(7) Reporting and analysing Cash & Receivables Flashcards
What are the 2 methods used to account for uncolletable amounts?
- Direct write-off method
2. Allowance method
Prepare a journal entry using the direct-write off method to write-off an uncollectable amount of $450.
DR Bad debts expense 450
CR Accounts receivable 450
Prepare a journal entry using the allowance method to write-off an uncollectable amount of $450.
DR Allowance for doubtful debts 450
CR Accounts receivable 450
What methods are used for estimating the doubtful debts allowance?
- Percentage of Net Sales method
2. Ageing of Total Receivables method
What kind of account is the Allowance for Doubtful Debts?
Contra-asset account
Equation for calculating Allowance for Doubtful Debts closing balance.
AFDD closing balance = AFDD opening balance + bad debts recovered + bad debts expense - bad debts written off
How do you calculate bad debts expense using the Ageing of Total Receivables method?
- Calculate the Allowance for Doubtful Debts closing balance
- Use the following equation to calculate bad debts expense:
AFDD closing balance = AFDD opening balance + bad debts recovered + bad debts expense - bad debts written off
How do you calculate bad debts expense using the Percentage of Net Sales method?
Bad debts expense = % of net credit sales
On April 11, 2019, $800 was received from J.Holloway; whose account of $800 had been written off as uncollectible in 2018.
Prepare a journal entry for the above transaction.
DR Accounts receivable - J. Holloway 800
CR Allowance for doubtful debts 800
(to record write-off for J. Holloway)
DR Cash at bank 800
CR Accounts receivable - J. Holloway 800
(to record cash receipts)
On Sept 8, 2019, Accounts Receivable-D. Draper $9,900 was written off as uncollectible.
Prepare a journal entry for the above transaction.
DR Allowance for doubtful debts 9,900
CR Accounts receivable - D. Draper 9,900
What is a dishonoured cheque?
A dishonoured cheque is a cheque is not paid by the bank because of insufficient funds in the payer’s bank account or because it has been cancelled by the payer.
What does the receivables turnover measure?
Liquidity of receivables
What is the receivables turnover formula?
Receivables turnover
= net credit sales / average net receivable
Unit: times per year
What is a dishonoured cheque?
A dishonoured cheque occurs when the bank on which the cheque is drawn refuses to pay the cheque, because it has been cancelled or because the balance of the account on which
it is drawn is less than the amount of the cheque.
What does the receivables turnover measure?
Liquidity of receivables
What is the receivables turnover formula?
Receivables turnover
= net credit sales / average net receivable
What is the average collection period formula?
Average collection period
= 365 / receivables turnover
Unit: days
What is the credit risk ratio formula?
Credit risk ratio
= allowance for doubtful debts / accounts receivable
(Expressed in percentage)
Journal entries for dishonoured cheque
Hint: journalise the original transaction then ‘reverse’ the original transaction
DR Cash
CR Accounts receivable
(original transaction)
DR Accounts receivable
CR Cash
(to record when a cheque is bounced)
How is accounts receivable reported under the allowance method?
Accounts receivable is reported at the NET amount on the statement of financial position
Reported like:
Accounts receivable X
Less: Allowance for doubtful debts X (net amount)
What is the difference between the direct write-off method and the allowance method?
Hint: net realisable value
Direct write-off method:
- net realisable value = accounts receivable amount
Allowance method:
- net realisable value = accounts receivable amount less allowance for doubtful debts
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Another difference is that the allowance method uses the allowance for doubtful debts
Journal entries for dishonoured cheque
Hint: journalise the original transaction then ‘reverse’ the original transaction
DR Cash
CR Accounts receivable
DR Accounts receivable
CR Cash
(to record when a cheque is bounced)
3 differences between a/c receivable and notes receivable
Accounts receivable:
- to be collected within 30-60 days (more liquid)
- less formal
- not interest bearing
Notes receivable:
- to be collected within 60-90 days or longer (less liquid)
- more formal
- interest bearing
What are the 3 accounting problems associated with a/c receivable?
- recognising accounts receivable
- valuing accounts receivable
- accelerating cash receipts from receivables