Account receivable

“ Under the reserve method of accounting a taxpayer includes in his income the full face amount of a receivable on its creation and adjusts at the end of each taxable year the reserve account so that it equals that portion of current accounts receivable that is estimated to become worthless in subsequent years. Any additions necessary to increase the reserve are currently deductible. When an account receivable becomes worthless during the year, the reserve account is decreased and no additional bad debt deduction is allowed. ”

“ Therefore the open account is credited to show cancellation of the original charge, and Notes Receivable is debited to show the new claim. It may be well to remark here that the same instrument which is a note receivable to the vendor is a note payable to the customer.
In some businesses, it is the policy to encourage customers to give notes. In such cases it is often advantageous, particularly for the credit information shown, to set up the note transactions with each customer under individual names, e.g., “John Doe, Notes Receivable.” ”

“ Experience demonstrating that income derived from merchandising and manufacturing businesses could not be computed on the basis of receipts and disbursements alone, treasury regulations were promulgated requiring the use of inventories in proper cases, and permitting the deduction of accounts payable when accounts receivable were brought into the income account. ”

“ Accounts with Customers
The balance owing us by a customer is an asset, and therefore a debit item.
Goods sold on account are charged to the customer because our claim against him constitutes an asset; at the same time the income account, Sales, is credited.
When a customer pays us on account, his account is credited and Cash is [Pg 87] debited, showing an increase of the asset Cash and a decrease of the asset Accounts Receivable. Such an entry is simply a transfer from one account to another, an increase of one asset offset by a decrease of another asset. ”

“ However, the student should always supply mentally the contra of each entry shown in the group reference account. For the sake of clarity, the personal pronouns “we” and “us” will be used instead of the impersonal name.
Accounts with Cash and Notes Receivable.—Entries to the Cash and Notes Receivable accounts are comparatively simple and are shown in the following schedule:
Transactions with cash are self-explanatory. ”

“ The 'accounts receivable' of the debtor, that is, the amounts owing to him on open account, are, of course, as susceptible of preferential disposition as other property; and if an insolvent debtor arranges to pay a favored creditor through the disposition of such an account, to the depletion of his estate, it must be regarded as equally a preference, whether he procures the payment to be made on his behalf by the debtor in the account,-the same to constitute a payment in whole or part of the latter's debt,-or be collects the amount and pays it over to his creditor directly. ”

“ Proving the Customers Ledger.—The use of a controlling account in the general ledger, however, does not eliminate the necessity of proving the accuracy of the customers ledger. It merely makes it possible to take a trial balance without bringing the numerous customers’ accounts into it. It is just as much a part of the proof of the work to make a list of customers’ accounts balances and check it against the balance of the Accounts Receivable general ledger account, as it is to prove the general ledger by means of a trial balance. ”

“ Interest accrued on notes receivable $.67. $49.53 worth of accounts and notes receivable will probably prove to be bad. Set up a reserve on the balance sheet. Inventories on hand: merchandise $7,218.20; expense supplies $25.75. Depreciation of $11.45 on furniture and fixtures for the month. Interest accrued on notes payable $4. Salaries accrued $5.71
2. The following transactions are to be entered in a purchase journal. Make daily postings to vendor accounts and a summary posting at the end of the month to Purchases account. [Pg 538]
3. ”

“ As for practical purposes some limit must be placed upon the daily record of transactions, certain classes show only a record of cash receipts and payments, which must, when it is desired to ascertain the actual position of affairs, be adjusted by bringing into account those transactions which have not yet been completed by the receipt or payment of money. ”

“ When we give our note, the effect of the transaction is just the opposite of the receipt of a note. Instead of adding to one class of our resources we are increasing one class of our liabilities, in return for which we either receive something of value or reduce our liabilities of another class. When we give our note in payment of a loan, we receive cash; if we buy goods and give a note in payment, we receive merchandise; if we give a note in payment of an account, we simply reduce our liabilities of one class and add to those of another. ”

“ Formerly, when credit was a considerably less important factor than now in commercial transactions, book-keeping was frequently limited to an account of receipts and payments of money; and in early times, before money was in use, to an account of the receipt and issue of goods of different kinds. Even now what may be called the “cash system” of accounts is almost exclusively used by governments, local authorities, and charitable and other institutions ”

“ If they buy even a small bill of goods, paying for it at the time of delivery, they take a receipted bill for it. If they pay a small balance of a book account, or any other small debt previously contracted, they take a written receipt for it. ”

“ As a preliminary to the payment of the tax to the collector, he is further required to make out in duplicate a schedule, list or statement, containing the names of every person entitled to any beneficial interest in the property, together with the clear value of such interest, the original of which he renders to the assessor, and the duplicate of which 'shall be by him immediately delivered, and the tax thereon paid to such collector.' The collector gives him a receipt, which is his voucher for that much paid on account of the legacy in his settlement with the legatee. ”

“ Yet even today it is sometimes difficult to convince the proprietor of a small business of the necessity, from the standpoint of accurate accounting, of taking cognizance of accrued and deferred expense items. Instances may sometimes, though rarely, arise in which all income has been received in cash at the end of the fiscal period and all expenses applicable to that period have been met in cash and that no deferred items need to be taken into account. Where such is the case, a statement of cash receipts and disbursements might give a fair indication of the profit and loss for the period. ”

“ Columnar Analysis of Cash Receipts and Disbursements.—As illustrated in the chapters on purchase and sales journals, additional money columns are often used for the purpose of analyzing the purchases and sales by departments or classes of commodities. A similar analysis of both the cash receipts and cash disbursements may aid in segregating certain classes of cash items and thus save labor in posting. Of cash receipts, two classes are usually more active than all others combined. More cash is received from cash sales and from customers on account than from any other source. ”

“ In the same way a statement with reference to the remaining balance retains its validity without regard to these repayments or debit entries, until in its place comes another acknowledgment of receipt in consequence of a new deposit, or a new statement with reference to the balance of the account in consequence of a new payment made without delay.
It is evident of itself that a higher sum than the balance remaining at the depositor's disposal after deduction of the last repayment and entered in the book cannot at any time be paid. ”

“ Special conditions sometimes arise which make it seem advisable to keep ledger accounts with all firms from whom the business is making purchases. A case in point is a business, lacking capital to pay all bills promptly, necessitating payments on account, or by note, instead of payments covering certain invoices in full. ”

“ The principle of the account-book consists naturally in the book forming a real account with debit and credit—like all accounts in ordinary book keeping,—in which is inscribed in a way which would be regarded as valid, having legal force the sums corresponding to the transactions effected either by being written out at full length, with the signature, or by marking in figures, and indicating at the same time the personality of the party making the transaction, or by means of stamps as we have just seen, or finally by some other way. ”

“ The record in each journal shows the individual vendor’s account, but at posting time no vendor account is set up in the ledger, neither the credit to the vendor’s account shown in the purchase journal nor its offsetting debit shown in the cash disbursements journal being posted. ”

“ It is necessary, therefore, to have a restatement of the account for this purpose. The restatement does not falsify the general account, but arranges the items of debts and credits, so as to exhibit the transactions of the collector during the four years in question. ”

“ While a garbled statement is not evidence, or a mutilated statement, wherein the debits shall be presented and the credits suppressed, or perhaps a statement of results only, it still seems to be clear that it is not necessary that every account with an individual, and all of every account, shall be transcribed as a condition of the admissibility of any one account. ”

“ If a payment appears directly opposite the corresponding charge, with no other credits intervening, lines are ruled underneath both the debit and the credit items to show that down to that point the account balances. The record of dealings with each customer should be as full as possible in order to furnish an accurate basis for credit rating. ”

“ During the same period he entered weekly receipts from the company to a total of £125. These must have gone to an old debt, for he did not balance them with the payments for the year, but carried on the whole debit of £166 17s. 7d. to 1598–9. Apparently, however, he was not satisfied with the way in which expenditure was outstripping income, for he headed a new receipts account, ‘Here I begyne to receue the wholle gallereys frome this daye beinge the 29 of July 1598’, and the weekly entries become about double what they were during 1597–8. ”

“ In an action, counter claim or set-off, founded upon an account, promissory note, bill of exchange, or other instrument, for the unconditional payment of money only, it shall be sufficient for the party to give a copy of the account or instrument, with all credits and indorsements thereon, and to state that there is due to him on such account or instrument, from the adverse party, a specified sum, which he claims with interest. ”

“ If the enterprise is more complicated, it may be required to set up a number of separate accounts, or even a separate set of records, but the summary or clearing account for these will still exhibit costs set over against returns. If the partners are all in the same city and have access to the records, one set of accounts is all that is necessary. Where the partners are in different places, each should keep a record of all transactions as reported by the manager of the venture. ”

“ To settle accounts quarterly, with the Secretary of the Treasury,Sec. 4. And be it further enacted, That the Postmaster General shall, once in three months, obtain from his deputies, the accounts and vouchers of their receipts and expenditures, and the balance due thereon, and render to the Secretary of the Treasury a quarterly account of all the receipts and expenditures in the said department, to be adjusted and settled, as other public accounts ”

“ The Cash Receipts Journal—Analysis of a Cash Receipt.—If $100 cash is received on account from John Doe, a customer, an analysis of the transaction shows “Cash” debit and “John Doe” credit.
Cash100.00 John Doe100.00
So with all receipts of cash; the “cash” element is a debit. The record of cash receipts being made in a journal devoted exclusively to receipts of cash, the “Cash, Dr.” element of the entry may be omitted and only the “credit” element need be shown; the very fact that the entry is made in the cash receipts journal is sufficient to indicate that “Cash” is a debit. ”

“ All who receive must be debited; all who give must be credited.
No cancel is ever made. If cash received be afterwards repaid, the sum paid is not struck off the receipts (or debtor-side of the cash account) , but a discharge, or credit, is written on the expenditure (or credit) side. [Pg 183]
The book in which the accounts are kept is called a ledger. It has double columns, or else the debtor-side is on one page, and the creditor side on the opposite, of each account. The debtor-side is always the left. Other books are used, but they are only to help in keeping the ledger correct. ”

“ And a true and accurate return of the amount of gross receipts as aforesaid shall be made and rendered monthly by each of such associations, corporations, companies, or persons to the collector of the district in which any such association, corporation, or company may be located, or in which such person has his place of business. ”

“ Here the system presents to us its highest degree of interest: the possessors of account books, adherents of the clearing service, can discharge their debts one to the other by the transfer of accounts. It is sufficient to write at the back of the cheque: to be carried to the credit of account No ..., with the name of the holder of the account and his address. In this case the amount of the cheque is placed to the debit of the person who issued it and to the credit of the person in whose favour it is drawn. ”