Acct chapter 5
What to remember about balance sheet method
$ estimate = End ADA
What to remember about income statement method
$ estimate = bad debt expense
Formula for average AR
(Beg AR + End AR)/2
What are the journal entries for the journal entries for the allowance method for each of these parts - to record credit sales during the year - customer making regular pmt on their account - to write off AR when known during the year - to collect previously written off AR during the year - to record BDE at year end
- [AR x sales rev x] - [cash x AR x] - [ADA x AR x] - [AR x ADA x] [cash x AR x] - [BDE x ADA x]
Balance sheet method
- aka aging method - est. = % of end AR - once you calc your estimate this is your new end balance in your ADA on balance sheet
Income statement method
- aka percentage of credit sales method - est. = % of credit sales for the year - once you calc your estimate this is bad debt expense on income statement
What are the accounts affected from bad debts
- bad debt expense - accounts receivable - Allowance for doubtful accounts (ADA)
Income statement method steps
- calculate BDE by multiplying credit sales by the % deemed uncollectable - record AJE - calculate the effect on NI by using ADA t chart and using sales-BDE=NI - calculate effect on balance sheet by using AR-ADA=NRV
Sales discounts
- gross method - incentive for customers to pay early - if they pay early then subtract discount to get net sales
Reporting net sales
- use multi step income statement
What are the steps of the balance sheet method
-calculate ADA by multiplying AR by % uncollectable - then make t chart for ADA - make BDE journal entry - effect on net income by using sales-BDE=NI -find effect on balance sheet by using AR-ADA=NRV
What is accounts receivable in relation to bad debts
-classified as a current asset on the balance sheet - must be reported at the amount the business expects to collect which is called Net Realizable Value (NRV)
What is the direct write off method and when it is allowed
-records bad debt expense only when the bad debt customer has been identified -violates matching -only allowed when acct receivable is small aka small % of sales
What are the four components of notes
1. principal 2. interest 3. maturity value= principal + interest 4. time period
Steps of items that reduce sales to net sales
1. sales discounts (gross method) 2. sales returns and allowances 3. reporting net sales (multi sept income statement)
Notes receivable
1. written and more formal 2. specific maturity date 3. interest bearing
what do that parts of ex 2/10, net 30 represent
2= % discount 10= number of days to pay to receive discount net 30= or else the amount is due in 30/# of days
Formula for bad debt expense
Accts Rec xxx (ADA) (xxx) = NRV xxx
What is ADA on
Balance sheet
* go memorize t charts on notes for AR and ADA
GO LOOK
What does the effect of writing off an uncollectible account have on total assets and net income?
[ADA xx AR xx] assets go up because ADA is going down and it is a contra asset while AR goes down which is an asset Overall there would be no effect on assets or NI
What is the AJE for BDE
[BDE x ADA x]
What does the recognition of BDE have NRV, total assets and net income
[BDE xx ADA xx] - BDE is going up since it is an expense it would cause NI to do down then SHE to go down - while ADA is going up and is a contra asset so assets would go down - To find NRV you would use AR-ADA=NRV and since ADA is going up and it is () it would cause NRV to go down
What is principal
amount borrowed /amount lent
Allowance for doubtful accounts
amount of AR that you do not expect to receive - it is a contra asset
Accounts receivable
amounts due from customers from sale of goods/services
What is interest
an expense for the borrower (cost of borrowing); income/revenue for the lender/creditor
When using the balance sheet method how do you find BDE
calculate end ADA by multiplying ending AR by % uncollectable from here you would plug this into your ADA t chart as ending balance Then use algebra to find BDE
What is bad debt expense
classified as a selling expense aka operation expense on the income statement and closed at the end of the year
what is the allowance method
estimated bad debt expense at end of year and recorded through an AJE - follows matching
what is the difference between gross and net sales
gross is total amount while net is after deductions
What is BDE on
income statement
What are the two ways to estimate bad debt expense using the allowance method
income statement method and balance sheet method
What it time period
interest rate is always expressed as an annual rate. to convert to shorter time periods express as a fraction time - denom will always by 12 months
Who is the receiver/acceptor
lender
Acct receivable turnover ratio is
net cr sales/ average AR
What is maturity
principal + interest
What are bad debts
the cost of doing business on credit with customers who do not pay
Who is the borrower
the issuer
Sales returns and allowances
when customers return merchandise or receive damaged goods - subtract these to get net sales
When do you record revenue
when sale is made