AFM 191 - 4.3 - Revenue recognition + timing of customer payment Flashcards
What are the benefits of having more detailed journal entries for revenue?
allowing the company to easily see who the money is owed from without having to search for those details
allow the company to keep track of specifically what type of clothing is being sold,
being able to compare sales performance across product for a chosen period and knowing how much money is owing from specific customers at any point in time
How do businesses reduce risks of customers not paying them back on a later date?
- companies usually only allow sales on credit for those customers with whom they have an established history (frequent or large-dollar transaction) - customer is proven to be reliable, never causes issues with payment and brings in a lot of revenue for the company, that company is more likely to extend credit to that customer to strengthen the relationship
- negative consequences for the the customer not making payment is quite severe - business community communicates - if word about the customer’s unprofessional business practices goes out, the customer will have a hard time finding a reputable seller in the future
what account do businesses create for sales on account?
an allowance for doubtful accounts
define an allowance for doubtful accounts (AFDA)
an estimate of the percentage of account receiavbles that the business believes are uncollectible
what type of account is AFDA?
contra account
define a contra account
an account that reduces the balance of the account it is associated with, when the 2 accounts are netted together
what role does AFDA have?
placeholder for the fact that not all sales on credit will results in cash, we just don’t know which ones are not collectible yet
What does the bad debt expense represent?
the estimate of uncollectible accounts receivable and amounts Definitely known to be uncollectible on the income statement - it’s a reduction to net income and is an estimate (until it becomes known)
What happens once it becomes known that an amount will definitely not be collected?
the AFDA is no longer there as there is no estimate and the accounts receivables should be written off.
the bad debt expense balance shouldn’t change because it reflects the now definitely uncollectible amount plus the previous estimate of uncollectible accounts
what’s the journal entry process of “writing off accounts receivables”?
Debit the allowance for doubtful accounts
credit accounts receivables - Customer X
How does a company come up with their estimate of allowance for doubtful accounts?
using accounts receivable aging reports to determine the amount of AFDA they should book, which is usually captured in an accounting policy (from company) - justified by data analytics techniques + can be adjusted as business evolves
define an accounts receivable aging report
a type of report that shows how long individual A/R transactions have been outstanding - usually grouped into the following timeframes, less than 30 days, between 30-60 days, between 60-90 days, and over 90 days
Are percentages used for estimation for AFDA prescribed by any accounting standards?
no
Define unearned revenue
represents money received for a product that has not yet been delivered or a service that has not yet been provided to the customer
what type of account is unearned revenue and why?
a liability account because the company has a legal obligation to deliver the product or provide the services since payment has already been made
