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

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 b

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  1. 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 1

  2. 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 2

  3. 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 3

  4. 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 4

  5. 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 5

  6. 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 6

  7. 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 7

  8. Risk, control, ethics Key controls Clear assignment of responsibility of physical control of assets Specific procedures – documentation Independent internal verification of data 8

  9. Assign#13, pg. 365-367 – E7-2A, E7-3A, E7-6A, E7-8A, E7-12A Assign#14, pg. 371 – P7-6A 9

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