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Module 5 PowerPoint Presentation

Module 5

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Module 5

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  1. Module 5 Accounts Receivable and Accounts Payable

  2. Learning Objectives

  3. Accounts Receivable

  4. Accounts Receivable

  5. Accounts Receivable General LedgerA/R Subledger Accounts Receivable Jones Co bal. 5,000 bal. 2,000 Store ABC bal. 3,000 Total 5,000 Control account balances with total of subledger balances.

  6. Accounts Receivable General LedgerA/R Subledger Accounts Receivable Jones Co bal. 5,000 bal. 2,000 550 bal. 5,550 Store ABC bal. 3,000 550 bal. 3,550 Total 5,550 Control account balances with total of subledger balances.

  7. Accounts Receivable General LedgerA/R Subledger Accounts Receivable Jones Co bal. 5,000 bal. 2,000 850 550 850 bal. 1,150 bal. 4,700 Store ABC bal. 3,000 550 bal. 3,550 Total 4,700 Control account balances with total of subledger balances.

  8. Non-Bank Credit Cards

  9. Valuing Accounts Receivable

  10. Valuing Accounts Receivable

  11. Allowance Method

  12. Recording Estimated Bad Debt Expense — Allowance Method

  13. Writing Off a Bad Debt — Allowance Method

  14. General Ledger Balances • Bad Debts Expense 1,000 • Allowance for Doubtful Accounts 1,000 • To record estimated bad debts • Allowance for Doubtful Accounts 880 • Accounts Receivable — Ron Trent 880 • To write off an uncollectible account Accounts Receivable Allow. For Doubtful Accts. bal. 18,000 1,000 880 880 bal. 17,120 bal. 120

  15. Realizable Value Before and After Write-off Accounts Receivable Allow. For Doubtful Accts. bal. 18,000 1,000 880 880 bal. 17,120 bal. 120

  16. Recovery of a Bad Debt- Allowance Method Example: Ron Trent pays his account in full after the account had been written off. Entries are needed to record the reinstatement of the account and the subsequent collection. The entries are: Accounts Receivable-Ron Trent 880 Allowance for Doubtful Accounts 880 To reinstate customer’s account. Cash 880 Accounts Receivable-Ron Trent 880 To record collection of account.

  17. Estimating Bad Debt Expense

  18. Percent of Sales Approach

  19. Percent of Sales Approach Current Period Credit Sales x Estimated Bad Debt % = Estimated Bad Debts Expense

  20. Percent of Sales Approach Example: BCD Company has sales of $500,000 and estimates 0.5% of those sales will not be collectible. Estimated Bad Debts Expense is calculated as $2,500 ($500,000 x .5%). The period end adjusting entry would be: • Bad Debts Expense 2,500 • Allowance for Doubtful Accounts 2,500 • To record estimated bad debts

  21. Percent of Accounts Receivable Approach Year-end Accounts Receivable x Bad Debt %

  22. Percent of Accounts Receivable Approach Bad Debts Expense is computed as: Estimated adjusted balance in Allowance for Doubtful Accounts - Unadjusted year-end balance in Allowance for Doubtful Accounts = Estimated Bad Debts Expense The objective for the entry is to make the Allowance account balance equal to the portion of outstanding Accounts Receivable estimated to be uncollectible.

  23. Aging of Accounts Receivable Approach • Assumes that the older the Account Receivable the more likely is will become uncollectible. Steps: • Group accounts based on how much time has passed since they were created. • Estimate rates of uncollectibility for each group. • Apply rate to each group to get the required balance for the Allowance account.

  24. Aging of Accounts Receivable Example: At December 31, the receivables for ABC Co were classified as follows:

  25. Aging of Accounts Receivable Using estimated bad debt percentages, ABC Co would calculate the estimated uncollectible amount as follows:

  26. Aging of Accounts Receivable ABC Co’s unadjusted balance in the allowance account is a debit of $700. The previous computation shows the desired balance is $2,350; therefore, the adjusting entry is for $2,350 + 700 = $3,050. Allowance for Doubtful Accounts Unadj. bal. 700 3,050 Adj. bal. 2,350 • Bad Debts Expense 3,050 • Allowance for Doubtful Accounts 3,050 • To record estimated bad debts

  27. Direct Write-off Method

  28. Writing Off a Bad Debt — Direct Write-off Method Example: A specific customer’s account (Ron Trent) is considered uncollectible. The entry to record the write-off is: Bad Debts Expense 450 Accounts Receivable—Ron Trent 450

  29. Short-Term Notes Receivable

  30. Short-Term Notes Receivable Principal of the note Annual interest rate Time expressed in years Interest = X X

  31. Short-Term Notes Receivable Example: Sample Co receives a $2,000, 90-day, 10% promissory note at the time of a sale. The entry to record the transaction would be: Notes Receivable 2,000 Sales 2,000

  32. Short-Term Notes Receivable Example: On December 1, Sample Co receives a $5,000, 60-day, 10% promissory note and $1,000 cash to settle a $6,000 past-due account. The entry to record the transaction would be: Cash 1,000 Notes Receivable 5,000 Accounts Receivable 6,000

  33. Short-Term Notes Receivable On December 31, 30 days after the note is issued, an accrual for interest earned on the note is made. The entry to record the accrual would be: Interest Receivable 41.10 Interest Revenue 41.10 (5,000 x 10% x 30/365) On January 30, the 60-day note matures. The entry to record the honouring of the note would be: Cash 5,082.20 Interest Revenue 41.10 Interest Receivable 41.10 Notes Receivable 5,000.00 (5,000 x 10% x 60/365)= 82.20

  34. Converting Receivables to Cash Before Maturity

  35. Converting Receivables to Cash Before Maturity

  36. Ratios

  37. Ratios Net Credit Sales Average accounts receivable Accounts receivable turnover = Days’ sales Uncollected Average accounts receivable Net sales x 365 =

  38. Accounts Payable

  39. Accounts Payable • Example: Sample has the following Accounts Payable balances at March 30: General LedgerA/P Subledger Accounts Payable Jones Co bal. 5,000 bal. 2,000 Store ABC bal. 3,000 Total 5,000 Control account balances with total of subledger balances.

  40. Accounts Payable • Example: Credit purchase for $550. • Purchases 550 Accounts payable - Store ABC 550 General LedgerA/P Subledger Accounts Payable Jones Co bal. 5,000 bal. 2,000 550 bal. 5,550 Store ABC bal. 3,000 550 bal. 3,550 Total 5,550 Control account balances with total of subledger balances.

  41. Accounts Payable • Example: Payment on accountAccounts Payable - Jones Co 850 Cash 850 General LedgerA/R Subledger Accounts Payable Jones Co bal. 5,000 bal. 2,000 850 550 850 bal. 1,150 bal. 4,700 Store ABC bal. 3,000 550 bal. 3,550 Total 4,700 Control account balances with total of subledger balances.

  42. Liabilities

  43. Current vs. Long-Term Liabilities

  44. Current vs. Long-Term Liabilities Current liability Long-term liability Balance sheet date 1 year or operating cycle Examples: • Accounts payable • Unearned revenues • Wages payable • Current portion of • notes payable • Bonds payable • Lease obligations • Long-term portion of notes payable

  45. Known (Determinable) Liabilities • Examples: • Accounts payable • Unearned revenues • Payroll taxes • Sales taxes • Notes payable

  46. Short-Term Notes Payable

  47. Short-Term Notes Payable: Example • On November 30, a note is used to replace a $5,000 overdue account payable that does not bear interest. The customer agrees to pay $1,000 cash and sign a 60-day, 10% note to replace the account payable. • The customer’s entry to record this transaction would be: • Accounts payable 5,000 Cash 1,000 Notes payable 4,000

  48. On December 31, the customer’s year end, an interest accrual is made. • The customer’s entry to record this accrual would be: • Interest expense 33.97 Interest payable 33.97 • $4,000 x 10% x 31/365

  49. On January 30, the note’s due date, the note and interest is paid in full. • The customer’s entry to record this would be: • Notes payable 4,000.00 Interest payable 33.97 Interest expense 31.78 Cash 4,065.75 • $4,000 x 10% x 29/365 = $37.78