Accounts Receivable

Aging Method

First, calculate ∑(Amount of receivables * %) to get the required ending credit balance Then use this in the AFDA T-chart as the ending balance to calculate the BDE

Sales Returns

Refer to merchandise that customers return to the seller after the sale.

Average Collection Period =

measures the # of days, on average, b/w making a sale on credit & collecting our cash from the customer 365/AR Turnover - lower is better

Accounts Receivable Turnover =

measures the number of times, on average, the company collects its accounts receivable - higher is better (means we are collecting cash at a faster rate) Net Sales Revenue/Avg Accounts Receivable Avg AR = (beg +end AR)/2

Allowance for Doubtful Accounts (AFDA)

the amount of accounts receivable the company estimates it will not collect - found on the balance sheet as a decrease to AR

Recovery

when a customer pays a bill after the company has written-off their account receivable

Financial Statement Ratios Relating to Accounts Receivable

- Accounts Receivable Turnover - Average Collection Period

Bad Debt Expense

- expense account - on income statement - reduces net income - is an estimate

Reasons for offering sale discounts

- increase sales - speed up collection of cash - minimize the likelihood of bad debts

Two Adjustments to Sales Revenue

1. Sales Returns & Allowances 2. Sales Discounts

Two methods of estimating bad debt expense

1. percentage of sales (net credit sales method) 2. percentage of receivables (aging method)

3/10, n/30 is read as

3% discount is allowed on all payments made within 10 days. After 10 days no discount is available & the remaining amount is due in 30 days

Net Realizable Value =

Accounts Receivable - Allowance for Doubtful Accounts

Net Credit Sales Method for calculating BDE

BDE = (Net credit sales)*(% expected uncollectible)

In which year should bad debt expense be recorded?

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

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

Income Statement - Sales Revenue - COGS Balance Sheet - Accounts Receivable - Inventory

To record BDE estimate

Net income decreases NRV decreases

To record the collection of a credit sale

Net income has no effect NRV decreases

To record a write-off

Net income has no effect NRV has no effect

To record making a credit sale

Net income increases NRV increases

Income Statement Format

Sales Revenue - Sales Returns & Allowances - Sales Discounts ___________________________________________ Net Sales Revenue - COGS ___________________________________________ Gross Profit - BDE ___________________________________________ Net Income

The write-off of an account has no effect on

The Net Realizable Value (NRV) - because write-off entry reduces both AR and AFDA, leaving the difference b/w the two accounts unchanged

Write-off

When a company gives up collecting an account receivable, it writes off the account by removing it from company records. - an actual amount unlike BDE

AFDA is a _______ account

contra-asset

Sales Returns & Allowances, & Sales Discounts are __________ accounts

contra-revenue

AFDA normal balance

credit

Sales Allowances

credit allowed a customer for part of the sales price of merchandise that is not returned, resulting in a decrease in the vendor's accounts receivable

Sales Returns & Allowances, & Sales Discounts normal balance is

debit

Write Off Entry _______ affect BDE

doesn't

Matching Concept

expenses are to be recorded in the same year they help to generate revenues

To record a recovery

net income has no effect NRV decreases

Realization Principle

record revenue when earnings process is complete or virtually complete AND there is reasonable certainty as to the collectability of the asset to be received (usually cash)

Sales Discounts

reduction in the amount of cash received from a customer for early payment