carrying amount) receivable (gross) allowance accounts
(after adjustment)

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The doubtful account expense recorded may be reported in the income statement as
operating expense (most commonly used practice) or as other non-operating
expense or as a deduction from sales.
Illustration: Account balance of accounts receivable for pear trading at
December 31, year 6 is determined to be a positive balance of $60,000. On the
other hand, allowance for doubtful accounts has a credit balance of $ 2,000 before
adjustment and 5% of accounts receivable is estimated to be uncollectible.
Required:
a. Compute the total amount of the allowance for doubtful account
b. Compute the net realizable value of the receivable
c. Record the adjusting entry

Solution: Current provision for doubtful account = (5%) (60000) = 3000

Adjustment amount bad debt expense is: 3000-2000 = 1000

- The net realizable value of the account receivable at the end of the year
(December 31, year 6) is $60,000 - $3,000 = $57,000
- The adjusting entry on December 31, year 6 is:

Doubtful account expense (bad debt expense) ------ 1000

Allowance for doubtful account --------- 1000
Note that when a given customer’s receivable is manifested uncollectible due to
various reasons the account will be written-off as uncollectible and the entry would
be:
Allowance for uncollectible account ------- xxx
Accounts receivable (specific customer) ------ xxx

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This entry has no effect on the net income of the accounting period, on the
receivables account and allowance for uncollectible account.

After accounts receivable is written-off, it is possible for organizations to collect

the mount written-off either in full or partially. This is called recovery or
reinstatement of accounts receivable written-off and the entry would be:
Accounts receivable ----- xxx
Allowance for doubtful account ---- xxx
This is to reverse the written of entry
Cash ---- xxx
Accounts receivable xxx
This is to record the collection of cash
Illustration: Assume that Pear Trading, in the above illustration, write off a
customer’s account that is considered to be uncollectible for $ 670. Assume,
further that $450 cash is collected from the customer whole account had been
written of (670)
Required: Record the necessary entries
Solution: Allowance for doubtful account ---- 670
Accounts receivable ---- 670
This is to record the written-off accounts receivable
Accounts receivable --------- 450
Allowance for accounts receivable -------- 450
To reinstate the customers account

Cash ----------- 450

A/R ----------- 450
To record the collection
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d. Direct written-off method: This is another method of recognizing doubtful

account expense. Under this method there is no provision or estimation of
uncollectibles for receivables and does not record doubtful accounts
beforehand unless specific accounts are identified to be uncollectible. This
method is sometimes called specific write-off method.
It is only upon discovery of specific receivable determined to be uncollectible,
specific customer defaulting, a write-off entry performed to record doubtful
account expense and cancel the balance from accounts receivable account with
the related account in the subsidiary ledger, i.e., the entry to record when a
special customer is found defauted would be:
Doubtful account expense ------ xxxx
Accounts receivable ------ xxxx

Under this method, no adjusting entry is required at the end of he period and a
valuation allowance account is not maintained for doubtful accounts.

Lo6:- Remit payments to creditors

Information Sheet Recover of written-off Accounts Receivable

Under the direct-written-off method, similar to the case in the allowance method,
when an amount is, either partially or in full, collected there are two entries
recorded.
iii) when the amount is recovered in the same period in which it is
written-off; where the doubtful account is not yet closed the entry
would be:

Account receivable ------- xxx

Doubtful account expense ------ xxx

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To record the reversal entry

Cash ------- xxx
A/R ------ xxx
To record the collection of cash
iv) When the amount is recovered in subsequent periods after it is
written-off it is common to credit “doubtful account recovered”
account for the balance recovered. This account is reported
separately in the income statement as other revenue. The journal
entry follows are:
Account receivable ------- xxx
Doubtful account recovered ------ xxx
This is to record the recovered amount after it was written-off in one period and
recovered in another period.
Cash ------- xxx
Account receivable ------ xxx
This is to record the collection.

Even if the direct write-off method appears simple and convenient, it has the
following limitations
a. It makes no matching of doubtful account expense with current period
revenue.
b. It overstates the carrying amount of receivables.

Disposition of receivables
Disposition of receivables are financing transactions that are commonly used as a
source of cash. It shortens the operating cycle and avoids short-run cash flow
problems instead of waiting until customers pay their accounts. Conversation of
accounts receivables into cash may be facilitated through three means:

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 Selling receivable
 Pledging receivables as collateral for loans
 Assigning receivables
Enterprises engaged in the buying of receivables are known as factors, and the
process of selling receivables is called factoring. Factors generally buy receivables
outright, that is, without recourse. Alternatively, factors or other lending
institutions may buy receivables with recourse, or may lend money to the owner of
the receivables under a legal arrangement known as assignment. In such cases
customers generally are instructed to make payments directly to the factors or other
lenders. Factoring is san important source of ready cash in different types of
business enterprises.

A pledge of accounts receivable as a collateral for a loan involves no special

accounting problems. Accounting for the sale and the assignment of account
receivable is described in the following sections.

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Lo7:- Prepare accounts paid report and reconcile balances outstanding

Information Sheet Notes Receivables Recognition, Valuation And Disposition

Sale of Receivables
Factoring of receivables involves selling receivables to a third party. Two parties
are involved with the transactions: Transferor (one who transfers the receivables)
and Transferee (the factor or lending institution).
Sale of receivables can happen in two ways:
Without recourse: This involves the shifting of the risk of credit losses, the effort
of collection and the waiting period that result from the granting of credit to the
purchaser of the receivables. But, sales returns and sales discount, issues are to be
considered by the transferor.

With recourse basis: when receivables are sold with recourse, the seller
(transferor) in effect guarantees the receivables, and the purchaser (transferee) is
reimbursed for failure of debtors to pay the full amount anticipated at the time of
sale.
This type of transfer is accounted and reported as sale of accounts receivable only
when all of the following three conditions are met:

 The transferor surrenders control of the future economic benefits of the

receivables; i.e., the transferor does not retain the option to purchases the
receivable later.
 The transferor can estimate the collectibility of receivables in the future.
 The transferee cannot require the transferor to purchase the receivables.

If any of the above condition is not met, the transferor is considered as a secured
loan; i.e., borrowing using receivables as a collateral. Hence, the amount of the

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proceeds from the transferor is reported as a liability resulting from a borrowing

transaction. In which case, the receivable account remains on the transferor’s
record. Thus, the only accounting entry required is to record the liability and
interest expense involved.
Accounting treatment: when receivables transferred are considered as sales
transaction, the following accounts treatments, using the illustration given, are
occur.
Illustration: Assume that account receivable with a carrying amount of $16,800 is
sold for $22,600. If the face amount of the receivable is $23,000, the transaction
would be recorded as follows:
Cash ----- 22600
Allowance for doubtful account (23000-16800) ---- 6200
Accounts receivable ------------
23000
Gain on sale of A/R (22600-16800) -----
5800

Associated bad debt expenses in subsequent periods are to be recorded by the

factor. The proceeds received from sale of receivables and the amount of
transferred receivables that remain uncollected at the end of the accounting period
should be disclosed in notes to the transferor’s financial statements.
Assignment of receivables: This involves using receivables and collateral for
borrowing. The assignor is the borrower whereas the assignee is the lender.
Assignment of accounts receivables requires executing the following accounting
activities into the assignor’s records:

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v) Amount of assigned accounts receivable would be recorded as “assigned

accounts receivable” being removed from “accounts receivable”
account
vi) Liability is recorded for the principal amount of promissory note singed
and cash is recorded for the amount of net proceeds received after the
initial interest charge is deducted. The interest fee deducted is to be
recorded as interest expense.
vii) Periodical cash collections from assigned accounts receivable are
recorded. These are immediately accompanied with payment to the
assignee for periodical interest charges on the unpaid balance and the
principal amount of the notes payable.
viii) Upon settlement of the note in full, when notes payable has zero balance,
balance outstanding on “assignee accounts receivable” is converted into
“accounts receivable”
To illustrate, assume that on January 2, year 1, Admas Company
assigned receivables of $50,000 to Finco, Inc… and received $45,000,
less a fee of 2% on the amount advanced. Interest at 1% of the unpaid
balance of the loan was to be paid monthly.
The journal entries required in the assignor’s accounting records for the problem
given above are summarized as follows.
January 1, Year1: Assigned account receivable ----- 50,000
Accounts receivable ----- 50,000
Cash (45,000-900) ------ 44,100
Interest expense ------- 900
Notes payable to FincoInc 45,000

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The above entry is for the assignment of accounts receivable by the company
(50,000) remitted 90% (45000X100%) of receivables, less 2% fee ($45,000X
0.02= $900)
50.000
Assume further that on January 31, year 1, the company received $30150 from
customers and paid the amount to Finco Inc including interest charges.
January 31, year1” Cash ------ 30150
Assigned account receivable ---- 30150
To record cash collection from assigned A/R
Notes payable to Finco, Inc 29700
Interest expense ($45,000X0.01) 450
Cash ----- 30150
This entry is to record payment to the assignee interest expense and retirement of
the loan.
Finally assuming that Adams Company collected 17,000 on February 28 from the
assigned accounts receivables and paid the balance owed to FincoInc 1% interest
on153000 unpaid loan all the related records, are shown below
Cash ------ 17,000
Assigned accounts receivable ---- 17,000
This is to record cash collection from assigned accounts receivable
Computations

Balance due on N/P ---- $45,000

Interest exp (1%X45,000) 450

2ndCollection
month from assigned N/R 30150
Computations:
Less: Interest expense 450
Remaining amount to settle
Balance due on N/P (45,000-30150) = 15300
Interested
Principalexp (1%X15300)
amount of N/P 153 297000

Amount collected from assigned receivables 17000

Interest expense 153
Full settlement of notes payable 15453
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Notes payable –FincoInc 15300

Interest expense 153
Cash 15453
This is to record payment to the assignee: Interest expense and full retirement of
the loan.
On February 28, year1, the balance of ‘notes payable’ is null, thus, journal entry is
required to covert or transfer balance in ‘assigned accounts receivable’ to account
receivable as is show (T/account)-the remaining balance is $28/50 Hence the last
entry would be from the ledger

Accounts receivable ------ 2,850

Assigned accounts receivable 2850

Assigned A/R
Jan 1. 50,000 30150 Jan 31
17000 Feb 28
2850
Self-Test
6. What is meant by valuation of receivables?
7. Describe a cycle billing system and state its advantage.
8. At what point are trade receivables recorded? Are shipments to consignees
recorded as receivables?
9. What meant by disposition of receivable?

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