Revenue and A/R Flashcards
How is a cash sale recorded
Cash sale is recorded as Debit to cash account and credit to sales revenue
How is a credit sale recorded
Credit sale is recorded as debit to A/R and Credit to sales revenue
What are the two requirements of revenue recognition
Goods or services must be delivered to the customers
Cash or an asset virtually assured of being converted into cash must be received
Define gross sales and net sales
Gross sales are the initial revenues or asset inflows based on the initial sales price
Gross sales are decreased by the amount of the returns and allowances to calculate the net sales on the income statement
Define sales return
A sales return occurs when a customer returns previously purchased merchandise
Define sales allowance
A sales allowance is a reduction of the original selling price ex: if a good is broken or nearly obsolete customer might get it at a lower price
What sort of t account do sales allowances and sales returns go into
A contra account (Sales returns and allowances) combines both returns and allowances in a single account
Define a trade discount
Trade discounts offer one or more reductions to the gross selling price for a particular class of customer ex: OAPs and students at the cinema The gross sales revenue recognised from a trade discount sale is the price received after deducting the discount
What are three reasons retailers accept credit cards
To attract credit customer who would otherwise shop elsewhere
To get cash immediately instead of waiting for customers to pay in due course
To avoid the cost of tracking, billing and collecting customers accounts
How to record sale on a credit card
Debit Cash (gross minus credit card charge)
Debit cash discount - bank cards
Credit Sales account
What’s the formula for net revenue on the income statement
Revenue-Returns-Allowances-Discounts = Net Revenue
How is VAT treated in sales
Gross revenue/sales returns and allowances should be recorded net of VAT as company is just a tax collector
What si the five step model for recognising revenues
Identify the contracts with customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognise revenue when (or as) a performance obligation is satisfied
Explain uncollectible accounts
Uncollectible accounts is known as bad debts - some people are unwilling or unable to pay what they owe
Define bad debt expense
The cost of granting credit that arises from uncollectible accounts is called bad debts expense
Explain specific write off
This involves waiting and seeing if debts are not paid. If 24months later A debtor declares bankruptcy the debt is written off
Bad debt expense is debited
A/R is credited
What are the two basic concepts of the allowance method for uncollectible accounts
An estimate of the amounts that will ultimately be uncollectible and
A contra account, which contains the estimated uncollectible amount that is deducted from the total accounts receivable
Whats the contra account for uncollectible accounts called
The contra account is called allowance for uncollectible accounts
How do we write off the debt in allowance method
Contra asset account recues (debit)
A/R reduces (credit)
Then calculate what the allowance should be equal to and :
Credit different to the allowance account
While debiting a bad debt expense to the amount that was lost
If bad debt is recovered what happens in the journal entry?
We have bad debts recovery by reinstating A/R DR
And reinstating Allowance for bad debt CR
What is the theory behind aging of A/R
As more time elapses after the sale, collection becomes less likely
Define absconded
Running away and leaving with another person’s money or property.
What is the formula for A/R turnover
Credit sales/ Average A/R
What is the meaning of a high A/R turnover vs low turnover
High turnover indicates rapid collection, low turnover implies slow collection
Formula for Days to collect ratio
365/ A/R turnover
