Week 5 Accounts Receivable EXAM 2

Does bad debt expense increase or decrease net income?

It decreases net income

What type of account is an allowance for doubtful accounts?

It's a contra asset account. The normal balance is a credit.

What type of account is Bad Debt expense?

It's an Expense account

Where can bad debt expense be found

It's on the Income statement

accounts receivable turnover ratio-were not able to....

Place a value judgment on these ratios. can't say if the ratio is good or not without something to compare it to, such as the industry average, or the ratio of this company last year without those meaningful comparison points. can't say if the ratio is good or average or not so good.

unlike the net credit sales method (percentage of sales)....

an existing balance in the allowance for doubtful accounts will effect the current years bad debt expense estimate.

How to record bad debt expense estimate (Journal Entry)

debit: bad debt expense credit: allowance for doubtful accounts Note: Made at the end of every year thus it is an adjusting entry

Transactions that decrease allowance for doubtful accounts

write-offs

Accounts receivable turnover ratio (Equation)

net sales revenue/average accts receivable = Accts receivable turnover IMPORTANT NOTE: Accts receivable at Jan. 1 + Accts receivable at Dec.31 / 2 = average accts receivable

Sales Discounts

offer of a cash discount to a credit customer for the prompt payment of a balance due.

Financial statement ratios relating to accounts receivable:

1. Accounts receivable turnover 2. Average collection period

Characteristics of sales returns & Allowances and Sales Discounts

1. Both accounts are classified as contra revenue accounts. 2. Result in a decrease to revenues (specifically sales revenue) on the income statement. Normal balance = Debit 3. Both accounts are subtracted from sales revenue on the income statement to calculate the net sales revenue

Where can the allowance for doubtful accounts be found?

1. Found on the balance sheet as a decrease to the accounts receivable specifically. (Assets)

Companies use one of two methods in estimating bad debt expense:

1. Percentage of sales (Net credit sales method) 2. Percentage of receivables (Aging method) Both methods are GAAP; the choice is a management decision.

Transactions that increase allowance for doubtful accounts

1. Recoveries 2. Bad debt expense Note: Beginning and ending balance will be on the right side (credit side of the account)

Two Adjustments to Sales Revenue

1. Sales Returns & Allowances 2. Sales Discounts

Reasons for offering sales discounts

1. increase sales 2. speed up collection of cash 3. minimize the likelihood of bad debts

two key points about the write-off entry:

1. it does NOT affect bad debt expense; bad debt expense is an estimate, thus when a specific account is written off bad debt expense is not recorded again, instead, we eliminate the Accounts Receivable and reduce the allowance for doubtful accounts. 2. write-off has no effect on NRV. This is because it reduces Accounts receivable and Allowances for doubtful accounts by the same amount This is counter-intuitive, yet true. The write-off entry reduces both the accounts receivable and the allowance for doubtful accounts, leaving the difference between the two accounts (net realizable value) unchanged. Remember: NRV = Accts receivable -Allowance for Doubtful Accounts

Two methods of estimating bad debt expense

1. percentage of sales (net credit sales method) 2. percentage of receivables (aging method) Note: Both methods are GAAP; the choice is a management decision.

Accounts Receivable

1. represents cash owed to the company 2. Come about when the company makes a credit sale (i.e., a sale on account).

If the company estimates that 1% of its credit sales for the year will be uncollectible and net credit sales for the year are $246,000, the estimated bad debt expense is....

2,460 (1% X $246,000)

Average Collection period (Equation)

365 / accts receivable turnover = Average collection period Note: Lower is better (collecting cash faster from credit customers).

If a customer pays their bill after the company has written-off their account receivable, what is it called?

A recovery

Accounts Receivable turnover example- Assume that XYZ Company has beginning accounts receivable of $35,000; ending accounts receivable of $40,000, and net sales revenue of $150,000 for 2025.

Accounts Receivable turnover = net sales revenue / average accts receivable 4 times = $150,000 / ($35,000 + $40,000) /2

Estimate the amount of bad debt expense in order to....

Adhere to the matching concept

Average collection period example- Assume that XYZ Company has beginning accounts receivable of $35,000; ending accounts receivable of $40,000, and net sales revenue of $150,000 for 2025.

Average collection period = 365 / accts receivable turnover 91.25 days = 365 / 4 REMEMBER: Accounts Receivable turnover = net sales revenue / average accts receivable $150,000 / ($35,000 + $40,000) /2 = 4 times

Bad debt expense equation

Bad debt expense = net credit sales × % expected uncollectible

Not all customers pay their bills. Thus, the company must record....

Bad debt expense each year.

To record making a credit sale (Journal Entry)

Debit: Accounts Receivable Credit: Sales Revenue

On June 24, 2025, Doxey Corporation sold inventory on account to Betty DeRose for $40,000. The credit terms offered by Doxey were 2/10, n/30. The inventory sold to Betty had a $12,000 cost to Doxey Corporation. On June 30, Betty paid ½ of her account balance. On July 20, Betty returned $8,000 of inventory to Doxey (the inventory returned had a cost to Doxey of $2,400) and paid her balance due. Record the necessary journal entry for Doxey Company on June 24

Debit: Accounts Receivable $40,000 Credit: Sales Revenue $40,000

How to record a write off (Journal Entry)

Debit: Allowance for doubtful accounts Credit: Accounts receivable Note: They can occur at any point during the year. write-offs represent the actual bad debts of the company.

To record a write-off (Journal Entry)

Debit: Allowance for doubtful accounts Credit: Accounts receivable

At the beginning of 2025, EZ Tech Company's accounts receivable balance was $140,000 and the balance in the allowance for doubtful accounts was a $2,350 credit balance. During 2025, EZ Tech reported sales of $1,050,000, all of which were sales on account. Collections from credit customers during 2025 totaled $670,000. During 2025, the company wrote off as uncollectible accounts receivable totaling $4,000 and recovered $5,000 of accounts that had been written off in the previous year. Prepare a journal entry to record the write-off of accounts receivable

Debit: Allowance for doubtful accounts $4,000 Credit: Accounts receivable $4,000 To record the write-off of accounts receivable

To record the bad debt expense estimate (Journal Entry)

Debit: Bad Debt Expense Credit: Allowance for Doubtful accounts

To record the collection of a credit sale (Journal Entry)

Debit: Cash Credit: Accounts Receivable

How to record a recovery (Journal Entry)

Debit: Cash Credit: Allowance for doubtful accounts

To record a recovery (Journal Entry)

Debit: Cash Credit: Allowance for Doubtful Accounts

On June 24, 2025, Doxey Corporation sold inventory on account to Betty DeRose for $40,000. The credit terms offered by Doxey were 2/10, n/30. The inventory sold to Betty had a $12,000 cost to Doxey Corporation. On June 30, Betty paid ½ of her account balance. On July 20, Betty returned $8,000 of inventory to Doxey (the inventory returned had a cost to Doxey of $2,400) and paid her balance due. Record the necessary journal entry for Doxey Company on July 20

Debit: Cash $12,000 Debit: Sales returns and allowances $8,000 Credit: Accounts Receivable $20,000 Debit: Inventory $2,400 Credit: Cost of goods sold $2,400

At the beginning of 2025, EZ Tech Company's accounts receivable balance was $140,000 and the balance in the allowance for doubtful accounts was a $2,350 credit balance. During 2025, EZ Tech reported sales of $1,050,000, all of which were sales on account. Collections from credit customers during 2025 totaled $670,000. During 2025, the company wrote off as uncollectible accounts receivable totaling $4,000 and recovered $5,000 of accounts that had been written off in the previous year. Prepare a journal entry to record the recovery

Debit: Cash $5,000 Credit: Allowance for doubtful accounts: $5,000 To record the recovery

At the beginning of 2025, EZ Tech Company's accounts receivable balance was $140,000 and the balance in the allowance for doubtful accounts was a $2,350 credit balance. During 2025, EZ Tech reported sales of $1,050,000, all of which were sales on account. Collections from credit customers during 2025 totaled $670,000. During 2025, the company wrote off as uncollectible accounts receivable totaling $4,000 and recovered $5,000 of accounts that had been written off in the previous year. Prepare a journal entry to record cash collected from credit customers

Debit: Cash $670,000 Credit: Accounts Receivable $670,000 To record the cash collected from credit customers

On June 24, 2025, Doxey Corporation sold inventory on account to Betty DeRose for $40,000. The credit terms offered by Doxey were 2/10, n/30. The inventory sold to Betty had a $12,000 cost to Doxey Corporation. On June 30, Betty paid ½ of her account balance. On July 20, Betty returned $8,000 of inventory to Doxey (the inventory returned had a cost to Doxey of $2,400) and paid her balance due. Record the necessary journal entry for Doxey Company on June 30

Debit: Cost of Goods sold $12,000 Credit: Inventory $12,000

How to record an allowance for doubtful accounts (Journal Entry)

Debit: Write-offs Credit: Bad Debt Expense Note: Bad debt expense is an estimate, write-offs are an actual amount Note: Normal balance is on the credit side of account (beginning balance and ending balance found on credit side) Note (NOT common): will credit recoveries because the write-off was debited.

In which year should bad debt expense be recorded?

In the same year the credit sale is made (MATCHING CONCEPT)

Which financial statement accounts are affected by the sale of a product?

Income Statement 1. Sales Revenue 2. Cost of Goods Sold Balance sheet 3. Accounts Receivable 4. Inventory

Average Collection period (Note)

Measures the number of days, on average, between making a sale on credit and collecting our cash from the customer. Lower is better (collecting cash faster from credit customers).

Accounts receivable turnover ratio (Note)

Measures the number of times, on average, the company collects its accounts receivable. Note: Higher ratio is better ( the higher the number, the faster we are collecting cash from our customers).

Net Realizable Value (NRV) Equation

NRV= Accounts Receivable - Allowance for Doubtful Accounts

Net Sales Equation

Net sales= sales - sales returns and allowances - sales discounts

Realization Principle

Record revenue when 1. The earnings process is complete or virtually complete 2. There is reasonable certainty as to the collectability of the asset to be received (usually cash) The earnings process is complete when goods are sold or when services are performed, even if cash is not collected at the time the good is sold or service is performed.

Sales Revenue

Represents revenue earned from selling inventory

sales allowance

Result when customers are dissatisfied with merchandise and the seller allows a reduction from the selling price. Goods are not returned in this case.

What happens when the company makes the determination that a specific customer will not pay?

They must write-off the customer's account receivable. A write-off can occur at any point during the year. Write-offs represent the actual bad debts of the company.

How to read 3/10, n/30 (Sales Discounts)

This is read as 'three, ten, net , thirty.' It means a 3% discount is allowed on all payments made within 10 days. After 10 days there is no discount available, and the remaining balance is due in 30 days.

At the beginning of 2025, EZ Tech Company's accounts receivable balance was $140,000 and the balance in the allowance for doubtful accounts was a $2,350 credit balance. During 2025, EZ Tech reported sales of $1,050,000, all of which were sales on account. Collections from credit customers during 2025 totaled $670,000. During 2025, the company wrote off as uncollectible accounts receivable totaling $4,000 and recovered $5,000 of accounts that had been written off in the previous year. Prepare a journal entry to record the sales on account

To record the sales on account Debit: Accounts Receivable $1,050,000.00 Credit: Sales Revenue$1,050,000.00

Average accounts receivable equation

accounts receivable at Jan 1 + accounts receivable at Dec 31) /2 = average accounts receivable

Net Credit Sales Method

bad debt expense is based on a % of current credit sales estimated to be uncollectible where the % is based on past experience/historical pattern

Does the allowance for doubtful accounts increase or decrease assets?

decreases assets

Bad debt expense is an

estimate

matching concept

expenses are to be recorded in the same year they help to generate revenues. Revenue is earned when the sale is made, thus bad debt expense must be recorded in the same year

Accounts receivable turnover ratio is an..

indication of how many times during a year a company is 'turning over' or collecting its receivables. Note: Higher ratio is better ( the higher the number, the faster we are collecting cash from our customers).

If the sale of goods or performance of services occurs prior to the receipt of cash....

it is an accrued revenue and an account receivable is recorded.

What does Allowance for Doubtful Accounts represent?

it represents the amount of accounts receivable the company estimates it will not collect

Aging Method

requires an analysis of accounts receivable balances by the length of time they have been unpaid. the idea is that the longer a debt is outstanding the less likely it is to be paid. Note: Put the accounts receivable into categories by age, and assign a % expected to be uncollectible to each category (this is called an aging schedule). • Σ(Amount of receivables x %) NOTE the answer to the equation above represents the required ending credit balance in the allowance for doubtful accounts. NOT BAD DEBT EXPENSE ESTIMATE We will need to 'force out' the bad debt expense estimate using a t-account for the allowance for doubtful accounts. To 'force out' the bad debt expense estimate, make it equal to X and set-up an algebra equation. • Thus, unlike the net credit sales method, an existing balance in the allowance for doubtful accounts will effect the current years bad debt expense estimate.

Sales Returns

result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or refund