Chapter 5 Flashcards
Net Sales Formula
Sales Revenue $xx
- Sale R&A (xx)
- Sales Discount (xx)
= “ Net Sales Revenue” $ xx
Items that reduce net sales
- Sales Discounts (Gross Method)- incentive for customers to pay early
- Sales Returns & Allowances- when customers return merchandise or receive damaged goods
- Reporting “Net” Sales (Multi step income statement)
Account Receivables
amounts due from customers from sale of goods/services
Recording and Reporting
record when sale is made
when to record uncollectible receivables
record in same acct. period as the revenue is recorded (use an estimate)
Bad debt expense
cost of doing business on credit
How to Report:
- Bad Debt Expense- operating expense on the income statement. must report the expense in the same accounting period you recognize the credit sale (follows matching)
- Accounts receivable- current asset on the balance sheet. GAAP: must record your account receivables at the amount you expect to receive in cash, this is called the Net Realizable Value (NRV)
Recording Bad Debts
- Direct write off method- wait until you can specifically identify the bad debt customer. this method can only be used if accts. rec. are immaterial
- Allowance Method- estimates uncollectible amounts at end of year, this is the preferred method, follows matching
Ways to estimate bad debts (using allowance method)
Income statement method
Balance sheet method
Income statement method
est. = % of credit sales for year
- once you calculate your estimate this is “Bad Debt Expense” on Income stmt.
$ Estimate = Bad Debt Expense
Balance Sheet Method
est. = % of End A/R
- once you calculate your est. this is the new End Bal. in Allowance for Doubtful Accounts on Bal. Sheet
$ Estimate = End Balance in Allowance for Doubtful Accounts
- using the balance sheet method: BDE is always a plug
