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Chapter Summary

Section 9.1: Revenue Recognition Principle​

  • Revenue recognized when earned, not when cash received
  • Credit sales create accounts receivable
  • Future sales (unearned revenue) are liabilities
  • Future purchases (prepaid expenses) are assets
  • VAT recognized at time of sale

Section 9.2: Uncollectible Accounts​

  • Two methods: Direct write-off and Allowance method
  • Allowance method preferred (matches expense with revenue)
  • Two approaches: Balance sheet (aging) and Income statement (percentage of sales)
  • Write off specific accounts when uncollectible
  • VAT may be recoverable on bad debts

Section 9.3: Receivables Management Ratios​

  • Accounts Receivable Turnover: Net Credit Sales ÷ Average Receivables
  • Average Collection Period: 365 ÷ Turnover
  • Lower collection period = better
  • Monitor and improve collection procedures

Section 9.4: Earnings Management​

  • Receivables can be used to manage earnings
  • Revenue recognition timing affects earnings
  • Bad debt estimates can be manipulated
  • Must use reasonable estimates and be ethical

Section 9.5: Long-Term Projects​

  • Percentage of completion: Recognize revenue as project progresses
  • Completed contract: Recognize revenue at completion
  • Percentage of completion preferred when progress measurable
  • Must estimate costs accurately

Section 9.6: Other Types of Receivables​

  • Other receivables: Insurance claims, tax refunds, etc.
  • Advances to employees
  • Tax refunds receivable
  • Interest receivable
  • Must be properly classified (PCN Class 4)

Section 9.7: Notes Receivable​

  • Formal written promise to pay
  • Usually includes interest
  • More legally enforceable than accounts receivable
  • Interest must be accrued
  • Convert to accounts receivable if dishonored

Section 9.8: Luxembourg Customer Account Management​

  • PCN Class 4: Tiers (Third Parties)
  • Customer accounts: 410000-419999
  • Supplier accounts: 400000-409999
  • VAT accounts: 430000-439999
  • Allowance: 490000
  • Proper account management supports compliance

Section 9.9: Luxembourg VAT on Receivables​

  • VAT due when sale is made
  • VAT may be recoverable on bad debts
  • Must follow proper procedures
  • Must maintain documentation
  • Affects VAT return