 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at introduction to account receivable. This topic is covered in introductory financial accounting course, also the CPA exam, the FAR section. As always, I would remind you, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I cover, including many CPA questions. If you like my lectures, please click on the like button. It doesn't cost you anything. Share them, put them in playlist, subscribe. These days, students are staying home because of the coronavirus. If these lectures are helping you, it means they might help other people. So please share the wealth and connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources, especially if you're studying for your CPA exam or if you'd like to supplement your accounting education. The first thing we're gonna look at is valuing account receivable. So what is a receivable? What is the idea of an account receivable? And it's a topic that you studied in financial accounting 101 in at the beginning of the course. But what is the idea of a receivable? Well, when you perform a service, when you provide a service to someone else, what do you expect? You expect to be paid. Sometime or often time, what happens is you perform a service, then the customer will promise to pay you in the future. You did your work, okay? So you did the work, so you have revenue. So revenue is recorded because you did the work. Now you would like to receive cash. So let's assume you did 10,000 worth of work. You would like to receive cash worth of 10,000. What happened? The customers usually they would say, I'm gonna pay you later. Paying you later means you have an account receivable. So an account receivable is an amount due from another party. Many businesses, when I was in practice, they would call account receivable due from. It means you have amount due from someone else. Why do you have an amount due because you performed a service? So that's what the receivable is. So you perform a service, you expect to be paid 10,000 and hopefully you are paid 10,000. So when you are paid the 10,000, you debit cash and you credit account receivable. And this is the life of a receivable in a perfect world. So in a perfect world, this is all we have to do for this chapter and we'll be done. But we don't live in a perfect world. Therefore we have to go a little bit further and talk about the what comes with receivables. So it's an amount due. And let me just show you real quick the percentage of receivables of certain companies. This is for example, John Deere, Galloway Golf, Pfizer, Abracame and Fitch. Notice certain companies like Galloway Golf, they sell a lot on account. Therefore account receivable represent 16% of their total asset, Abracame and Fitch only 4%. So different companies will have different amount of receivable depending whether they sell on account or not. A company must also maintain, and this is a new concept that you're gonna be learning about, a separate account for each customer. This account is called the subsidiary account which we're gonna be seeing this account shortly on a slide soon. But think about it, each individual will have their own separate account receivable that tracks how much that customer purchases already paid and still owes. So each individual, if you, for example, your credit card company, they keep a record of your borrowing, your payment and how much do you still owe. And they will keep a record for each customer separately. So they have a receivable from each customer separately. And hopefully this makes sense. And we're gonna look at this subsidiary ledger concept in a moment where actually we're gonna see it physically. Sales on credit, basically what is a sales on credit? You perform a service on credit. So on July 1st, Techcom had a credit sales of 950 to Comstore and a collection of 720 from RDA electronics from a prior credit sales. So we have two transactions. We sold something on credit and we collected some cash. So for the sale on credit, we debit account receivable. Now notice the new concept that we are introducing. We are putting the name of the customer right after the receivable. We sold to Comstore 950 worth of goods. So we debit account receivable Comstore, we credit sales. Then we received from RDA electronics 720. We debit cash and we credit account receivable RDA electronics. So notice now we are specifying which customer we are receiving the funds from. So sales on credit and let's take a look at the account receivable ledger. So this is what it looks like. So we made the sale for 950 for Comstore and we collected from RDA electronics. Now what we have is the sub ledger. Though those are called the subsidiary ledger. So each individual customer, here we are dealing with two customers to keep it simple. We have RDA electronics and Comstore. So here's where we stand. Let me choose a blue color, maybe it works better. So on June 30th, on June 30th, RDA owed us $1,000. Then made the payment of 720. Their balance right now is 8, 280. So this is the subsidiary ledger for RDA. For Comstore, as of June 30th, they owe us $2,000. Then on July 1st, we made another sale. We debited the receivable. Their new balance is 2950. So the balance for RDA is 280. The balance for Comstore is 2950. That's the balance for each individual customer and their subsidiary ledgers. Now what we do, we prepare a schedule before we prepare the schedule of receivable, let's take a look at the general ledger. The general ledger will have the debit, the 950 debit and the 720 credit, which will make the total account receivable for the whole company is 3230. This is the general ledger account receivable. So notice we have a general ledger, a general ledger, we have a general ledger and we have a subsidiary ledgers. Now when we add up all the general ledgers, when we add up all the general ledgers, they will add up to the subsidiary ledger. Why, what do I mean by this? So if I add up 280 plus 2950, they will give me 3230. Now companies also what they do is they prepare what's called a schedule of account receivable. And what is a schedule of account receivable is a list of all the receivable. Sometime it's by amount, sometime alphabetically, sometime randomly. And here we have only for this company to keep it simple, we only have two customers, RDA Electronics and Comstore and our total receivable is 3220. So now hopefully we are introduced to this new idea that we have a subsidiary ledger for each customer separately. So this is what you need to learn from this slide. And if you add all the subsidiary, they should equal to the general ledger. They should equal to the general ledger. If we add up all the balances, the balance should equal to the general ledger. Now we're gonna talk about sales on store credit card. What do we mean by sales on store credit cards? Think about best buy. If you want to buy something from Best Buy, they do offer you to buy it on credit. And specifically they finance the transaction. So simply put, they will allow you to buy the goods from Best Buy and Best Buy themselves, they will finance the transaction. So the credit card would look something like this. It will not show Visa, it will not show MasterCard, it will show their logo, my Best Buy. So let's take a look at how this works. Let's assume on November 1st, Techcom recorded sales on their own credit card in the amount of 1,000. On December 31st, well, let's take a look at the first transaction. So they will debit account receivable credit sales for 1,000. On December 31st, since they made the sale, since they financed the transaction, they are going to be earning interest. Techcom recorded an adjusting entry for the interest earned at a rate of 1.5 per month. So what happened is, you have a thousand dollar, 1.5 per month, 1.5 per month for the month of November and December, it end up to be $15. Therefore, what they do is they will debit interest receivable. Now they earned interest of $15. It's not paid yet, but it's earned, earned interest of $15, earned interest of $15. And what happened here is they debit account receivable credit interest revenue, credit interest revenue. And I'm thinking there's a mistake on this slide. I believe the date should be December 1st. The sale should have made December 1st. This way it will give us an interest of $15. It's not November 1st, it's December 1st, just to make it realistic. So it's December 1st because we want to make sure that you see where the 15 numbers coming from. It's 1,000 times 1.5% per month. So this way the $15 will work the $15, rather it might not give us the right answer. Let's take a look at sales on bank credit card. So this is not your own credit card, this is the bank, you are using the bank. What do I mean by using the bank? You are using someone else, someone else's credit card. Like Citibank will issue a master card or a visa, okay? And now it's different than your own company. It's different than your own company credit card. Let's take a look at this transaction. On July 15, TechCom has sales of $100 on credit card sales with a 4% fee. Obviously the bank, it's gonna charge you a fee. Actually the credit card company will charge you a fee. And it's $96 cash is received immediately on deposit. So simply put, they made a sale for $100. That's good. The customer paid using their credit card, their own credit card. So although they made the sale for $100, they would only receive $96 because they have to pay a 4% fee. Therefore we will debit cash $96. We credit sales $100 and the 4% is a credit card expense which is $4. So this is different than the store credit card. The store credit card, so basically a store credit card, TechCom will issue the credit card here. TechCom is financing the transaction here. Here's TechCom is financing the transaction. Here it's Citibank financing the transaction. Citibank is financing the transaction. Therefore we don't have to worry about interest. We don't have to worry about making an adjustment for interest revenue because we don't receive any interest. Last but not least in this session is just to take a look at sales on installment. What is an installment? Every time you hear the word installment, installment is when you have a series of payments, usually it's the same amount. When you have a loan, you make installment. So amounts owed by customers from credit card sales for which payment is required in a periodic amount over an extended time. This is where an installment, for example, you're supposed to pay 500 every month, 500 every month, 500 every month. The customer is usually charged interest, including in the amount. Think about when you buy a car. When you buy a car, they make you make payments. Payments of 450, 500, 700, whatever that payment is. It's the same payment every month, every period. That's why we call it installment. It's the same amount over an extended period of time. So this is the sales on installment. In the next session, we will start to introduce the issues that comes with a count receivable, starting with the direct write-off method. As always, if you like my recording, please click on the like button, share it, put it in playlist. Also, if you're looking to supplement your education, visit my website for headlactures.com, especially if you're studying for your CPA exam. You study for your CPA once. You wanna make sure you make the right investment. It's a 20 to 30 year investment in your career. Study hard, take it seriously, and please stay safe. Good luck.