6 cash and receivables accounting school · zhongnan university of economics & law ntermediate...

6 Cash and Receivables

Accounting School · Zhongnan University of Economics & Law

ntermediate Accounntermediate Accountingting

I

中级会计学

1. Accounting for cash 1. Accounting for cash

Intermediate Accounting 6 Cash and Receivables

Cash is the resources on hand to meet

planned expenditures and emergency

situations.

Components of Cash vs. non-componentsComponents of Cash vs. non-componentsComponents of Cash vs. non-componentsComponents of Cash vs. non-components


Cash

Included in Cash Excluded from Cash

• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts

• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps

Cash and Cash Equivalents Cash and Cash Equivalents

Many companies report investments in very short-term,

interest-earning securities as cash equivalents in the balance sheet.

Many companies report investments in very short-term,

interest-earning securities as cash equivalents in the balance sheet.


Cash ManagementCash Management


Control Over ReceiptsControl Over Receipts

Immediately count the receipts (by the person opening the mail or the sales person using the cash register).

Record daily all cash receipts in the accounting records.

Deposit daily all receipts in the company’s bank account.

Cash ManagementCash Management


Control Over PaymentsControl Over Payments

Make all payments by check (except petty cash items) so that a record exists for every company expenditure.

Authorize and sign all checks only after an expenditure is verified and approved.

Periodically reconcile the cash balance in the bank statements with the company’s accounting records.

Petty CashPetty Cash

A petty cash system is a cash fund created to allow a company to pay for small amounts that might be impractical or impossible to pay by check.

A petty cash system is a cash fund created to allow a company to pay for small amounts that might be impractical or impossible to pay by check.

The entry to record the establishment of the fund is:

Petty Cash 500

Cash 500

The petty cash account is neither debited nor credited again unless the fund size is to be increased or decreased.


Petty CashPetty Cash

As money is paid from the fund, prenumbered vouchers are prepared to document the expenditures but no journal entries are made until the fund is reimbursed.

At the time of reimbursement, appropriate expense accounts are debited

and the cash account is credited as follows : Office Supplies Expense 120

Postage Expense 150

Cash 370


2. Bank Reconciliation2. Bank Reconciliation

A company prepares a monthly bank reconciliation in order to analyze and reconcile the differences between the cash balance on the monthly bank statement and the company's accounting record of the proper cash balance.

A company prepares a monthly bank reconciliation in order to analyze and reconcile the differences between the cash balance on the monthly bank statement and the company's accounting record of the proper cash balance.


Common causes of differencesCommon causes of differences


Outstanding checks Deposits in transit Charges made by the bank Deposits made directly by the

bank Errors

Procedures in preparing a bank

reconciliation Procedures in preparing a bank

reconciliation


① Compare the deposits listed on the company's records with the deposits on the bank statement;

② Compare the checks listed in the company's records with the checks shown on the bank statement;

③ Identify any deposits or charges made directly by the bank that are not included in the company's records;

④ Determine the effect of any errors; ⑤ Complete the bank reconciliation

Balance per books.............. $3,950 Additions to book balance:Direct deposit...................… 450 Interest.............................… 71 Total............................… $4,471

Deductions from book balance:Service charge...........… $ 7 NSF check.................… 100 Error in recording check 180 287 Adj. book balance $4,184

Balance per bank.... $4,135 Additions to bank balance:Deposits in transit.... 500 Total................... $4,635

Deductions from bank balance:Outstanding checks: 191....... $251 192....... 125 195....... 75 451 Adj. bank balance $4,184


Lee CorporationBank Reconciliation

July 31, 2005

Lee CorporationBank Reconciliation

July 31, 2005

3. Special topics3. Special topics 3. Special topics3. Special topics

Electronic funds transfer systems

The use of computer systems to transfer funds between parties without the use of checks, is increasingly being used by banks to process the large number of cash transactions generated by large companies.

Because fewer physical source documents (in the form of checks) are available to substantiate such transactions, the importance of internal controls, such as bank reconciliations, is even greater.

The use of computer systems to transfer funds between parties without the use of checks, is increasingly being used by banks to process the large number of cash transactions generated by large companies.

Because fewer physical source documents (in the form of checks) are available to substantiate such transactions, the importance of internal controls, such as bank reconciliations, is even greater.


Special topicsSpecial topics Special topicsSpecial topics

Compensating balances

Banks may require a portion of any amount loaned to remain on deposit with the bank for the duration of the loan period. These required deposits are called compensating balances.

SEC requires that compensating balances be separately reported on a company's balance sheet if the compensating balances are legally restricted. If they are not legally restricted, they are disclosed in the notes to the financial statements.

Banks may require a portion of any amount loaned to remain on deposit with the bank for the duration of the loan period. These required deposits are called compensating balances.

SEC requires that compensating balances be separately reported on a company's balance sheet if the compensating balances are legally restricted. If they are not legally restricted, they are disclosed in the notes to the financial statements.


4. Receivables4. Receivables4. Receivables4. Receivables

Receivables are all claims against other entities. They are usually settled in cash.

Trade receivables: Receivables arising from normal operating activities.

Nontrade receivables: All receivables arising from activities other than normal operations.


Trade ReceivablesTrade Receivables

Trade ReceivablesTrade Receivables

Revenue Recognition and

Valuation• Normal

circumstances• Right of return• Valuation

• Cash discounts• Sales returns and allowances• Uncollectible accounts• Financing arrangements

Recording and Reporting Accounts

Receivable• Interest-bearing• Non-interest-

bearing• Discounted

Recording and Reporting Notes

Receivable


Accounts receivable Accounts receivable


Cash (sales) discountsCash (sales) discounts

. A cash (sales) discount is offered to

customers to encourage prompt payment of bills

A cash (sales) discount is offered to

customers to encourage prompt payment of bills

Accounting for Cash (sales) discountsAccounting for Cash (sales) discounts


Gross price method Gross price method

Assume on March 15, $1,000 of merchandise is sold on account. The terms of the agreement are 2/10, n/30. The firm uses the gross method for record sales on account.

Entry on date of sale:Accounts Receivable 1,000

Sales 1,000

ContinuedContinuedContinuedContinued



Gross price method Gross price method

If paid within the discount period:Cash 980Sales Discounts 20

Accounts Receivable 1,000

If not paid within the discount period:Cash 1,000




Net price method Net price method

ContinuedContinuedContinuedContinued

This time, assume that all sales on account are recording using the net method. Again, the terms of the agreement are 2/10, n/30.

At the point of sale (March 15):Accounts Receivable 980

Sales 980



Net price method Net price method

If paid within the discount period:Cash 980

Accounts Receivable 980

If not paid within the discount period:Cash 1,000

Sales Discounts Not Taken 20Accounts Receivable 980

Sales Returns and AllowancesSales Returns and Allowances


Felton Company sold $1,000 of merchandise. When delivered, it was determined that the wrong color had been sent. The customer agrees to keep the merchandise for a reduction in price of $100. What are the journal entries?

Sales entry:Accounts Receivable (Cash)....… 1,000 Sales..................................…. 1,000

Sales allowance entry:Sales Returns and Allowances..… 100 Accounts Receivable (Cash).. 100

Sales Returns and AllowancesSales Returns and Allowances


Sales entry:Accounts Receivable (Cash)....… 1,000 Sales..................................…. 1,000

Felton Company sold $1,000 of merchandise. One week later, when it was delivered, $100 in merchandise (cost, $60) was the wrong color. With Felton’s approval, it was returned. What are the journal entries?

Sales return entry:Sales Returns and Allowances..… 100 Accounts Receivable (Cash).. 100Inventory………………………… 60 Cost of Goods Sold…………. 60

6. Valuation of accounts receivable for

uncollectible accounts 6. Valuation of accounts receivable for

uncollectible accounts


Bad debt occur when customers do not pay for items or services purchased on credit.

Bad debts are uncollectible accounts receivable. Bad Debt Expense is reported as a selling or general and

administrative expense. Accounts receivable are reported on the balance sheet at

their net realizable value.

Accounting for Uncollectible Receivables (Direct Method)

Accounting for Uncollectible Receivables (Direct Method)


Write Off:

Bad Debts Expense……………. 400

Accounts Receivable………. 400

To write off an uncollectible account.

This entry is made when the account has been determined uncollectible. Since this determination was made after the

period in which the sale takes place, the matching principle is violated. This method is not accepted under GAAP.

This entry is made when the account has been determined uncollectible. Since this determination was made after the

period in which the sale takes place, the matching principle is violated. This method is not accepted under GAAP.

Accounting for Uncollectible Receivables (Estimated Bad Debts Method)

Accounting for Uncollectible Receivables (Estimated Bad Debts Method)


Bad debts can be estimated based on sales or on accounts

receivable.

Bad debts can be estimated based on sales or on accounts

receivable.

Estimated Bad Debts MethodEstimated Bad Debts Method


1. Relationship to sales (income statement approach):

a. Percentage of salesb.Percentage of net credit sales

2. Relationship to accounts receivable (balance sheet approach):

a.Percentage of outstanding accounts receivable

b.Aging of accounts receivable

Estimated Bad Debts MethodEstimated Bad Debts Method


In this method, an estimate of the total uncollectible accounts is made at the end of the period, and an expense is recognized.

Bad Debts Expense………………….. 2,000

Allowance for Doubtful Accounts.. 2,000 To record estimated uncollectible accounts.

When the account is then determined to be uncollectible, the write-off entry is:

Allowance for Doubtful Accounts……... 400 Accounts Receivable……………… 400 To write off an uncollectible account.

7. Generating immediate cash from

accounts receivable 7. Generating immediate cash from

accounts receivable


There are three basic forms of financing agreements to

obtain cash from accounts receivable.

There are three basic forms of financing agreements to

obtain cash from accounts receivable.

PledgingAssigningFactoring

PledgingAssigningFactoring

Accounts Receivable Financing AgreementsAccounts Receivable Financing Agreements

Retain Risks and Benefits of Ownership

Pledge

(Collateral for Loans)

Transfer Some Risks and Benefits of

Ownership

Assign

(Specific Receivables with Recourse)

Transfer Risks and Benefits of

Ownership

Factor

(Sale without Recourse)


PledgingPledging

When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing

activities remain its responsibility.

When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing

activities remain its responsibility.


When a company assigns its accounts receivable to a financial

institution, it enters into a lending agreement with the

institution to receive cash on specific customer accounts.

When a company assigns its accounts receivable to a financial

institution, it enters into a lending agreement with the

institution to receive cash on specific customer accounts.

Assignment of Accounts ReceivableAssignment of Accounts Receivable


When a company factors its accounts receivable, it sells individual accounts

to a financial institution (called a factor).

When a company factors its accounts receivable, it sells individual accounts

to a financial institution (called a factor).

Factoring of Accounts ReceivableFactoring of Accounts Receivable


Sal

e of

Acc

ount

s R

ecei

vabl

e

Accounts Receivable Established

Goods and Services Provided

CustomersCustomers CompanyCompany

FactorFactorFactorFactor

Cas

h fr

om F

acto

ring

A

ccou

nts

Rec

eiva

ble

Pay

men

t of

Acc

ount

s R

ecei

vabl

e

Factoring of Accounts ReceivableFactoring of Accounts Receivable


Lee Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on the gross amount of

factored accounts receivable.

Lee Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on the gross amount of

factored accounts receivable.

FactoringFactoring

Cash 60,000Receivables from Factor 8,000Factoring Expense 12,000


($80,000 x .90) - $12,000$80,000 x 0.10$80,000 x 0.15


8. Notes Receivable8. Notes Receivable


A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

Notes ReceivableNotes Receivable


They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments.

They usually involve interest, requiring the separation of the receivables into its principal and interest components.

Notes receivable generally have two attributes that are not found in accounts receivable:

Notes receivable generally have two attributes that are not found in accounts receivable:


Interest-BearingInterest-Bearing

Received a $5,000, 60-day, 12% note on October 1, 2004.

Notes Receivable 5,000Sales 5,000

Received maturity value on December 1, 2004.

Cash 5,100Notes Receivable 5,000Interest Revenue 100

$5,000 x 0.12 x 60/360



Non-Interest-BearingNon-Interest-Bearing

Received a $5,100, 60-day, non-interest-bearing note on October 1, 2004.

Notes Receivable 5,100Interest Revenue 100Sales 5,000

Received maturity value on December 1, 2004.

Cash 5,100Notes Receivable 5,100


Notes Receivable DiscountedNotes Receivable Discounted

On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from

the customer on August 1, is for 90 days, has a face value of $5,000, and

carries an interest rate of 12%.

On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from

the customer on August 1, is for 90 days, has a face value of $5,000, and

carries an interest rate of 12%.


1. Face value of note $5,000.00

2. Interest to maturity($5,000 x 0.12 x 90/360) 150.00

3. Maturity value of note $5,150.00

4. Discount ($5,150 x 0.14 x 60/360) (120.17)

5. Proceeds $5,029.83

6. Accrued interest revenue: $50

7. Book value of note ($5,000 + $50) (5,050.00)

8. Loss from discounting of note $ (20.17)




October 30, 2004

Notes Receivable Discounted 5,000.00Notes Receivable 5,000.00

Cash 5029.83Loss from Discounting of Note 20.17

Notes Receivable Discounted 5,000.00Interest Receivable 50.00

August 31, 2004

Interest Receivable 50.00Interest Revenue 50.00



Assume instead that on November 3, 2004 the bank

notified Kasper that the note had not been paid and also charged

Kasper a $10 fee.

Assume instead that on November 3, 2004 the bank

notified Kasper that the note had not been paid and also charged

Kasper a $10 fee.

Notes Receivable Dishonored 5,160Notes Receivable Discounted 5,000

Notes Receivable 5,000Cash 5,160


The EndThe End


6 cash and receivables accounting school · zhongnan university of economics & law ntermediate...

Documents