Receivables
Accounts receivable, bad debts and notes receivable — and the estimate you must make before you know who will not pay.
A receivable is a promise to pay, and the whole of this topic follows from one awkward fact: some of those promises will be broken, and you have to account for that before you know which ones. The chapter opens with the receivable itself and the contra account that sits against it — the allowance that reduces receivables to what you actually expect to collect. From there it works the two competing approaches to uncollectible accounts: the direct write-off method, which is simple and wrong for most purposes, and the allowance method, which estimates the loss in the period of the sale — so that writing off a customer later, or recovering from one, never touches profit. You then estimate the allowance itself, including the two cases students consistently get wrong: when an allowance balance already exists, and when that balance is a debit. IFRS 9 takes the same idea further, holding lifetime expected credit losses from the day a receivable is recognised, measured with a provision matrix. A section on notes receivable covers interest, maturity value, dishonoured notes and imputed interest on a non-interest-bearing note. The chapter closes with how receivables are presented and analysed, including the turnover and collection-period ratios that tell you whether any of this is actually working. An optional final section shows the same entries in US GAAP terms.
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01The Receivable and Its Contra Accounts
the receivable ledger itself, and the allowance that reduces it to what you actually expect to collect.
02Direct Write-Off vs the Allowance Method
under the allowance method the loss is recognised when it is estimated, so writing off a specific customer later changes nothing in profit.
03Estimating the Allowance
every method estimates the balance the allowance should have; the expense is whatever adjustment gets it there — including from a debit balance. IFRS 9 makes that estimate forward-looking.
04Write-offs, Recoveries & the Year-End Adjustment Together
a full year where accounts are written off, some recovered, and the allowance re-estimated at the end.
05Notes Receivable
a receivable with interest and a maturity date: accrue the interest at year end, and when a note is dishonoured the full maturity value moves back to accounts receivable.
06Presenting & Analysing Receivables
receivables shown net of the allowance, and the turnover and collection-period ratios that tell you whether credit control is working.
07Receivables under US GAAPOptional · US GAAP
for US GAAP students — the direct write-off method, the allowance adjustment and a note receivable in US GAAP terms. IFRS students can skip this section.