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Accounts receivable and bad debts expense A/R – current asset – arises from sales on credit Extending credit - attract business PowerPoint PPT Presentation


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Accounts receivable and bad debts expense A/R – current asset – arises from sales on credit Extending credit - attract business Pay later - will not collect 100% NRV - net realizable value Allowance method - match revenues with expenses - won’t know until later

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Accounts receivable and bad debts expense A/R – current asset – arises from sales on credit Extending credit - attract business

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Accounts receivable and bad debts expense

A/R – current asset – arises from sales on credit

Extending credit - attract business

Pay later - will not collect 100%

NRV - net realizable value

Allowance method - match revenues with expenses - won’t know until later

Bad debts expense – record uncollectible

Recording uncollectible accounts

Record bad debts expense in correct period - adjusting entry

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Allowance for uncollectible accounts - contra asset account

Hold credits until identify specific accounts - bad - written off

Deduction - accounts receivable - carrying value

Methods - estimating bad debts expense

Allowance method - percentage of sales method

Focuses on income statement

Percentage of sales

Adjustment

Contra-asset account

Balancing amount is credited to the allowance account

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Allowance method - accounts receivable method

Focuses on balance sheet

How much of accounts receivable will be collected – net realizable value

Aging schedule

Percent of accounts receivable method

More overdue – more likely that will not collect

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Writing off a specific account

No net effect on assets – written off

Already recognized the bad debts expense

Direct write-off method

Bad debt expense – recorded only when specific account is uncollectible

Only when very few bad debts

Not GAAP

Notes receivable – promissory note

Maker, payee

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Short-term note – current asset – less than a year

Controlling cash

Segregation of duties

Bank reconciliation

Bank statement – deposits, checks, debit card, summary of activity in bank account

Comparing general ledger cash balance with bank statement cash balance

Crucial part of controlling cash

Transactions recorded in one place but not the other

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Steps

Balance per bank – monthly bank statement - adjustments – been recorded in books but not recorded in bank’s balance

Outstanding checks

Deposits in transit

No adjustments to books – already there

Balance per books – general ledger cash ledger balance – adjustments – bank recorded but not in firm’s books

Adjustments needed in firm’s books

Reconciling items

Locate any errors – by bank or firm

Make adjustments

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Outstanding checks, deposits in transit, errors made by bank

Collections by bank, service charges, nsf checks, interest earned, errors made by firm

Reporting cash

Balance sheet

Statement of cash flows

Cash equivalents – highly liquid

Analyzing A/R – ratio analysis

A/R turnover – net credit sales/average A/R

Ability to collect from credit customers

Average number of days in A/R

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Risk, control, ethics

Key controls

Clear assignment of responsibility of physical control of assets

Specific procedures – documentation

Independent internal verification of data

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Assign#13, pg. 365-367 – E7-2A, E7-3A, E7-6A, E7-8A, E7-12A

Assign#14, pg. 371 – P7-6A

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