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    Magarsaa Hirphaa
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    1. The document discusses the nature and classification of liabilities as either current or long-term. Current liabilities are expected to be paid within one year, while long-term liabilities are not expected to be paid within one year. 2. It also discusses two methods for accounting for uncollectible receivables: the direct write-off method and the allowance method. The direct write-off method records bad debt expense when an account is written off as uncollectible, while the allowance method estimates bad debts at the end of each period. 3. Additionally, it covers the nature of notes receivable, including their key characteristics, and provides examples of accounting entries related to notes receivable for both

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    1. The document discusses the nature and classification of liabilities as either current or long-term. Current liabilities are expected to be paid within one year, while long-term liabilities are not expected to be paid within one year. 2. It also discusses two methods for accounting for uncollectible receivables: the direct write-off method and the allowance method. The direct write-off method records bad debt expense when an account is written off as uncollectible, while the allowance method estimates bad debts at the end of each period. 3. Additionally, it covers the nature of notes receivable, including their key characteristics, and provides examples of accounting entries related to notes receivable for both

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    3K views17 pages

    Manage Overdue Customer Account

    Uploaded by

    Magarsaa Hirphaa
    1. The document discusses the nature and classification of liabilities as either current or long-term. Current liabilities are expected to be paid within one year, while long-term liabilities are not expected to be paid within one year. 2. It also discusses two methods for accounting for uncollectible receivables: the direct write-off method and the allowance method. The direct write-off method records bad debt expense when an account is written off as uncollectible, while the allowance method estimates bad debts at the end of each period. 3. Additionally, it covers the nature of notes receivable, including their key characteristics, and provides examples of accounting entries related to notes receivable for both

    Copyright:

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    of 17

    RIFT VALLEY UNIVERSITY MARI GORO CAMPUS

    DEPARTMENT OF ACCOUNT & BUDGET SUPPORT LEVEL-IV

    Unit of Competence: -MANAGE OVERDUE CUSTOMER


    ACCOUNTS
    Module Title:- MANAGING OVERDUE CUSTOMER
    ACCOUNTS
    LG Code: BUF ACB415 0812
    TTLM Code: BUF ACB4M 15 0812
     
    BY MEGERSA HIRPHA
    1.1. Distinguishing current liabilities from long term liabilities
    WHAT IS LIABILITIES?
    Definition – A liability is a probable future payment of assets,
    services that a company is presently obligated to make as a
    result of past transactions or events.
    This definition includes three crucial factors.
    1. Due to a past transaction or event
    2. Present obligation
    3. Future payment of assets or services.
    2. Classification of Liabilities.
    Information about Liabilities is more useful when the balance
    sheet identifies them as either current or long – term. Decision
    makers need to know when obligations are due so they can plan
    for them & take appropriate action
    a) Current Liabilities- also called short term liabilities
    are obligations expected to be paid using current assets
    or by creating other current liabilities – current
    liabilities are due with in one year or the company’s
    Operating cycle, which ever is longer.
    Examples:
     Accounts Payable
     Short term notes payable
     Wages Payable
     Lease Liabilities
     Taxes Payable
     Un earned revenues
    Current Liabilities are different for different companies.
    b) Long – Term Liabilities- A company’s obligation,
    not expected to be paid with in one year (or a longer
    operating cycle) are reported as long term liabilities
    Long – term Liabilities can include long –
     Long-term notes payable,
     warranty liabilities
     Mortgage payable
     Bonds Payable.
    They are some times reported on the balance sheet
    in a single long – term liabilities total.
    Many liabilities can be either current as long term
    depending on their characteristics.
    Receivables
    The term receivables includes all money claims against
    other entities, including people, business firms, and other
    organizations.
    Classifications of Receivables
    a) Accounts receivable are normally expected to be collected
    within a relatively short period, such as 30 or 60 days.
    b) Notes receivable are amounts that customers owe for
    which a formal, written instrument of credit has been issued.
    c) Other receivables expected to be collected within one year
    are classified as current assets. If collection is expected
    beyond one year, these receivables are classified as non-
    current assets and reported under the caption Investments
    Describe the nature of and the accounting for
    uncollectible receivables.
    Companies often sell their receivables to other
    companies. This transaction is called factoring the
    receivables, and the buyer of the receivables is called a
    factor.
    Uncollectible Receivables
    There are two methods of accounting for receivables
    that appear to be uncollectible: The direct write off
    method records bad debt expense only when an account
    is judged to be worthless. The allowance method
    records bad debt expense by estimating uncollectible
    accounts at the end of the accounting period.
    Describe the direct write-off method of
    accounting for uncollectible receivables.
    Direct Write-Off Method
    On May 10, a $4,200 accounts receivable from
    FH CO. has been determined to be uncollectible.

    May 10 Bad Debt Expense 4 200 00


    Accounts Receivable—FH CO. 4 200 00
    The amount written off is later collected on
    November 21.

    Nov. 21 Accounts Receivable—FH CO. 4 200 00


    Bad Debt Expense 4 200 00
    21 Cash 4 200 00
    Accounts Receivable—FH CO. 4 200 00
    Describe the allowance method of
    accounting for uncollectible receivables.
    Allowance Method
    On December 31, ABC Company estimates that a
    total of $40,000 of the $1,000,000 balance in his
    company’s Accounts Receivable will eventually
    be uncollectible.

    Dec. 31 Bad Debt Expense 40 000 .00


    Allowance for Doubtful Accounts 40 000. 00
    (Uncollectible accounts
    estimate.)
    Net Realizable Value
    The net amount that is expected to be collected,
    $960,000 ($1,000,000 – $40,000), is called the net
    realizable value (NRV). The adjusting entry
    reduces receivables to the NRV
    On January 21, John Parker’s account totaling
    $6,000 is written off because it is uncollectible .

    Jan. 21 Allowance for Doubtful Accounts 6 000 . 00


    Accounts Receivable—John Parker 6 000 . 00
    (To write off the uncollectible account.)
    Estimating Uncollectibles
    The allowance method uses two ways to
    estimate the amount debited to Bad Debt
    Expense.
    1. Estimate based on a percentage of sales.
    • A straight percentage calculation of sales
    2. Estimate based on analysis of receivables.
     The longer an account receivable is outstanding,
    the less likely that it will be collected. Basing
    the estimate of uncollectible accounts on how
    long specific amounts have been outstanding is
    called aging the receivables.
    Note Receivable
    A note receivable, or promissory note, is a written
    document containing a promise to pay:
     a specific amount of money (face amount)
     on demand or at a definite time
    to an individual or a business (payee), or to the
    bearer or holder of the note.
    The one making the promise is called the maker.
    The date a note is to be paid is called the due date
    or maturity date.
    Characteristics of, and accounting for Notes Receivable
    Accounting for Notes Receivable

    Received a $6,000, 12%, 30-day note


    dated November 21, 2008 in settlement
    of the account of W. A Bunn Co.
    Nov. 21 Notes Receivable 6 000 00
    Accts. Receivable 6 000 00
    Received 30-day, 12%
    note dated November 21,
    2008.

    13
    On December 21, when the note matures,
    the firm receives $6060 from W. A. Bunn
    Company ($6,000 plus $60 interest).

    Dec. 21 Cash 6 060 00


    Notes Receivable. 6 000 00
    Interest Revenue* 60 00
    Received principal and
    interest on matured note.

    *$6,000 x 12% x 30/360 = $60


    14
    A 90-day, 12% note dated December 1, 2008,
    is received from Crawford Company to settle
    its account, which has a balance of $4,000.

    2008
    Dec. 1 Notes Receivable. 4 000 00
    Accts. Receivable. 4 000 00
    Accepted note in
    settlement of account.

    15
    9-6
    On March 1, 2009, $4,120 is received for the
    note ($4,000) and interest ($120).

    2009
    Mar. 1 Cash 4 120 00
    Notes Receivable. 4 000 00
    Interest Receivable 120 00

    Collected note and


    accrued interest.

    ($4,000 x 12% x 30/360).

    16
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