Cash and Receivables

Sid Glandon, DBA, CPAAssistant Professor of

Accounting

Cash and Cash Equivalents Cash

coin and currency demand deposits

Cash equivalents Short-investments (90 days) Money market funds Treasury bills Commercial paper

Internal Controls Separation of duties Checking accounts Petty cash funds Physical protection of cash Protection of the accounting

information system records Bank reconciliations

Bank Reconciliation Three steps

Reconciliation per bank Reconciliation per book

Adjusting journal entries

Items Not Considered Cash Overdraft without the right of

offset Restricted cash accounts Investments Post dated checks from customers Loans to employees

Restricted Cash Not available to cover current

liabilities Bond sinking funds Compensating balances

Receivables Accounts receivable (Trade) Notes receivable Nontrade receivables

Advances to officers and employees Advances to subsidiaries Deposits Dividends and interest receivable Claims against others

Initial Valuation Converted into cash within operating cycle Initial valuation at the amount expected to

be received Trade discounts

Selling price less than normal list price Cash or sales discounts

Incentive for paying invoice on time gross method net method

Subsequent Valuation

Sales Returns Uncollectible accounts

Allowance method Balance sheet approach Income statement approach

Balance Sheet Approach Prepare a schedule of agee accounts

receivable Determine amount or percentage that

will likely not be collected Adjust the allowance account to reflect

the computed amount by Journalize

Bad debt expense-debit Allowance for doubtful accounts-credit

Journal Entry: Balance Sheet Approach

ACCOUNT DEBIT CREDITBad debt expense XXX Allowance for doubtful accounts XXXTo adjust the allowance for doubtful accounts

Income Statement Approach Determine net credit sales Calculate estimated percentage of

bad debt expense against net credit sales

Journalize Bad debt expense-debit Allowance for doubtful accounts-

credit

Journal Entry:Income Statement Approach

ACCOUNT DEBIT CREDITBad debt expense XXX Allowance for doubtful accounts XXXTo record bad debt expense for the year

Transactions Using the Allowance for Doubtful Accounts

Beginning balance Write-off of uncollectible accounts Reinstate accounts previously

written-off Analyze ending balance and adjust

based on the analysis of year end aged accounts receivables

ACCOUNT DEBIT CREDITAllowance for doubtful accounts XXX Accounts receivable XXXTo write-off an uncollectable account

ACCOUNT DEBIT CREDITAccounts receivable XXX Allowance for doubtful accounts XXXTo reinstate an account previously written-off

ACCOUNT DEBIT CREDITCash XXX Accounts receivable XXXTo record the collection of the reinstated account

Balance Sheet Presentation

Current Assets:Cash XXXAccounts receivable XXXLess allowance for doubtful accounts XXXNet realizable receivables XXX Total current assets XXX

ASSETS

Recognition of Notes Receivable

Interest-bearing notes Note issued at face value

Noninterest-bearing notes Zero-interest-bearing notes

Interest is Imputed and the note is sold at a discount

Financing with Receivables

Secured borrowing Assigned or pledged

Sales of receivables Factoring Securitization

Sales without recourse Sales with recourse

Discounting a Note

Sale of note to a financial institution

Discount rate (banks market interest rate) is applied to the maturity value

The seller receives cash of the maturity value less the discount