The Value Of Accounts Receivable Accounting Essay


Typically, revenue and related accounts receivable are recognized at the point of delivery of the product or service. Revenue can be recognized only after the earnings process is virtually complete and collection from the customer is reasonably assured. For the typical credit sale, these criteria are satisfied at the point of delivery of the product or service, so revenue and the related receivable are recognized at that time.

To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.

Value of Accounts Receivable

The typical account receivable is valued at the amount expected to be received, not the present value of that amount. To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value. Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

There is a risk that the customer will not pay you. If so, you can, either charge these losses to expense when they occur (known as the direct write-off method) or you can anticipate the amount of such losses and charge an estimated amount to expense (known as the allowance method). The later method is preferred, because you are matching revenues with bad debt expenses in the same period (known as the matching principle).

Methods Used

Two methods of accounting for uncollectible accounts are:

Direct write-off method

Allowance method

Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense. No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet.

The allowance method is required when bad debts are deemed to be material in amount. Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred. Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period.

Companies may use either the percentage-of-sales or the percentage-of-receivables basis to estimate uncollectible accounts using the allowance method. The percentage-of-sales basis emphasizes the matching principle. The percentage-of-receivables basis emphasizes the cash realizable value of the accounts receivable. An aging schedule is often used with this basis

Dispose of Accounts Receivable

In order to accelerate the receipt of cash from receivables, owners frequently (1) sell to a factor such as finance company or bank, or (2) make credit card sales.

A factor buys receivables from businesses for a fee and then collects the payments directly from the customers. When a company sells an account receivable, a service charge expense reduces the amount received. The entry for a sale to a factor is:

Cash XXX

Service Charge Expense XXX

Accounts Receivable XXX

Credit cards are frequently used by retailers because the retailer does not have to be concerned with the customer's credit history and the retailer can receive cash more quickly from the credit card issuer. However, the credit card issuer usually receives a fee of from 2-6% of the invoice price from the retailer

Recognize Notes Receivable

A note receivable is supported by a formal promissory note, a written promise to pay a certain sum of money at a specific future date. Such a note is a negotiable instrument that a maker signs in favor of a designated payee who may legally and readily sell or otherwise transfer the note to others. Although all notes contain an interest element because of the time value of money, companies classify them as interest-bearing or non-interest-bearing. Interest-bearing notes have a stated rate of interest. Zero-interest-bearing notes include interest as part of their face amount. Notes receivable are considered fairly liquid, even if long-term, because companies may easily convert them to cash (although they might pay a fee to do so).

Value of Notes Receivable

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

Like accounts receivable, companies record and report short-term notes receivable at their net realizable value-that is, at their face amount less all necessary allowances. The primary notes receivable allowance account is Allowance for Doubtful Accounts. The computations and estimations involved in valuing short-term notes receivable and in recording bad debt expense and the related allowance exactly parallel that for trade accounts receivable. Companies estimate the amount of uncollectible by using either a percentage of sales revenue or an analysis of the receivables.

Recording the Disposition of Notes Receivable

Notes may be held to their maturity date, at which time the face value plus accrued interest is due. In some situations, the maker of the note defaults, and appropriate adjustment must be made. A dishonored note is a note that is not paid in full at maturity. If the lender expects that it will eventually be able to collect, the Notes Receivable account is transferred to an Account Receivable for both the face value of the note and the interest due. In many cases, the holder of the note speeds up the conversion by selling the receivable to another party (a factor). If there is no hope of collection, the face value of the note should be written off.

How Cost Principle Applies to Plant Assets

Plant assets are resources that have physical substance, are used in the operations of a business, and are not intended for sale to customers. It is important for companies to (1) keep assets in good operating condition, (2) replace worn-out or outdated assets, and (3) expand its productive assets as needed.

The cost principle requires that plant assets be recorded at cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use. Costs incurred to acquire a plant asset that are expensed immediately are referred to as revenue expenditures. Costs that are not expensed immediately, but are instead included in a plant asset account are referred to as capital expenditures.

Cost is measured by the cash paid in a cash transaction or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable. Once cost is established, it becomes the basis of accounting for the plant asset over its useful life.


Companies acquire land for use as a site upon which to build a manufacturing plant or office. All necessary costs incurred to make land ready for its intended use are debited to the Land account. The cost of Land includes: cash purchase price, closing costs such as title and attorney's fees, real estate brokers' commissions, accrued property taxes and other liens on the land assumed by the purchaser.

Land Improvements

Land improvements are structural additions made to land. The cost of land improvements includes all expenditures needed to make the improvements ready for their intended use such as: parking lots, fencing, and lighting.


Buildings are facilities used in operations, such as stores, offices, factories, and warehouses. The cost of buildings includes all necessary expenditure relating to the purchase or construction of a building, including purchase price, closing costs, and broker's commission. Costs include expenditures for remodeling and replacing or repairing the roof, floors, wiring, and plumbing. When a new building is constructed, cost consists of the contract price plus payments for architects' fees, building permits, interest payments during construction, and excavation costs.


Equipment includes assets used in operations, such as store check-out counters, office furniture, factory machinery, and delivery trucks. The cost of equipment consists of the cash purchase price and certain related costs. These costs include: sales taxes, freight charges, and insurance paid by the purchaser during transit. Cost includes all expenditures required in assembling, installing, and testing the unit. Recurring costs such as licenses and insurance are expensed as incurred.

Concept of Depreciation

Depreciation is the allocation of the cost of a plant asset to expense over its useful life in a rational and systematic manner. Depreciation is not a process of valuation, nor is it a process that results in an accumulation of cash. Depreciation is an accounting concept used to keep track of the value of an asset over time. Over time, due to wear and tear, the value of assets goes down and businesses must determine the real value of assets for the best presentation of financial results. Therefore, every year, the value of assets must be written off of the "books." The amount to be written off is referred to as depreciation expense and the most popular method for calculating depreciation expense is the straight-line method.

Revenue and Capital Expenditures

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

Both revenue and capital expenditure are concerned with spending money to help a business survive and grow. The key difference between the two is the intent of the expenses and where the money goes. Revenue is for short-term costs that are not used afterwards to make the company grow, such as repairs. Capital expenditure is for long-term assets, such as new vehicles or software, which will be used to make the company stronger.

There is no hard and fast rule for distinguishing revenue expenditure from capital expenditure because, the same item of expenditure may be treated as revenue or capital depending upon the circumstances.

For example, to a machinery dealer purchase of machinery is revenue expenditure, while machinery purchased for manufacturing goods is a capital expenditure. In the same way, wages are generally revenue expenditure, but wages paid for the installation and erection of machinery is a capital expenditure. However, generally the following principles are followed to make a distinction between revenue expenditure and capital expenditure.

Any expenditure that benefits the business only for one accounting year is considered revenue expenditure; any expenditure that benefits the business for several accounting years is regarded as a capital expenditure

Any expenditure which is incurred again and again is revenue expenditure, while any expenditure which is not incurred repeatedly and regularly is capital expenditure e.g., a motor vehicle is not bought again and again, but the gas required to drive it is bought at regular intervals

Any expenditure incurred to improve the concern or to increase the profit-earning capacity of the concern is a capital expenditure. On the other hand, expenditure incurred to keep the activities of a concern going, is revenue expenditure

Revenue expenditure is more often associated with day-to-day costs the company accrues through its life cycle. Capital expenditure, unlike revenue, is looked at more as an investment than a cost, because it is being used to strengthen the company so it can do better business.

Recording Revenue and Capital Expenditures

Both revenue and capital expenditure amounts are recorded in separate accounts. By separating the two, it makes it easier for investors to know where the money is going and makes it easier to account for the associated costs of both expenditures.

Revenue expenditure is an amount that is expensed immediately-thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

Capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset

Account for Disposal of A Plant Asset

Discarding an asset is when you stop using an asset, throw it out, or give it away. Sometimes the asset has value. Other times it does not. Either way, cash is NOT involved when you discard an asset.

Selling an asset is when you give the asset to someone else in exchange for cash. Sometimes a business makes money when it sells an asset. Sometimes a business loses money when it sells an asset.

Trading an asset is when you give the asset to someone else in exchange for another asset. This exchange could be an even exchange or an exchange with you paying additional cash as well. In a trade, you are not losing or making money from the trade. You are just exchanging one asset for another.

Regardless of the reasons why you stop using an asset, sell an asset, or trade an asset, the steps for journalizing the transactions are similar. For all discards, selling of assets, or trades, follow the three steps below.

Does additional depreciation need to be recorded?

If yes, record in general journal. Update plant asset record

If no, skip this step

Record discard, sell, or trade in appropriate journal

Select journal

Record discard, sale, or trade in general journal if no cash is involved

Record sell in cash receipts journal if receiving cash

Record trade in cash payments journal if paying cash

Record transaction in appropriate journal

Debit Accumulated Depreciation to remove

Credit Plant Asset account to remove original cost

If a gain or loss applies, include this in the journal entry above

If gain on sale, credit "Gain on Sale of Plant Assets" account

If loss, debit "Loss on Sale of Plant Assets" account

If cash is involved, record cash

Update plant asset record

Step I. Assets are depreciated at the end of a fiscal period. When you discard, sell, or trade an asset, if the depreciation was just recorded, you do not need to record additional depreciation. If even one (1) month has passed since you last depreciated the asset, additional depreciation MUST be recorded. Depreciation is recorded in the General Journal.

Step II. Select the journal to record the disposal, sale, or trade in. If NO cash is involved, use the General Journal. If cash is going up, use the Cash Receipts journal. If you are paying cash, use the Cash Payments journal.

When discarding a plant asset, you are getting rid of it. Therefore, you must get rid of the associated asset and accumulated depreciation. When an asset is purchased it is debited. When you are removing the asset, it must be decreased. Accumulated depreciation is a contra-asset account. To remove the balance of this account, it must be debited.

After removing the original cost and accumulated depreciation, you must always ask yourself whether or not this asset had value. The difference between the asset's cost and accumulated depreciation is its book value. This amount will be recorded in an account called Loss on Plant Assets. Debit the Loss in this account. If ever there is a gain, the gain is considered revenue and is credited to an account called "Gain on Plant Asset." You can only experience a gain when you are selling an asset.

Step III. Once the journal entries have been recorded; update the Plant Asset Record.

Accounting for Intangible Assets

Intangible assets are typically expensed according to their respective life expectancy. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. Examples of intangible assets with identifiable useful lives include copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If impairment has occurred, then a loss must be recognized. An impairment loss is determined by subtracting the assets fair value from the assets book value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.

Reporting Plant Assets and Natural Resources

Companies usually combine plant assets and natural resources under property, plant, and equipment; they show intangibles separately under intangible assets.

Plant assets and natural resources

Under ―property, plant, and equipmentâ€- in the balance sheet

Major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total should be disclosed

Depreciation and amortization methods that were used should be described. Finally, the amount of depreciation and amortization expense for the period should be disclosed

Reporting Intangible Assets

In general, accounting for intangible assets parallels the accounting for plant assets.

intangible assets are:

Recorded at cost

Written off over useful life in a rational and systematic manner

At disposal, book value is eliminated and gain or loss, if any, is recorded

Key differences between accounting for intangible assets and accounting for plant assets include:

The systematic write-off of an intangible asset is referred to as amortization

To record amortization

Debit Amortization Expense and credit the specific intangible asset

Intangible assets typically amortized on a straight-line basis

Work Cited