ACCT: Midterm 2
Operating Margin
operating income/sales
Sales Discounts
reduction of normal selling price and is attractive to both parties -encourage prompt payament - reduces holding costs and intrest expense
How are the selling/invoice price recorded?
selling or invoice price is usually assumed as price after adjustment for the trade or quantity discounts. Trade and quantity discounts are not recorded separately in the accounting records
Allowance Example w/Write Offs
A/R - (less: allowance for doubtful accounts)= net accounts recivable
Accounting for Accounts Receivable with the allowance method
A/R: 1,000,000 Less: Allowance for dbt acct: 25,00 A/R Net: 975,000
Accounting for Accounts Receivable with the direct write off methods
A/R: 1,000,000 at the end of the year in full
Types of Recivables
Accounts Receivables/Notes Current/non current trade/non-trade
Current Receivables vs noncurrent
Accounts receivable are typically due in 30 to 60 days and do not have interest while notes receivable have interest and typically are due in anywhere from 3 to 12 months. - over a year, note receivable becomes non-current!
Transactions recorded by the business but not yet recorded by the bank: Bank will have to make adjustments.
Adjustments to the Bank Bal: (-) Outstanding Checks: a check issued and recorded by the business that has not been "cashed" by the recipient of the check (+) Deposits in Transit: an amount received and recorded by the business, but which has not been recorded by the bank in time to appear on the current bank statement. (+/-) Errors: adjustments to the bank account for errors that increase/decrease the business's books.
Cash Equivalents:
all highly liquid investments with an original maturity of 3 months or less at the inception date. They are easily convertible into known amounts of cash, close enough to maturity that they are insensitive to changes in interest rates.
Transactions recorded by the bank but not yet recorded by the bank: Business will have to make adjustments
(-) Service Charge: fees charged by bank for services it provided (+) Intrest Earnings: Bank pays you intrest that you earned over time (-) Intrest on your loans: you have to adjust your account for the intrest accrued on loans (-) NSF Check: Bank deducts money from the business's account for the amount the check they issued was (-) Debit Memo: Bank pays an expense (ex utilities) for you. Decreases to the bank's books that need to be recorded on the business books. (+) Credit Memo: Bank collected money from customer. Increases to the bank's books that need to be recorded on the business' books (+/-) Errors: adjustments to the business account for errors that increase/decrease the bank's books.
Sales Returns and Allowances are what type of account?
- Contra Asset Accounts to Sales Revenue while calculating net sales - If sales revenue is Credit, then sales returns and allowances are debit
Adjusting Entries for Bank Reconciliation of Company pt 2: - Record Bank service charge - Record NSF check - Record debit memo for electric bill
- Debit: Bank Service Charge Expense, Credit: Cash - Debit: Accts. Receivable, Credit: Cash - Debit: Utilities Expense, Credit Cash
Adjusting Entries for Bank Reconciliation of Company pt 1: - Correct Error in Recording Check - Record Intrest
- Debit: Cash, Credit: Acct. Payable - Debit: Cash, Credit: Intrest Income
When bill has already been paid, what can the seller do?
- Provide refund of portion of purchase price, and record credit to cash - Or can apply the "allowance" that previously recorded
How Bad Debts are Treated:
- as an expense Since defaults on credit sales arise from actions of the purchaser rather than the seller, bad debts should not be recorded as revenue reductions. If bad debts are not treated as negative revenues, then they must be treated as expenses
Aging Method
- focuses on potentially uncollectible accounts among current period sales - Beg Balance of Allowances for bad debt- W/O = Pre balance Pre balance - (bad debt expense)= end balance - find bad debt expense
Percentage of Sales Method
- focuses on recivables owed by customers that might be uncollectible
Reduction in sales revenue should...
- recorded only for transactions that result from actions of the seller -acceptance of returned merchandise (a sales return)
Two methods to estimate bad debt expense under allowance procedure:
-Percentage of credit sales -Aging Method
Direct Write off method- Calculate Bad Debt Expense
-Waits until an account is deemed uncollectible before reducing accounts receivable and recording the bad debt expense - can only be used if bad debts are immaterial under GAAP debit allowance for doubtful accounts, credit accounts receivable
Free Choice: J/E: Setting up a petty cash fund, reimbursing, and adding to fund
1. Debit: Petty Cash Fund, Credit: Cash 2. Debit: Supplies/Expenses, Credit: Cash 3. Debit: Petty Cash Fund, Credit: Cash
Journal Entries for Sales Discount: Within Sales Period
1. Dr. A/R, Cr. Sales Revenue 2. Dr. Cash, Cr. A/R All amounts of $14,700 which is net amount
Journal Entries for Sales Discount: After Sales Period
1. Dr. A/R, Cr. Sales Revenue @ 14,700 2. Dr. Cash @ 15,000 Cr. Sales Revenue @ 14,700 Cr. A/R @ 300
Free Choice Response: How to make a Bank Reconciliation- to calculate the adjusted cash balance
1. Identify Outstanding Checks, Deposits, and errors 2. Write down these adjustments under Add or Less 3. Start with beginning cash balance. Under Add, write adjustments. Then, under Less, write adjustments. 4. Calculate final cash balance
Operating Cycle Steps
1. Purchase Inventory and other assets 2. Sell or use assets (inventory and other assets) 3. Collect from customers (financial resources/invoices)
2/10, n/30
2% discount if paid within 10 days, otherwise net amount due within 30 days
Notes Receivable
A "note" is a legal document given by a borrower to a lender stating the timing of repayment and the amount (principal and/or interest) to be repaid.
Percentage of Credit Sales Method
A method of determining bad debt expense whereby past experience and management's view of how the future may differ from the past are used to estimate the percentage of the current period's credit sales that will eventually become uncollectible.
Accounts Receivable
Amounts to be received in the future due to the sale of goods or services
Bank Reconciliation: Bank vs Books
Bank duplicates the company's accounting by keeping their own accounting records of your account. However, the bank's and your accounting records don't always agree because transactions are not recorded simultaneously.
When Cash is paid out
Cash acct is credited.
When Cash is Received
Cash acct is debited.
Sales Allowances
Credit allowed a customer for part of the sales price of merchandise that is not returned, - decrease in the vendor's accounts receivable
Calculate Bad Debt Expense w/Allowance Method:
Dec 31: Dr. Bad Debt Exp (increase current "A/R" expenses not paid) Cr.Allowance for Doubtful Accounts (decreasing acct, since sales revenue is credit acct, allowance is opposite)
Bank Statement: Deposits and Withdraws
Deposits (yours) = credits on bank statements. They increase the bank's liability to you. Withdraws (yours) = debits on the bank statement because decrease the bank's liability to you.
Direct Write Off Method for Bad Debt Expense
Direct write-off method fails to recognize the bad debt expense in the period it helped generate revenues, which is the period of sale, and does not show accounts receivable at net realizable value on the balance sheet. (GAAP says no)
Sales Invoices
Documents provided to clients when a business sells services or goods; tells the business how much revenue to record
Write-Off of an Uncollectible Account journal entry (no impact on financial statements/NRV)
Dr. Allowance for doubtful accounts Cr. Accounts receivable Beg Bal of Allowances - W/Os= pre-adjusted balance Pre-Adjusted Balance + any adjustements (sales % method) = ending balance
Journal Entry for Returns/Allowances: Granting Allowances for following year as merchandise is returned
Dr: Returns and Allowances Liability 1.5K (increase= reduction of sales revenue) Cr: Accounts Receivable 1.5K
Journal Entry for Returns/Allowances: Estimated Allowances for the end of the year B/S
Dr: Sales Revenue 2K Cr: Returns and Allowances Liability 2K
GAAP accounts receivable requirement:
GAAP requires accounts receivable to be shown at their "net realizable value," which is the amount of cash the company expects to collect.
Gross Profit Margin
Gross Profit/Sales
Accrual Basis: Revenue Recognition
In the period goods and services are provided to customers. - When performance obligation is satisfied, usually at sale, seller recognizes revenue - in service organizations, revenue are recognized as they are earned (things are done)
A/R Turnover
Net Sales / Avg. net A/R
How should companies record the revenue and associated receivable?
Net ammount
When are bank reconciliation made?
Once a month. The bank returns all checks processed during the period. Together with a detailed record of the account's activity. This is called a bank statement.
Objectives of the company
Operations, Reporting, and Compliance
Petty Cash
Putting money aside for future small purchases
Sales Returns
Refer to merchandise that customers return to the seller after the sale.
Role of Internal Control
Regulations and controls within a business to manage employees and the system. Management will ensure that employees operate within the scope of their assigned responsibility and act for the business's good.
Cash Shortage: Cash Short
Requires a debit to cash over short- recorded too little money, need to account for that in the debits JE: Debit Cash, Credit Sales Revenue JE: Debit Cash over short, Credit Accounts Recivable
Cash Overage: Cash Over
Requires credit to cash over short- recorded too much money- needs to be accounted for by adding credit to offset cash in debits JE: Debit Cash, Credit Sales Revenue JE: Debit Cash received, Credit Cash over and Short for the difference
Factor A/R
Sell receivables for another factor to bear the liabilities in return for quick cash
Operating Cycle
The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash. - length of operating cycle influences the classification of assets and liabilities on the balance sheet - affects the amount of capital a business needs and the policies that govern its sales
Net Price
The price after the trade discount has been deducted from the list price.
Bank Reconciliation: Accounting for differences
To ensure accounting records are consistent with the bank's accounting records- any differences must be reconciled (bank reconciliation)
Types of Sales Discounts: - Trade - Quantity
Trade: reduction in the selling price granted by the seller to a particular class of customers Quantity: reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered
Cash Over Short:
When Cash receipts be deposited in a bank daily: The amount of cash received during the day is debited to the cash accounts The amount deposited should be equal to the total of cash register tapes If amounts do not equal each other, the discrepancy is recorded in an account called cash over short.
How Bad Debt Occurs:
When customers do not pay their accounts receivable, bad debts (also called uncollectible accounts) result
Allowance Method
bad debt expense is recognized in the period of sale, which allows it to be properly matched with revenues - bad debt expense is recognized before the actual default (allowance acct)
Amount of Revenue Recognized
cash received or cash equivalent of the receivable
Components of internal control:
control environment and ethical behaviour, risk assessment, control activities, information and communication, and monitoring.
Cash
currency, coins, savings, and checking accounts. Also, checks and money orders.
Control Activities
designation of duties, safeguarding, outside checks, and adequate documents and record.
3 changes to sales revenues
discounts, returns, and allowances
Trade Receivables
due from customers purchasing inventory in the ordinary course of business
Net Profit margin
net income/net sales
Significant changes in sales revenue, returns, allowances, and net income
quality problems, decrease in net income affects profitability
Bank Statement
shows the beginning and ending account balance and the individual deposits and withdrawals recorded by the bank during the period
Difference btw: Write off method and Allowance
the direct write-off method would make the entry in the period the customer defaults, while the allowance method makes the entry in the period of sale
Gross Price
the price in the market (the price paid by or received by the party not paying any other intrest, discount, or changes to the original price)
Revenue Recognition under GAAP and IFRS
the same/consistent
Sarbanes Oxley Act of 2002
top management of publicly traded corporations have increased responsibility for a system of internal controls towards their financial statements
Non-Trade Receivables
transactions not involving inventory (such as interest receivable or cash advances to employees)
