Revenue and A/R

Question 1

How is a cash sale recorded

Answer 1

Cash sale is recorded as Debit to cash account and credit to sales revenue

Question 2

How is a credit sale recorded

Answer 2

Credit sale is recorded as debit to A/R and Credit to sales revenue

Question 3

What are the two requirements of revenue recognition

Answer 3

Goods or services must be delivered to the customers

Cash or an asset virtually assured of being converted into cash must be received

Question 4

Define gross sales and net sales

Answer 4

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

Question 5

Define sales return

Answer 5

A sales return occurs when a customer returns previously purchased merchandise

Question 6

Define sales allowance

Answer 6

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

Question 7

What sort of t account do sales allowances and sales returns go into

Answer 7

A contra account (Sales returns and allowances) combines both returns and allowances in a single account

Question 8

Define a trade discount

Answer 8

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

Question 9

What are three reasons retailers accept credit cards

Answer 9

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

Question 10

How to record sale on a credit card

Answer 10

Debit Cash (gross minus credit card charge)
Debit cash discount - bank cards
Credit Sales account

Question 11

What’s the formula for net revenue on the income statement

Answer 11

Revenue-Returns-Allowances-Discounts = Net Revenue

Question 12

How is VAT treated in sales

Answer 12

Gross revenue/sales returns and allowances should be recorded net of VAT as company is just a tax collector

Question 13

What si the five step model for recognising revenues

Answer 13

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

Question 14

Explain uncollectible accounts

Answer 14

Uncollectible accounts is known as bad debts - some people are unwilling or unable to pay what they owe

Question 15

Define bad debt expense

Answer 15

The cost of granting credit that arises from uncollectible accounts is called bad debts expense

Question 16

Explain specific write off

Answer 16

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

Question 17

What are the two basic concepts of the allowance method for uncollectible accounts

Answer 17

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

Question 18

Whats the contra account for uncollectible accounts called

Answer 18

The contra account is called allowance for uncollectible accounts

Question 19

How do we write off the debt in allowance method

Answer 19

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

Question 20

If bad debt is recovered what happens in the journal entry?

Answer 20

We have bad debts recovery by reinstating A/R DR

And reinstating Allowance for bad debt CR

Question 21

What is the theory behind aging of A/R

Answer 21

As more time elapses after the sale, collection becomes less likely

Question 22

Define absconded

Answer 22

Running away and leaving with another person’s money or property.

Question 23

What is the formula for A/R turnover

Answer 23

Credit sales/ Average A/R

Question 24

What is the meaning of a high A/R turnover vs low turnover

Answer 24

High turnover indicates rapid collection, low turnover implies slow collection

Question 25

Formula for Days to collect ratio

Answer 25

365/ A/R turnover