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