looking at receivables the term receivable refers to amounts due from

individuals and companies

these are claims the company expects to collect

cash the types of receivables include

account receivables, these receivables are generated

when we sell goods or services to customers on account. The other type is note

receivables. These are claims for which formal instruments of credit

um is issued as proof of the debt, they

typically require interest to be paid

on the balance owed, so in essence

a note is a formal signed agreement were as an account is typically a verbal agreement

in essence a note typically will bear interest whereas

an account will not. Now you can have an accounts that bare a late fee or a late penalty

for example your power bill, it's an account receivable from you as the

customer

but the power company can charge a late fee and

that's what that one percent is, only if you are late it's not an actual

interest its a late penalty and then there are other tax receivables and these are receivables

that do not result

sell of goods or services. They are typically outside the normal scope of

the business and include items such as interest receivable,

income tax refunds, advances to employees, dividends receivable

on investments, etcetera. So there are other types of receivables the primary of course is

accounts and

notes but the other receivables do exist

interest receivable is a big one. If you have note receivable odds are you gonna

have interest that has accrued.

So we've defined the receivable, now

how do we handle the creation of a receivable in our accounting records

so again let's start by looking at just accounts receivable

the first few lectures will be only on account receivable and then we will switch

gears

and we will look at notes. Let's look at how we would record a few transactions

as there relate to accounts receivable

so on June 1st we sold merchandise to XY company on account

for five thousand terms 2/10 n/30

well a couple of notes here, one on account means we did not receive cash

and we also know its own account because of credit terms

now let's review credit terms you did have this in the last class but let's talk about

a little bit

terms 2/10, n/30 means there's

a 2 percent discount if our customer pays us within 10 days

otherwise the net is due in 30 now that means nothing to us at the moment but

when we

receive the payment from our client then it will make a difference

quite possibly. So how would we record this June first entry? Well first we

would debit

our accounts receivable. Accounts receivable

again is something that is owed from the customer we sold them goods or perform

a service in this case we sold merchandise

sold goods and they owe us money. We expect to collect that money in

cash so we're gonna debit accounts receivable. Now post reference remember

post reference is for when we post to the ledger

it is included here we're actually not going to post

these transactions. We're simply journaling so this column is for

reference it will not be used in this example.

Now we're debiting our accounts receivable for the full amount

the customer owes us, the five thousand, remember the two percent

does not come into play this case until we physically

do the collection. Now what are we gonna credit?

Well we sold merchandise so we have received

revenues we're going to credit sales or sales revenue

and again our credit will be five thousand. Now I want to remind everyone of

good journal form, I expect everyone in this class to use proper journal form.

Proper journal form is the debit goes first

just as we have it here followed by the credit and the credit is always

indented, so noticed how this appears, this is good journal form

I do deduct points if you do not use journal form

and then you would leave, if we had another transaction to do, we would leave

a blank line

start transaction. Luckily we're only looking at one here

but keep this in mind, good journal form is important. Alright, let's move on June 3rd

XY company returns 750 of the

merchandise so we have a return here

we basically are going to reverse our sales

entry with one slight difference. Remember when we have a return of a sale we tracked

those returns and we call the account sales returns

and allowances. Sales returns and allowances is a contra

account it reduces our sales and again we're debiting that account

for the amount of the returned goods 750

now what do we need to credit? Well if our customer returns the goods they no

longer owe us

so we're going to credit their accounts

receivable to reduce the amount they owe

750. So we've looked at creating

a receivable, we've looked at one possibility once a receivable is

created

we may accept a return to return reduces

our receivable, reducing the amount that our customer actually

owes us now let's move to June 9th now on June 9th we collected the amount due from

XY company from the June 1st sale

so this is one possibility with a receivable once we have sold the goods

we can either except a return and reduce receivable

or we can show the collection of the receive

where customer has physically paid us well let's talk about that

what happens when we receive the payment

well our company is actually gaining cash we're receiving a payment our

cash is going up.

How do we take cash up? We debit the account, so we are going to debit our cash account

showing that increase in cash and we're gonna debit for the amount that we

received

now here's where we have to be careful. Notice those credit terms

two percent if paid within 10 days.

Are we within the 10-day window?

Correct, we are within the 10 day window so we need to take into account that

we will not receive the full amount due

we have to reduce it by the discount. So how much in

discount and how much will receive? Well

remember our client purchased 5,000

we do not get the discount on the full, or we do not give the discount on the full five thousand

because

our customer returned $750

so at the moment our accounts receivable is only 4,250 for this client

that's the amount that they would get the discount on,

so in order to find the discount we'd take the amount owed and we'd

multiply that by the two percent and when we did that

we would end up with an eighty-five dollar discount

so we're giving eighty five dollars of discount to our customer

so how much cash are we going to receive well

they owed us 4,250

we've given them a two percent discount which equals

eighty five dollars so that leaves us with the collection

4,165 dollars

said that is the amount of cash that we are going

to receive.

All right, now

how much do we need to reduce the receivable by

well keep in mind they did get the discount but we have a balance sitting

in that receivable of 4,250

we have to fully wipe out their account we have to zero out that customer's

account

because even though they got a discount they do not owe us that eighty five dollars

so that leaves us a break of 85 dollars where will that go well we need

debit of eight-five to make is balance remember debits

must always equal credits

Any ideas where we would put this? Well from your prior class you know that you

would put this in sales

discounts and again sales discounts just like sales returns and allowances

is a contra account it's a contra revenue account

it reduces our total revenues so in essence

we made four thousand 165 in sales we had five thousand in original sale, right

minus the return of 750 brought us down to 4,250 in

net revenues minus the 85 so that brings us down to four thousand

165 in net sales we calculate net sales by taking the sales revenue

minus any sales returns minus in the sales

discounts

alright let's move on

the next thing we need to look at is possibility of

have credit card purchases so what we just let that was an example of

account receivable and collecting the amount but what do we do

if our customer comes in with a credit card? Well the answer to that is it

all depends on the type of credit card we're dealing with

so if the customer comes in and uses the national credit card

say a visa or master card that's a bank sponsored card

then our company records this is a cash sale

to us we are not responsible for the collection

if it is a national brand credit card it's actually the credit card companies

that are responsible for the collection

or the bank sponsoring the credit card company so when they use a national brand

like visa or mastercard

we simply record it as cash so when you go down to

Target or Walmart and you go in and you use your founders credit card for example

thats actually a cash transaction to Target and to Walmart

they do not see that as a receivable because they are not responsible for any

of the collection

activity the bank will simply settle and send them their

periodically typically they settle

sometimes its twice a week depending on the size

of the account it could vary. Now on the other hand if it's a store credit card and we have to be

careful here because not all store credit cards or store credit cards

for example if you go into Best Buy and you get a Best Buy store credit card

that's actually sponsored by

outside bank so again Best Buy is not responsible for those collections

it's a Visa or MasterCard sponsored by Capital One or another

banking company those are cash transactions to Best Buy

now Kohls though on the other hand Kohls is a

actual Kohls account it is sponsored by Kohls and

Kohls is responsible for the collection the Kohls credit card

in that case if the customer uses a store credit card

then the company records the debit to accounts receivable

as the store is responsible for the collection of the receivable

so notice the difference there you have to be very careful

so let's look at some examples. On June 10th our company

Flank Incorporated sold merchandise for 2500 to XY Company

and accepted the customer's Juneau Bank MasterCard

now right off the bat we know that this is Juneau bank MasterCard this is a

national card sponsored by Bank

therefore Flank is not responsible for the collection

however if they do use a national card usually

we have to pay a service fee so merchant MasterCard excuse me

charges a 2 percent service charge for credit card sales,

How would we record this transaction? well first let's start with our date

now let's talk about what we now we know we sold merchandise and anytime we sell

merchandise

we record sales revenue, it's a revenue for our company.

We're gaining profit here. Is a revenue account a debit or a credit?

Well hopefully you remember that revenue accounts are credit accounts so

I must skip down here and go ahead and put in my credit so we came back into everything

you can see it. Now how much it sells revenue do we recognize?

Well we physically sold 2500 so that's the amount of revenue we are going to recognize.

Now we said that if it

if it is a national brand card like MasterCard or Visa that sponsored by

a bank

we record it as a trash, cash excuse me trash,

(laugh) a cash transaction now when we're looking at this

cash would be going up or down? Correct

it would be going up and to take cash up in our accounting world

we debit the account, so cash is going up but we have to ask ourselves how much

cash are we physically going to receive

well remember we have to pay that 2 percent so the bank is actually going to

take the 2 percent before we

receive the cash distribution so 2 percent of

2500 is fifty dollars so the banks

going to charge us fifty dollars which means they're going to settle the account

at 2,450

now does that fifty dollars just get lost well to us it gets lost

remembered debits must equal credits so we have to record it and in this case

it's simply just a service charge or service charge expense