Chapter 5

Net Revenue = total revenue -

- Sales & Trade Discounts - Sales Returns - Sales Allowances

Two conditions that must exist for a sale and the related receivable to be recognized:

- collection from customer is probable - the company has provided goods or services to the customer

When using the percentage of receivables method to account for bad debt expense, the write off includes these entries:

- credit to accounts receivable - debt to allowance for uncollectible accounts

Recording Bad Debt Expense

- decreases net income and assets - increases expenses

Sales Credit

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectation

Sales Returns and Sales Allowances

Are Contra Revenue Accounts

Allowance Method

a company will utilize this when they expect that some of its customers will not pay the agreed upon sales price - Required by GAAP - When the Allowance Method is used, the write-off of an uncollectible account has NO EFFECT ON NET INCOME (because bad debt expense has already reduced net income) - The write-off of a specific accounts receivable HAS NO EFFECT ON total assets reported in the balance sheet.

Trade Discount

a reduction in the list price granted to customers - recognized by reducing the amount of revenue recorded

allowance for uncollectible accounts

contra asset account (to accounts receivable) representing the amount of accounts receivable that we do not expect to collect - to record an estimate of future bad debts at the end of the period, an adjustment would be made with a credit to allowance for uncollectible accounts - usually has a credit balance

Sales Allowance

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 (A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectation) - Decreases the amount owed by the customer for merchandise that is retained by the customer

Sales Discount

discount in the amount to be paid if the customer pays within a specified time period (a reduction given by a seller for prompt payment of a credit sale)

Bad Debt Exepense

estimated expense for accounts that may not be collected -reported on the income statement and is classified as an operating expense

Sales Return

when a customer returns a product for a refund - Financial statement effects of recording an allowance for estimated sales returns are that... equity, net income, and assets decrease