Session 10 Flashcards
- Receivables - Current liabilities and Payroll -Corporation Income tax
Types of Receivables
- Accounts receivable
- Notes receivable
- Other receivable
These are the 3 major types of receivables.
Accounting for Bad Debts
- Selling on credit provides both a benefit and a cost
The Benefit = Selling to a wide range of customers
The Cost = unable to collect from some customers
- Uncollectible accounts create a cost or expense called bad-debt expense, uncollectible-account expense, or doubtful;-account expense
- Bad-debt is an operating expense
The Allowance Method
- Satisfies matching principle by matching bad debts losses (expenses) with revenues that produced the losses.
- Adjustments for bad debts are made at the end of the accounting period.
- Adjustments use a contra asset account called Allowance for Doubtful Account.
Recording Bad Debt Allowance
Bad Debts Expense (debit)
Allowance for Doubtful Accounts(credit)
Approaches to Estimating Uncollectible
Percent of Sales approach (or Income Statement approach)
- The primary focus is on estimating bad debts expense for the income statement)
Accounts receivable approach (balance sheet approach)
-Aging-of-accounts-receivable method
- Percent-of-accounts-receivable method
(The primary focus is on estimating the allowance for doubtful account for the balance sheet)
Percent of Sales Approach
Under this approach, bad debts expense is computed as follows:
Current Period Sales (on account)
x Estimated Bad Debt %
= Estimated Bad Debts Expense
- End of period adjustment would be:
Bad debts expense(debit)
Allowance for doubtful accounts(credit)
Percent fo Accounts Receivable approach
- This method assumes that a percentage of Accounts Receivable s uncollectible.
- Using this method, we compute the estimate of the Allowance for Doubtful Accounts as:
Year-end Accounts Receivable x Bad Debt %
-Bad debts expenses is computed as:
Estimated adjusted balance in Allowance for Doubtful Accounts
- Unadjusted year-end balance in Allowance for Doubtful Accounts
= Estimated Bad Debts Expense
(The objective for the entry is to make the Allowance account balance equal to the portion of outstanding Accounts Receivable estimated to be uncollectible).
End of period adjustment entry would be:
Bad debts expense(debit)
Allowance for doubtful accounts(credit)
Aging of Accounts Receivable approach
- Assumes that the older the account receivable the more likely it will become uncollectible.
1) Group accounts based on how much time has passed since they were created
2) Estimate rates of uncollectibility for each group.
3) Apply rate to each group to get the required balance for the Allowance account.
Adjustment entry for the end of the period would be:
Bad debts expense(debit)
Allowance for doubtful accounts(credit)
Direct Write-off Method
- Sometime used as an alternative to the Allowance method when uncollectible accounts are not material.
- The loss from an uncollectible account is recorded when it is determined to be uncollectible.
- This method doe snot satisfy the principles of matching and conservatism.
The entry to record the write-off is:
Bad debts expense(debit)
Accounts Receivable-Clients account name(credit)
Credit Card Sales
- VISA and MasterCard are bank credit cards
- Assume that the customer at the KEG diner for 100$, and paid by VISA (the discount fee is 2%) this would be the journal entry:
Cash(debit) 98
C-CDiscount expense 2
Sales(credit) 100
(To record VISA sale less 2% discount fee)
-Note that the cash for the sale is received immediately when is it a bank credit card.
Debit-Card Sales
- The journal entry for the business is the same as if a credit-card was used - this includes a fee for usage
- The bank transfers the purchase amount, minus a fee, into the business’s account from the customer’s account.
The entry is:
Cash(debit). 55.85
Debit-Card Fee. 0.50
Sales(credit). 56.35
Online Payments
- PayPal, Apple Pay, and other providers of online payment solutions are usually accounted for in the same way as bank debit and credit card transactions.
- Payments are deposited directly into a company’s bank account at the time of the transaction, less a percentage discount and sometime an additional transaction fee.
- Companies that accept cryptocurrencies such s Bitcoin incur no transaction fees when the sale is made and finalized.
Notes Receivable
- A promissory note is a written promise to pay a specified sum of money at a particular future date.
- A note receivable may arise from a sale or may be given in settlement of an account receivable
- The maker pays the payee the maturity value
- The maturity value includes principal plus interest.
Interest is calculated as follows:
Interest = Principal of the note X Annual interest rate X Time expresses in years
The entry (2021) for a note received in (2020) for a sum of 1000$ at a 6% interest rate would be as follows:
Cash(debit) 1060
Note receivable(cr). 1000
Interest revenue(cr). 60
Acid-test (or Quick) Ratio
- This is a more stringent measure of the ability to pay current liabilities.
- It tells whether the entity can pay al of its current liabilities if they become due immediately.
- The higher the ratio, the better the ability to pay its current liabilities.
Acid-test ratio = Cash + Short-term investments + Net current receivables /
Total current liabilities
Accounts Receivable Turnover
- It indicates how rapidly accounts receivable are converted into cash.
Net Sales / Average net accounts receivable
