lecture 6 Flashcards
companies frequently offer 3 things
What are they?
1) Sales disount to other business
Ex: 2/10,n30
Make a jounral entry assuming a1,000 credit sale
2) sales returns and allowances
3) Credit card sales to consumers
1) Under IFRS, Revenue redcued by Expected disoucnt at the time of Sale
Sales discount to toher business:
are disoucnts that can be offfered to enoruage rompy payments of a receivable
So in the example above, we know that 2 is th percentage of the discount, 10 is the number of days in the discout period
N= Total sales minus returns
30 = maximum credit period
so it would be
2% * 1000 = 20, so they get a
1) Sales disount to other business, under IFRS
Ex: 2/10,n30
Make a jounral entry assuming a1,000 credit sale
1) Under IFRS, Revenue redcued by Expected disoucnt at the time of Sale
Sales discount to toher business:
are disoucnts that can be offfered to enoruage rompy payments of a receivable
So in the example above, we know that 2 is th percentage of the discount, 10 is the number of days in the discout period
N= Total sales minus returns
30 = maximum credit period
so it would be
2% * 1000 = 20, so they pay 20 dollars less than 1000
Jounral entry:
Accounts Receivable (+A) 980
Sales Revenue (+A) 980
Sales Returns Under IFRS,
Assume: customer paid 2,000 for goods that cost 1000
Assume Estimained returns of 10%
Record it as a journal entry at the time of sales and when its returned
Under IFRS: Revenue reduced by EXPECTED Retunrs at the Time of sales
Cash 2000
Refudn liability: 200
sales revneue 1800
cosg 900
est inventory return
100
inventory 1000
when returned
refund liability 200
csh 200
inveotry 100
est inventroy return 100
Credit card sales to consumers
Assume a 3% fee on a 2000 sale, with cash deposited n the day of sale
Under IFRS: Record Credit card fees as an expense
Cash (+A) 2000
Sales revenue (+R,-SE) 2000
Bank charge 60
Casj 60
Bad Debt expense:
can it be avoideed and what is the solution?
where is bad debt expense located?
Ex: you made 100,000 credit sales int he current period and you know that 9,000 is uncolletable make a adjusing entry
WHAT ARe the things that increase and decrease doubtful accounts
Expense associated with Accounts Receivable that will not be collected because a customer is unbale or unwilling to pay
It cna be resolved if the company 1) only uses cash or 2) to such low risk customers that many sales would be missed
Bad debt is located in the income statement
The solution is: Allowance method
on the income statment: Reconigze estimsaed bad debt expense related to credit sales made inthe current period
On the balance sheet: Reduce the book value of accounts receviable using a contra asset- Allowance or doubtful Accounts
Adjusting entry:
Bad debt expense (+E,-SE) 9000
Allowance for doubtful Accout (+xa,-A) 9,000
for doubtful accounts:
you have beginning balance and bad debt will increase doubtful accounts the write offs will decrease it
Estimaed uncollectiable accounts: Percetgnage of credit sales method
ex: credit sales of 100,000 where 1% expects to be uncollectiable
make journal entry for bad debt
Percentage of credit sales method:
Bad debt expense = cerdit sales * percetnag eof uncollectble
100,000*0.01=1000
Bad debt expense 1,000
CR Allowance for doubtufl 1000
Aging of Receivables Method
The Aging of Receivables Method relies on the fact that older receivables are less likely to be collected
* e.g., a customer who made a purchase on credit today is more likely to pay than a customer whose payment is already 120 days past due
Rather than estimating Bad Debt Expense directly, this method:
1. Estimates the ending balance of Allowance for Doubtful Accounts based on the age of the accounts within Accounts Receivable
- Calculates Bad Debt Expense as the amount of the credit needed to bring Allowance for Doubtful Accounts to this ending balance
write offs how does it effect journal entry?
Example: We learn that a customer who owes us $5,000 is not going to pay.
When it’s clear that a specific receivable will not be collected, we “write off” the Accounts Receivable and Allowance for Doubtful Accounts
Example: We learn that a customer who owes us $5,000 is not going to pay.
Dr.Allowance for doubtful Accounts (-xA,+A) 5000
CR. Accounts eceivable (-A) 5000
Recovery of an uncollectible account
An account previously written off may be collected in the future (this is rare) – this is called a bad debt recovery
we record this WITH two seprate entries:
1) Reverse the writee of entry to reinsate the account
Dr. A/R: 5000
CR. Allowance for DB: 5000
2) record the cash collection
DR.Cash : 5000
CR: AR 5000
We need to put the $5,000 back into Allowance for Doubtful Accounts (xA) because even though this customer paid, we still expect this amount to be uncollectible (i.e., other customers won’t pay)
How to find carrying amoutn of A/R
By Accounting reciebale - allowance for doubtful accounts = carrying amount
