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ACC225 – Intro to Financial Accounting MODULE 6 FINANCIAL ASSETS - ACCOUNTS RECEIVABLE GOALS FOR MODULE 6 GOALS FOR MODULE 6 Introduce Sales on Credit - Retail vs. Business GOALS FOR MODULE 6 Introduce Sales on Credit - Retail vs. Business Discuss Costs of Credit Sales

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Acc225 intro to financial accounting l.jpg

ACC225 – Intro to Financial Accounting

MODULE 6

FINANCIAL ASSETS -

ACCOUNTS RECEIVABLE



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GOALS FOR MODULE 6

  • Introduce Sales on Credit - Retail vs. Business


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GOALS FOR MODULE 6

  • Introduce Sales on Credit - Retail vs. Business

  • Discuss Costs of Credit Sales


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GOALS FOR MODULE 6

  • Introduce Sales on Credit - Retail vs. Business

  • Discuss Costs of Credit Sales

  • Introduce Methods for Estimating

    Bad Debts



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SALES ON CREDIT

  • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30)


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SALES ON CREDIT

  • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30)

  • Business to Individual - Consumer Protection Laws in effect. Often Sale made by Credit Card. Either Outside Company (e.g., VISA) or Company Processed (e.g., Lazarus)


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SALES ON CREDIT

  • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30)

  • Business to Individual - Consumer Protection Laws in effect. Often Sale made by Credit Card. Either Outside Company (e.g., VISA) or Company Processed (e.g., Lazarus)

  • Because of Large volume, detail of individual accounts not kept in General Ledger. Maintained in subsidiary Accounts Receivable Ledger



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COSTS OF CREDIT SALES

  • Loss of Use of Money until Paid (Time value of Money)


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COSTS OF CREDIT SALES

  • Loss of Use of Money until Paid (Time value of Money)

  • Processing costs. Fee paid to VISA or Mastercard

    Administrative costs if internal system.


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COSTS OF CREDIT SALES

  • Loss of Use of Money until Paid (Time value of Money)

  • Processing costs. Fee paid to VISA or Mastercard

    Administrative costs if internal system.

  • Major Risk (not always a major cost) is Bad Debts


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COSTS OF CREDIT SALES

  • Loss of Use of Money until Paid (Time value of Money)

  • Processing costs. Fee paid to VISA or Mastercard

    Administrative costs if internal system.

  • Major Risk (not always a major cost) is Bad Debts

  • Bad Debt occurs when a customer account cannot be collected. It is an expense arising from selling on credit.


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COSTS OF CREDIT SALES

  • Loss of Use of Money until Paid (Time value of Money)

  • Processing costs. Fee paid to VISA or Mastercard

    Administrative costs if internal system.

  • Major Risk (not always a major cost) is Bad Debts

  • Bad Debt occurs when a customer account cannot be collected. It is an expense arising from selling on credit.

  • Matching Principle comes into consideration.



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ESTIMATING BAD DEBTS

  • Major issue for all companies which sell on credit (and financial institutions which lend money)


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ESTIMATING BAD DEBTS

  • Major issue for all companies which sell on credit (and financial institutions which lend money)

  • Allowance method (Contra account on B/S) is used and bad debts expected to occur in future must be estimated and expense recorded in I/S

    Accounts Receivable DR

    Allowance for Bad Debts CR

    Net Accounts Receivable


Estimating bad debts19 l.jpg
ESTIMATING BAD DEBTS

  • Major issue for all companies which sell on credit (and financial institutions which lend money)

  • Allowance method (Contra account on B/S) is used and bad debts expected to occur in future must be estimated and expense recorded in I/S

  • To aid in the identification of bad debts and in the estimation of future bad debts Accounts Receivable Aging

    is Prepared


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on

    Past Experience


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on

    Past Experience

    Similar Companies


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on

    Past Experience

    Similar Companies

    Economic Conditions


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on

    Past Experience

    Similar Companies

    Economic Conditions

  • Estimate % of Sales (or credit sales if there is a major difference) that are expected to become uncollectible.


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ESTIMATING BAD DEBTS

  • FOCUS ON INCOME STATEMENT

    * Based on

    Past Experience

    Similar Companies

    Economic Conditions

  • Estimate % of Sales (or credit sales if there is a major difference) that are expected to become uncollectible.

  • Make entry to expense that amount each month or at end of year.


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach

    Past Experience


Estimating bad debts30 l.jpg
ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach

    Past Experience

    Similar Companies


Estimating bad debts31 l.jpg
ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach

    Past Experience

    Similar Companies

    Economic Conditions


Estimating bad debts32 l.jpg
ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach

    Past Experience

    Similar Companies

    Economic Conditions

  • Estimate % of end of year open A/R that are expected to be uncollectible.


Estimating bad debts33 l.jpg
ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

    Using Same basis as income statement approach

    Past Experience

    Similar Companies

    Economic Conditions

  • Estimate % of end of year open A/R that are expected to be uncollectible.

  • Make adjustment to bring Allowance for Bad Debts up/down to that balance


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - COMPLEX METHOD


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - COMPLEX METHOD

  • Specifically identify problem accounts.


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - COMPLEX METHOD

  • Specifically identify problem accounts.

  • Age A/R and apply different % to total of each category of aging.


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ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - COMPLEX METHOD

  • Specifically identify problem accounts.

  • Age A/R and apply different % to total of each category of aging.

  • Obtain overall Estimate.


Estimating bad debts38 l.jpg
ESTIMATING BAD DEBTS

  • FOCUS ON BALANCE SHEET - COMPLEX METHOD

  • Specifically identify problem accounts.

  • Age A/R and apply different % to total of each category of aging.

  • Obtain overall Estimate.

  • Make adjustment to bring Allowance for Bad Debts up/down to that balance



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A/R JOURNAL ENTRIES

  • Record Bad Debt Expense


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A/R JOURNAL ENTRIES

  • Record Bad Debt Expense

    Bad Debt Expense DR


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A/R JOURNAL ENTRIES

  • Record Bad Debt Expense

    Bad Debt Expense DR

    Allowance for Bad Debt CR

    REMEMBER:

    Accounts Receivable DR

    Allowance for Bad Debts CR

    Net Accounts Receivable


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A/R JOURNAL ENTRIES

  • Record Bad Debt Expense

    Bad Debt Expense DR

    Allowance for Bad Debt CR

  • Write off Uncollectible Account

    Allowance for Bad Debt DR


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A/R JOURNAL ENTRIES

  • Record Bad Debt Expense

    Bad Debt Expense DR

    Allowance for Bad Debt CR

  • Write off Uncollectible Account

    Allowance for Bad Debt DR

    Accounts Receivable CR


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A/R JOURNAL ENTRIES

  • Recover Previously Written Off Account


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A/R JOURNAL ENTRIES

  • Recover Previously Written Off Account

    Accounts Receivable DR


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A/R JOURNAL ENTRIES

  • Recover Previously Written Off Account

    Accounts Receivable DR

    Allowance for Bad Debt CR


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A/R JOURNAL ENTRIES

  • Recover Previously Written Off Account

    Accounts Receivable DR

    Allowance for Bad Debt CR

    Cash DR


A r journal entries49 l.jpg
A/R JOURNAL ENTRIES

  • Recover Previously Written Off Account

    Accounts Receivable DR

    Allowance for Bad Debt CR

    Cash DR

    Accounts Receivable CR


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SUMMARY

  • Accounts Receivable usually consist of many individual accounts maintained in subsidiary ledger


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SUMMARY

  • Accounts Receivable usually consist of many individual accounts maintained in subsidiary ledger

  • Estimation of Uncollectible Accounts and Bad Debts major emphasis of Receivable Accounting