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C10 Lecture Notes

Freight terms determine whether freight charges are paid by the buyer or seller. Accounts receivable arise from credit sales and are initially recorded at the invoice amount, later adjusted to the estimated net realizable value. Estimating net realizable value involves deducting allowances such as for freight, returns, discounts, and doubtful accounts. Doubtful accounts can be estimated using aging of accounts, a percentage of accounts receivable, or a percentage of credit sales. Impaired receivables are identified and valued individually or collectively.

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42 views3 pages

C10 Lecture Notes

Freight terms determine whether freight charges are paid by the buyer or seller. Accounts receivable arise from credit sales and are initially recorded at the invoice amount, later adjusted to the estimated net realizable value. Estimating net realizable value involves deducting allowances such as for freight, returns, discounts, and doubtful accounts. Doubtful accounts can be estimated using aging of accounts, a percentage of accounts receivable, or a percentage of credit sales. Impaired receivables are identified and valued individually or collectively.

Uploaded by

Jonathan Navallo
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Freight Collect – freight charge already paid

CHAPTER 10: by the buyer


ACCOUNTS RECEIVABLE
Freight Prepaid – freight charge already paid
Receivables – financial assets that represent a by the seller
contractual right to receive cash/financial asset
from another entity.
Trade Receivables – arising from services in
the ordinary course of the business;
TERMS RELATED TO SALES
Expected to be realized w/in the normal DISCOUNT
operating cycle or 1 year, whichever is longer,
classified as current assets Cash Discount – reduction from an invoice
price by reason of prompt payment
 Accounts Receivable – open accounts,
not supported by notes; Sales Discount – part of the buyer
o Initially at face/original invoice Purchase Discount – part of the seller
amount
o Subsequently at net realizable
value/amortized cost
METHODS OF RECORDING CREDIT SALES
 Notes Receivable – supported by formal
promise to pay in the form of notes 1. Gross Method – account receivables and
sale are recorded at gross amount of the
Nontrade Receivables – claims arising source invoice
other than sale of merchandise or services
2. Net Method - account receivables and sale
are recorded at net amount of the invoice
(invoice price - cash discount)
ESTIMATING THE NET REALIZABLE
VALUE
Deduct… ACCOUNTING FOR BAD DEBTS
1. Allowance for freight charge 1. Allowance Method – recognition of a bad
2. Allowance for sales return debt loss if the accounts are doubtful in
3. Allowance for sales discount collection
4. Allowance for doubtful accounts
2. Direct Write-off Method – recognition of
bad debt loss only when accounts are proved to
be worthless or uncollectible
TERMS RELATED TO FREIGHT
CHARGE
DOUBTFUL ACCOUNTS IN THE INCOME
FOB Destination
STATEMENT
 Ownership of goods vested in the buyer
1. Distribution Cost – collection of accounts
upon receipt
under the charge of the sales manager
 Seller responsible for freight charge up to
point of destination 2. Administrative Cost – collection of
accounts under the charge of an officer other
FOB Shipping Point than the sales manager
 Ownership of goods vested in the buyer
upon shipment
 Buyer responsible for freight charge up METHODS FOR ESTIMATING
to point of destination DOUBTFUL ACCOUNTS
STATEMENT OF FINANCIAL POSITION
APPROACH
Violates matching principle
1. Aging the accounts receivable

 More accurate and scientific computation


of allowance for DA and A/R
 Accounts are classified into not due/past
due
 Time consuming
2. Percent of accounts receivable

 Present A/R at estimated net realizable


value
 May not be reliable

INCOME STATEMENT APPROACH


3. Percent of sales

 Eliminate extra work of making a record


of cash sales and credit sales, but
unsatisfactory when there is fluctuation
of the two
 Proper matching of cost against revenue
 May not show estimated realizable value
 Resulting amount is ALREADY the
amount of DA expense

IMPAIRMENT – accounts receivable


considered uncollectible with objective
evidence, and can be measured reliably
1. Individually significant A/R – impaired
separately
2. Not individually significant A/R –
collectively assessed
3. A/R not considered impaired – included
w/ other A/R and collectively assessed

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