NOTES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 Revenue Recognition Income Taxes Cash and Cash Equivalents Deferred Debt Costs Deferred Income Stock Based Employee Compensation, Deferred Compensation and Stock Plan for Directors In addition to rents due currently, accounts receivable include $12,101,000 and $9,370,000, at December 31, 2004 and 2003, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases. These amounts are presented  after netting allowances of $237,000 and $548,000, respectively, for tenants whose rent payment history  or financial condition cast doubt upon the tenant’s ability to perform under its lease obligations. Cash and cash equivalents include short-term investments. Short-term investments are highly liquid investments that are both readily convertible to cash and so near their maturity that they present insignificant risk of changes in value arising from interest rate fluctuations. Short-term investments include money market accounts and other investments which generally mature within three months, measured from the acquisition date. Deferred debt costs consist of fees and costs incurred to obtain long-term financing, construction financing and the revolving line of credit. These fees and costs are being amortized over the terms of the respective loans or agreements, which approximates the effective interest method. Deferred debt costs totaled $5,011,000 and $4,224,000, net of accumulated amortization of $4,229,000 and $3,300,000, at December 31, 2004 and 2003, respectively. Deferred income consists of payments received  from tenants prior to the time they are earned and recognized by the Company as revenue. These payments include prepayment of the following month’s rent, prepayment of real estate taxes when the taxing jurisdiction has a fiscal year differing from the calendar year reimbursements specified in the lease agreement and advance payments by tenants for tenant construction work provided by the Company. Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case  the accrual is discontinued. When rental payments  due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis in accordance with accounting principles generally accepted in the United States. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint. The Company made an election to be treated, and intends to continue operating so as to qualify as a  REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing  with its taxable year ending December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes  at least 90% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Effective January 2003, the Company adopted the  fair value method to value and account for employee stock options using the prospective transition method specified under SFAS No. 148, “Accounting for  Stock-Based Compensation-Transition and Disclosure.” The Company had no options eligible for valuation  prior to the grant of options in 2003 and 2004. The  fair value of the 2003 and 2004 options was determined  at the time of each award using the Black-Scholes model, a widely used method for valuing stock based employee compensation, and the following assumptions: (1) Expected Volatility. Because Saul Centers common stock is thinly traded, with average daily trading volume averaging less than 50,000 shares (since the Company’s inception), expected volatility is determined using the entire trading history of the Company’s common stock (month-end closing prices since its inception), (2) Average Expected Term. Allowance for Doubtful Accounts ( In thousands ) For the Year Ended  December 31, 2004 2003 Beginning Balance $ 881 $ 1,001 Provision for Credit Losses 488 171 Charge-offs (244) (291) Ending Balance $ 1,125 $ 881