Chapter 6 Flashcards
5 key elements of internal control systems
Physical controls Assignment of responsibilities Separation of duties Independent verification Documentation
Bad debts are effected at their carrying amount which =
Accounts receivable - allowance for doubtful accounts
Allowance for doubtful accounts is a contra
Asset account
Allowance method
Management estimates amount of receivables it expects not to collect
Three key journal entries under allowance method
Allowance entry : establishes allowance for doubtful accounts and records the bad debt expense
Write off entry : removes an AR if it is deemed uncollectible
Recovery entry: customer makes payment for an account that has been written off
Allowance entry
Dr bad debts expense
Cr allowance for doubtful accounts
Affects income statement by increasing expenses and balance sheet by reducing carrying amount of AR
Write off entry
Dr allowance for doubtful accounts
Cr AR
Recovery entry
Dr AR
Cr allowance for doubtful accounts
Dr cash
Cr AR
2 methods to estimate amount uncollectible AR
Percentage of credit sales method
Aging of accounts receivable
Percentage of credit sales method: bad debts expense =
Sales on account * historic %
Allowance for doubtful accounts usually has what balance
Credit
May have debit balance if write offs exceed the allowance
Direct write off method journal entry
Dr bad debts expense
Cr AR
Problem with this is that the revenue ends up being recorded in one period and the associated bad debts expenses in another
Factoring
Selling AR to another company
Factor
Company purchasing the AR
Factoring with recourse
Factor is able to come back to seller for payment if unable to collect
