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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

ACC225 – Intro to Financial Accounting

MODULE 6

FINANCIAL ASSETS -

ACCOUNTS RECEIVABLE

goals for module 63
GOALS FOR MODULE 6
  • Introduce Sales on Credit - Retail vs. Business
goals for module 64
GOALS FOR MODULE 6
  • Introduce Sales on Credit - Retail vs. Business
  • Discuss Costs of Credit Sales
goals for module 65
GOALS FOR MODULE 6
  • Introduce Sales on Credit - Retail vs. Business
  • Discuss Costs of Credit Sales
  • Introduce Methods for Estimating

Bad Debts

sales on credit7
SALES ON CREDIT
  • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30)
sales on credit8
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)
sales on credit9
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
costs of credit sales11
COSTS OF CREDIT SALES
  • Loss of Use of Money until Paid (Time value of Money)
costs of credit sales12
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.

costs of credit sales13
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
costs of credit sales14
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.
costs of credit sales15
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.
estimating bad debts17
ESTIMATING BAD DEBTS
  • Major issue for all companies which sell on credit (and financial institutions which lend money)
estimating bad debts18
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
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

estimating bad debts20
ESTIMATING BAD DEBTS
  • FOCUS ON INCOME STATEMENT
estimating bad debts21
ESTIMATING BAD DEBTS
  • FOCUS ON INCOME STATEMENT

* Based on

estimating bad debts22
ESTIMATING BAD DEBTS
  • FOCUS ON INCOME STATEMENT

* Based on

Past Experience

estimating bad debts23
ESTIMATING BAD DEBTS
  • FOCUS ON INCOME STATEMENT

* Based on

Past Experience

Similar Companies

estimating bad debts24
ESTIMATING BAD DEBTS
  • FOCUS ON INCOME STATEMENT

* Based on

Past Experience

Similar Companies

Economic Conditions

estimating bad debts25
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.
estimating bad debts26
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.
estimating bad debts27
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - SIMPLE METHOD
estimating bad debts28
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

Using Same basis as income statement approach

estimating bad debts29
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

Using Same basis as income statement approach

Past Experience

estimating bad debts30
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - SIMPLE METHOD

Using Same basis as income statement approach

Past Experience

Similar Companies

estimating bad debts31
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
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
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
estimating bad debts34
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - COMPLEX METHOD
estimating bad debts35
ESTIMATING BAD DEBTS
  • FOCUS ON BALANCE SHEET - COMPLEX METHOD
  • Specifically identify problem accounts.
estimating bad debts36
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.
estimating bad debts37
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
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
a r journal entries40
A/R JOURNAL ENTRIES
  • Record Bad Debt Expense
a r journal entries41
A/R JOURNAL ENTRIES
  • Record Bad Debt Expense

Bad Debt Expense DR

a r journal entries42
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

a r journal entries43
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

a r journal entries44
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

a r journal entries45
A/R JOURNAL ENTRIES
  • Recover Previously Written Off Account
a r journal entries46
A/R JOURNAL ENTRIES
  • Recover Previously Written Off Account

Accounts Receivable DR

a r journal entries47
A/R JOURNAL ENTRIES
  • Recover Previously Written Off Account

Accounts Receivable DR

Allowance for Bad Debt CR

a r journal entries48
A/R JOURNAL ENTRIES
  • Recover Previously Written Off Account

Accounts Receivable DR

Allowance for Bad Debt CR

Cash DR

a r journal entries49
A/R JOURNAL ENTRIES
  • Recover Previously Written Off Account

Accounts Receivable DR

Allowance for Bad Debt CR

Cash DR

Accounts Receivable CR

summary
SUMMARY
  • Accounts Receivable usually consist of many individual accounts maintained in subsidiary ledger
summary51
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
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