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# Accounts Receivable Accounts receivable turnover ratio is a measure of the liquidity of a company's accounts receivable asset.

Typically, the higher the turnover is, the more favourable it is. Only credit sales are used in the calculation. If all sales are included and there is a measurable amount of cash sale, the calculation will not be true and can be very misleading. When calculating the account receivable turnover ratio on an intra-period basis we need to account for the period (generally the ratio equation is used for a year-to-year calculation). The accounts receivable turnover ratio is also known as the sales-toreceivable ratio. The formula for accounts receivable turnover is: Account receivable turnover = total credit sales / average accounts receivable Example: ABC CORPORATION sales for its fiscal year ended September 30, 2007 were Rs. \$66,074,312,000 and Accounts receivable, net for the years ended Sept. 30, 2007 and 2006 were Rs. 3,468,199,000 and \$3,427,139,000 respectively. ABC CORPORATIONs account receivable turnover was: 66,074,312 / (3,468,199 + 3,427,139) / 2 which equates to 19.2 times. This is indicative of the wholesale pharmacy business which is typically a 15 day pay. Notes Receivable A note receivable is a formal promise to receive a specific amount of cash from another party on one or more future dates. Overdue accounts receivable are sometimes converted into notes receivable, thereby giving the creditor more time to pay, while also sometimes including a personal guarantee by the owner of the creditor. The payee is the party who receives payment under the terms of the note, and the maker is the party obligated to send funds to the payee. The amount of payment to be made, as listed in the terms of the note, is the principal. The principal is to be paid on the maturity date of the note. A note receivable usually includes a specific interest rate, or a rate which is tied to another interest rate, such as a banks prime rate. The calculation of the interest earned on a note receivable is: Principal x Interest rate x time period If an entity has a large number of notes receivable outstanding, it should consider setting up an allowance for doubtful notes payable, in which it can accrue a bad debt balance that it can use to write off any notes payable that later become uncollectible. An uncollectible note receivable is said to be a dishonoured note. For example, ABC sells a number of computers to DEF for Rs. 15,000, with payment due in 30 days. After 60 days of non-payment, the two parties agree that DEF will issue a note payable to ABC for Rs. 15,000, at an interest rate of 10%, and with payment of Rs. 5,000 due at the end of each of the next three months. The initial entry to convert the account receivable to a note receivable is:

## Debit Notes receivable Accounts receivable 15,000

Credit

15000

Credit Card Sales Retail companies, which sell merchandise in small quantities directly to consumers, often receive a significant portion of their revenue through credit card sales. Some credit card receipts, specifically those involving credit cards issued by banks, are deposited along with cash and checks made payable to the company. The company receives cash for these credit card sales immediately. Because banks that issue credit cards to customers handle billing, collections, and related expenses, they usually charge companies between 2% and 5% of the sales price. This fee is deducted when the receipts are deposited in the company's bank account, so these credit card receipts are slightly more complicated to record than other types of cash deposits. Example: If a company deposits credit card receipts totalling Rs. 1,000 and the fee is 3%, the company makes a compound entry that debits cash for Rs. 970, debits credit card expense for Rs. 30 (3% of \$1,000), and credits sales for Rs. 1,000.

Investment held to maturity: It is investments in bonds of other companies in which the investor has the positive intent and the ability to hold securities. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased. The investments can be classified as held to maturity, held for trading or available for sale. This type of security is reported at amortized cost on a companys financial statements and is usually in the form of a debt security with a specific maturity date. Example: On March 2, 2012, Graham Company paid Rs. 539,000 plus accrued interest to purchased ABC Corp. 12% bonds with a face value of \$500,000. These bonds pay interest semiannually on April 1 and October 1. These debt securities were purchased as a held-to-maturity investment and will mature in 5 years. The effective interest rate for this investment was 10%. Date 2012 Mar 2 Investment in Held-to-Maturity Securities Interest Receivable [Rs. 500,000 x 12% x 5/12] Cash 539,000 25,000 564,000 Effective Interest Method Debits Credits