Exam 3
Aging of Receivables Method
1. Classify each receivable by how long it is past due. 2. Each age group is multiplied by its estimated bad debts percentage. 3. Estimated bad debts for each group are totaled.
Two advantages to the allowance method:
1. It records estimated bad debts expense in the period when the related sales are recorded. 2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.
Two Methods to Estimating Bad Debts Expense
1. Percent of Sales Method 2. Balance Sheet Methods‒Accounts Receivable Percent of Accounts Receivable Aging of Accounts Receivable
Allowance Method
At the end of each period, estimate total bad debts expected to be realized from that period's sales.
Adjusting entries are recorded for the reconciling items on the
Book side of the reconciliation
Cash Receipts Journal
Cash from credit customers Cash from cash sales Cash from other sources
Reimbursement of Petty Cash Fund
Cash payments report is used in making the journal entry to reimburse the fund. Debit each of the expenses and credit Cash.
Percent of Receivables Method
Computes the estimate of the Allowance for Doubtful Accounts which will give you an estimate of Bad Debts Expense. Year-end Accounts Receivable x Bad Debt %
Committee of Sponsoring Organizations five ingredients of internal control which add quality to accounting information:
Control environment Risk assessment Control activities Information & communication Monitoring
System Principles
Control, relevance, compatibility, flexibility and cost benefit
Accounts Payable Ledger
Controlling Account: Accounts Payable Characteristic: Amounts owed to creditors
Accounts Receivable Ledger
Controlling Account: Accounts Receivable Characteristic: Amounts due from customers
Cash
Currency, coins, and deposits in bank accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
Accounting information systems collect and process data from transactions and events, organize them in reports, and communicate results to
Decision Makers
Internal control principles common to all companies:
Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews.
Limitations of Internal Control
Human Error: Carelessness, Misjudgment, Confusion Human Fraud: Intentionally defeating internal controls for personal gain
Cash Over and Short
If petty cashier fails to obtain a receipt for payment or overpays an amount, cash over or short will result. Petty cash payments report plus cash left in account will not total to the fund balance. Shortage: difference is debited to Cash Over and Short. Overage: difference is credited to Cash Over and Short.
Cash Budget:
Includes projected cash receipts and cash disbursements.
Human fraud triple-threat
Opportunity, Financial Pressure, Rationalization
Interest Computation
Principal of the note x Annual interest rate x Time expressed in fraction of year = Interest
Enterprise Resource Planning Software (ERP)
Programs that manage and integrate a company's vital operations.
Policies and Procedures use to:
Protect assets. Ensure reliable accounting. Uphold company policies. Promote efficient operations.
General Journal Transactions
Purchase of plant assets by Note Payable, Receipt of a Note Receivable, Purchase Returns & Allowances, Sales Returns & Allowances
Keys to Controlling Cash Payments:
Require all payments to be made by check. Limit access to checks except for those who have the authority to sign checks.
Cash Equivalents
Short-term, highly liquid investments that are: 1. Readily convertible to a known cash amount. 2. Close to maturity date and not sensitive to changes.
Bad Debts
Some customers may not pay their account. Uncollectible amounts are referred to as this.
System Components
Source Document, Input Devices (Keyboard and Scanners), Information Processor (Journals and Ledgers), Cloud or Information Storage, Output Devices
Purpose of Bank Reconciliation
The balance of a checking account reported on the bank statement rarely equals the balance in the depositor's accounting records.
Decreasing a Petty Cash Fund
To decrease, debit Cash and credit Petty Cash.
Increasing a Petty Cash Fund
To increase, debit Petty Cash and credit Cash.
Promissory note
a written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.
Batch Processing
accumulates information for a period of time and then processes all the data at one time (daily, weekly, or monthly)
Receivable
an amount due from another party
Control of cash payments important
as most large thefts are from payment of fictitious invoices
Banker's rule
calculating interest based on 360 days in the calendar year
The balance of the Accounts Payable
controlling account in the general ledger should equal the accounts in the accounts payable subsidiary ledger
The balance of the Accounts Receivable
controlling account in the general ledger should equal the accounts in the accounts receivable subsidiary ledger
Cost-benefit principle
costs of internal controls must not exceed their benefits
Source Documents
electronic files creating a "paperless" system
Online Processing
enters and processes data immediately
A company must also maintain a separate account
for each customer that tracks how much that customer purchases, has already paid, and still owes
Cash and similar assets are called
liquid assets because they can be readily used to pay current liabilities
Subsidiary Ledgers
listing of individual accounts with common characteristics
Schedule of Accounts Receivable
lists each customer and the balance owed.
Schedule of Accounts Payable
lists each supplier and the balance owed to them
A company with many sales returns
may use a Sales Returns and Allowances Journal
Materiality constraint
permits direct write-off method if results approximate results using the allowance method.
Expense recognition principle
requires expenses to be reported in the same accounting period as the sales they helped produce.
Sarbanes-Oxley Act
requires managers and auditors of public companies to document and certify the system of internal controls. Section 404 of it requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting.
After all items are posted
the balance in the accounts receivable controlling account is equal to the sum of the balances in the accounts receivable subsidiary ledger.
Maturity date of a note
the day the note (principal and interest) must be repaid
Cloud computing
the delivery of computing as a service rather than a product and uses applications via the Web instead of installing them on one's own computer
Even for rates less than one year
the rate is annualized
If a company has few sales returns
they may be recorded in the General Journal
Bad Debts Expense is computed as:
total estimated bad debts expense - previous balance in allowance account = current bad debts expense
Direct Write-Off Method
usually does not best match sales and expenses.
There are two methods of accounting for bad debts:
•Direct Write-Off Method •Allowance Method