Lecture 10 Flashcards
accumulated depreciation is a contra ___ account
asset
sales returns and allowances is a contra ___ account
revenue
allowance for doubtful accounts is a contra ___ account
asset
sales returns journal entry (record sale & sales return)
- A/R (or Cash)
Sales Rev - Sales returns
A/R (or Cash)
Sales discounts (2 types)
- trade/volume discounts = reduction for a particular class of customers
- cash or sales discounts = encourage prompt payments
trade/volume discounts
record at DISCOUNTED price
ex. large quantity, early orders
cash/sales discounts
record at FULL price
contra-revenue Sales Discounts used
credit terms (ex. interpret 2/10, n/30)
customer gets a 2% discount by paying w/in 10 days or NO discount (pays full amount) w/in 30 days
how do sales returns and cash discounts affect sales?
they decrease sales
journal entry to record payment received w/in 10 days (2/10, n/30)
Cash 98
sales discount 2
A/R 100
gross sales
total sales revenue before deducting sales returns and allowances and cash discounts, if any
net sales
total sales revenue reduced by sales returns and allowances and cash discounts
direct write-off method
in period in which sales made, NI overstated
in period when default occurs, NI understated
time b/w sale and time of defualt, AR overstated
direct write-off method journal entry
bad debts expense
A/R
allowance for doubtful accounts method
est amount of bad debt based on past history
maintain AFDA account (contra-asset)
this updates every period with new estimates
journal entry for bad debts est and write off
- bad debts expense
allowance for bad debt - allowance for bad debt
A/R
periodic increases in AFDA account
reflects new periodic estimations of default that flow to bad debt exp (which lowers the period’s NI)
periodic decreases in AFDA account
result from PERMANENT write-offs of particular A/R’s
decreases DO NOT flow to bad debt expense since the expense was already taken when the original estimate was made
% of sale method
bad debt exp will always be x% times current period credit sales
changes in AFDA will be the period’s bad debt exp
prior journal entries already accounted for anticipated default; when it happens, avoid double counting by…
SUBTRACT default amount from AR (credit)
SUBTRACT default amount from AFDA (debit)
ex. 3% of sales not collectible, $2M sales, actual default of 57,000
A/R 2M
Sales Rev 2M
Bad debt exp 60,000
AFDA 60,000
AFDA 57,000
A/R 57,000% of A/R method; steps
estimate DESIRED EB of AFDA as a percentage of the current ending balance of A/R
- historical avg uncollectible % = ave write-offs / ave EB A/R
- desired EB AFDA = (hist avg uncollectible %) * (current period EB AR)
- make adjusting entry to get AFDA to target amount
bad debt exp
AFDA
aging of receivables method
for each age category, there is a dollar amount of accounts in each one, with probability of default
multiply dollar amount and probability of default to get contribution to AFDA
get total AFDA by adding up all category amounts
when rate is too high (AFDA balance is too high), adjusting entry:
AFDA
Gain on Re-estimation
when rate is too low (AFDA balance is too low), adjusting entry:
Loss on re-estimation
AFDA
recovery of bad debt
reverse write-off and record normal collection
A/R
AFDA
Cash
A/R
