selling goods and services l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 6 PowerPoint Presentation
Download Presentation
Chapter 6

Loading in 2 Seconds...

play fullscreen
1 / 24

Chapter 6 - PowerPoint PPT Presentation


  • 112 Views
  • Uploaded on

Selling Goods and Services. Chapter 6. Revenue should be recognized (recorded) when earned, and realized or realizable (collectible) Revenue is earned when an exchange has taken place, and the company has provided goods or services that entitle them to collect. Revenue Recognition Principle.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 6' - nonnie


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
selling goods and services
©Kimberly Lyons

Selling Goods and Services

Chapter 6

revenue recognition principle

Revenue should be recognized (recorded) when earned, and realized or realizable (collectible)

Revenue is earned when an exchange has taken place, and the company has provided goods or services that entitle them to collect

©Kimberly Lyons

Revenue Recognition Principle
cash collection of receivables

Usually, a company will collect its receivables and convert them to cash

  • Issues that result in reduced cash collections include:
    • Sales Discounts
    • Sales Returns and Allowances
    • Uncollectible Accounts (bad debts)

©Kimberly Lyons

Cash Collection of Receivables
sales discounts

Discounts are offered to customers to encourage timely payment

  • Example: Simco Inc. sells goods to Balto for $1,000 on September 27th, with credit terms 2/10, net/30
  • The credit terms allow Balto a 2% discount on payments made within 10 days, the remainder (net) is due within 30 days
  • Simco records the initial sale:

9/27 Accounts Receivable 1,000

Sales Revenue 1,000

©Kimberly Lyons

Sales Discounts
sales discounts continued

Balto pays the bill on October 5th and Simco records the following

10/5 Cash 980

Sales Discounts 20

Accounts Receivable 1,000

  • Sales Discounts is a “contra revenue” account
  • Contra = opposite
  • This account has a debit balance and will reduce sales revenue indirectly in the income statement

©Kimberly Lyons

Sales DiscountsContinued
sales returns and allowances

Occasionally customers return goods or are allowed a reduced price allowance for defective products

  • Example: Simco Inc. sells goods to Patton Inc. for $1,000 on September 25th with credit terms 2/10, net/30. Patton returns half of the goods on September 30th and pays for the remainder on October 15th (outside of the discount period)
  • Simco records the following:

9/25 Accounts Receivable 1,000

Sales Revenue 1,000

9/30 Sales Returns & Allow. 500

Accounts Receivable 500

10/15 Cash 500

Accounts Receivable 500

©Kimberly Lyons

Sales Returns and Allowances
sales returns and allowances continued
©Kimberly LyonsSales Returns and AllowancesContinued
  • Sales returns and allowances are also a contra revenue account
  • They have a debit balance and reduce sales revenue indirectly in the income statement
  • When both of Simco’s transactions are complete, accounts receivable is zero, and total cash collected of $1,480 equals net sales which is the net “inflow” from the transaction
uncollectible accounts and bad debt expense

There are two methods of accounting for uncollectible accounts

    • Direct write-off method
    • Allowance method
  • Direct write-off method: when accounts are known to be uncollectible they are written off immediately

Bad Debt Expense XXX

Accounts Receivable XXX

©Kimberly Lyons

Uncollectible Accounts and Bad Debt Expense
direct write off method continued

The direct write-off method often results in the recording of sales revenue in one period and bad debt expense in another

No matching of related revenues and expenses

Not GAAP

Used for tax purposes instead

©Kimberly Lyons

Direct Write-off Method Continued
allowance method

Achieves matching by recording bad debt expense in the same period related sales revenue is recorded (GAAP)

Estimates are used to record uncollectibles before they happen

An allowance account is credited instead of accounts receivable, since specific uncollectible receivables are not yet known

When actual write-offs occur at a later date, they are debited against the existing credit in the allowance account

©Kimberly Lyons

Allowance Method
allowance method continued

Example: Piper Inc. estimates uncollectible accounts receivable of $1,300. This estimate is recorded at December 31st as part of the year-end adjustment process:

12/31 Bad Debt Expense 1,300

Allowance for Uncollectibles 1,300

  • When actual bad debts become known (in a later period) piper writes them off with:

5/13 Allowance for Uncollectibles 1,250

Accounts Receivable 1,250

©Kimberly Lyons

Allowance Method Continued
allowance for uncollectibles

Allowance for uncollectibles is a contra accounts receivable account

It has a credit balance that will net against and reduce receivables in the balance sheet

Net receivables is also referred to as net realizable value of receivables

A more conservative value of assets

©Kimberly Lyons

Allowance for Uncollectibles
making estimates of credit sales

Example: Piper Inc. estimates uncollectibles of 1% of credit sales. Credit sales for the period are $150,000:

150,000 x .01 = $1,500

12/31 Bad Debt Expense 1,500

Allowance for Uncollectibles 1,500

©Kimberly Lyons

Making Estimates% of Credit Sales
making estimates of credit sales continued

When estimates are made as a % of credit sales, the adjustment will be recorded without considering any existing balance in the allowance account

Allowance

Write-offs 1,250 1,300 Beginning

1,500 Adjustment

1,550 End

©Kimberly Lyons

Making Estimates% of Credit SalesContinued
making estimates of accounts receivable

Example: Piper Inc. estimates uncollectibles of 5% of outstanding accounts receivable. Accounts receivable at 12/31 are $28,400. Piper started the year with a credit balance in the allowance account of $1,300, against which $1,250 was written off. The balance in the allowance account before adjustment is $50 (credit). Estimate of uncollectibles = (28,400 x .05) = $1,420 year-end adjustment = $1,420 – 50 = $1,370

12/31 Bad Debt Expense 1,370

Allowance for Uncollectibles 1,370

©Kimberly Lyons

Making Estimates% of Accounts Receivable
making estimates of accounts receivable continued

When estimates are made as a % of accounts receivable, the adjustment must take the existing allowance balance into consideration

The estimate will become the new balance in the allowance account and will go to the balance sheet to net with accounts receivable

Allowance

Write-offs 1,250 1,300 Beginning

1,370 Adjustment

1,420 Estimate

©Kimberly Lyons

Making Estimates% of Accounts ReceivableContinued
making estimates review

When making estimates of uncollectibles as a % of sales, ignore the existing balance in the allowance account and record the estimate as bad debt expense

When making estimates of uncollectibles as a % of accounts receivable, adjust the allowance account so that the estimate will become its ending balance

©Kimberly Lyons

Making Estimates Review
product warranties

Selling products with attached warranties gives rise to related expenses

These expenses should be matched with related revenues at the time of sale

Use of estimates allows recoding warranty expense with the related liability without having to wait for future returns

©Kimberly Lyons

Product Warranties
warranty example

Tilton Inc. Sells goods that are under warranty

  • The company sells 2,000 units for $25 each and expects 2% to be returned for replacement at a cost of $17 each
  • At the time of sale Tilton must record the warranty expense:

(DR) Accts rec. 50,000

(CR) Sales revenue 50,000

(DR) Cost of goods sold 34,000

(CR) Inventory 34,000

(DR)Warranty expense 680

(CR) Warranty liability 680

(2,000 x .02 x $17 = $680)

©Kimberly Lyons

Warranty example
warranty example21

Suppose 10 units are returned in the future and Tilton replaces the units at cost:

(DR) Warranty liability 170

(CR) Inventory 170

(10 units x $17 = $170)

©Kimberly Lyons

Warranty example
product warranties22

The recorded warranty expense is matched with the related revenue at the time of sale

The warranty liability remains in the balance sheet (carries over to the next period or later) until it is honored

©Kimberly Lyons

Product Warranties
review for exam

State the revenue recognition principle

Calculate and record sales discounts and sales returns and allowances

Calculate net sales

Record bad debts with the direct write-off method of accounting for uncollectibles

Calculate and record bad debt expense using the allowance method and a % of credit sales

Calculate and record bad debt expense using the allowance method and a % of accounts receivable

©Kimberly Lyons

Review for Exam
review for exam continued

Which method of accounting for bad debts is GAAP?

Why?

Calculate net receivables, or net realizable value of receivables

Account for warranties

©Kimberly Lyons

Review for ExamContinued