Cash, Receivables & Bad Debts

Cash

• Cash equivalents: original maturity ≤ 3 months.
• Exclude postdated checks, certificates of deposit over 3 months, restricted balances, employee advances.
• Bank reconciliation: bank side = deposits in transit, outstanding checks; book side = bank charges, non-sufficient funds (NSF) checks, collections — only book items need entries.

Credit losses — current expected credit loss (CECL) model

• Lifetime expected losses from day one; history + current conditions + forecasts.
• Expense = required ending allowance − unadjusted balance (add a debit balance).
• Roll-forward: Beginning + expense − write-offs + recoveries = Ending.
• Write-off: no effect on net receivables, assets, or income.
• Direct write-off: not Generally Accepted Accounting Principles (GAAP) unless immaterial; required for tax.
• Accounting Standards Update (ASU) 2025-05: may assume current conditions persist for current receivables and contract assets.

Transfers

• Pledging → keep receivables, disclose.
• Factoring without recourse → sale, loss = fee.
• With recourse → sale only if control surrendered; recourse liability at fair value; else secured borrowing.

Notes receivable

Long-term at present value; impute interest if none or unreasonable.

Exam traps

• Legally restricted compensating balances are shown separately from unrestricted cash.
• Bank overdrafts are liabilities, not negative cash (unless offset against other accounts at the same bank).
• A recovery of a written-off account first reinstates the receivable and the allowance, then records the cash — no effect on expense.
• CECL covers trade receivables and held-to-maturity debt securities, but not available-for-sale debt securities, which use their own allowance capped at the fair value shortfall.