Accounting chapter 5

RTR equation

Net credit sales/ average accounts receivable

sales return

customer returns a product

contra revenue account

An account with a balance that is opposite, or "contra," to that of its related revenue account

Average Collection Period

Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio

At the end of the year, Mercy Cosmetics' balance of Allowance for Uncollectible Accounts is $400 (credit or debit) before adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts will not be collected over the next year. What adjustment would Mercy Cosmetics record for Allowance for Uncollectible Accounts?

If credit you subtract: 15000*.10=1500 = 1500-400=1100 If debit you add: !5000*.10= 1500 = 1500+400=1900

Percentage-of-receivables method

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

Receivables Turnover Ratio

Number of times during a year that the average accounts receivable balance is collected (or "turns over"). It equals net credit sales divided by average accounts receivable.

Credit Sales

Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

Notes Receivable

Written promise (as evidenced by a formal instrument) for amounts to be received.

Net Revenues (Net Sales)

a company's total revenues less any amounts for discounts, returns, and allowances

Interest Calculation

face value x annual interest rate x fraction of the year

The benefit of extending credit

is that the seller makes it more convenient for the buyer to purchase goods and services.

The cost of extending credit

is the delay in collecting cash from customers, and as already discussed, some customers may end up not paying at all.

key point 4

notes receivable are similar to accounts receivable except that notes receivable are formal credit arrangements made with a written debt instrument, or note.

nontrade receivables

receivables that originate from sources other than customers

sales discount

reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of tme

trade discount

represent a reduction in the listed price of a product or service

*1

revenues are reported for the amount of cash a company expects to be entitled to receive from customers for providing goods and services.

key point 2

sales returns, sales allowances, and sales discounts are contra revenue accounts. we subtract the balances in these accounts from total revenues when calculating net revenues.

sales allowance

seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service

Accounts Receivable

the amounts of cash owed to the company by its customers from the sale of goods or services on account

Key point 3

the direct write off methods waits to reduce accounts receivable and record bad debt expense until accounts receivable prove uncollectible in the future. this leads to accounts receivable being overstated in the current year. the direct write off method generally is not acceptable for financial reporting.

key point 7

the receivable turnover ratio and average collection period can provide an indication of management's ability to collect cash from customers in a timely manner

*3

total revenues are further reduced by an adjusting entry at the end of the year for the estimate of additional sales returns, sales allowances, and sales discounts expected to occur in the future but that relate to the current year.

*2

total revenues are reduced by sales returns, sales allowances and sales discounts that occur during the year.

aging method

using a higher percentage for "old" accounts than for "new" accounts when estimating uncollectible accounts

key point 5

we calculate interest as the face value of the note multiplied by the stated annual interest rate multiplied by the appropriate fraction of the year that the not is outstanding.

key point 6

we record interest earned on notes receivable but not yet collected by the end of the year as interest receivable and interest revenue

key point 8

when applying the percentage of credit sales method, we adjuct the allowance for uncollectible accounts for the current year's credit sales that we don't expect to collect " rather than adjusting at the end of the year for the percentage of accounts receivable we don't expect to collect"

At the beginning of 2021 Brad heating and air has a balance of 25,600 and accounts receivable at the end of 2021 estimate the Uncollectible accounts total 20% of any accounts receivable. 186000 on account. 181000 collected from customers on account.

(186000+25600)-18100 * .20 = 6120

Trump Agency separates its accounts receivable into three age groups for purposes of estimating the percentage of uncollectible accounts: In addition, the balance of Allowance for Uncollectible Accounts before adjustment is $2,000 (credit).1. Accounts not yet due = $27,000; estimated uncollectible = 4%.2. Accounts 1-60 days past due = $12,000; estimated uncollectible = 25%.3. Accounts more than 60 days past due = $7,000; estimated uncollectible = 50%.- Compute the total estimated uncollectible accounts.- Record the year-end adjustment for estimated uncollectible accounts

1.Not yet due: (27,000 X 0.04) = 10801-60 days past due: (12,000 X 0.25) = 3,00060+ days past due: (7000 X 0.50) = 3,500Total: 7,5802. Record the year-end adjustment for estimated uncollectible accounts Debit: Bad debt expense 5,580 Credit: Allowance for uncollectible accounts 5,580

ACP equation

365 days/receivable turnover ratio

Notes Receivable

Formal credit arrangements evidenced by a written debt instrument, or note

On March 12 medical waste services provides services on account to Grace Hospital for 9600 terms 4/10. For medical waste services record the service on account on March 12 in the collection of cash on March 20.

Record the service revenue on account. Debit: accounts receivable 9600 credit: service revenue 9600 Record the cash received on account. Debt cash 9216 sells discounts 384 credit accounts receivable 9600 9600*.04=384

direct write-off method

Recording bad debt expense at the time we know the account is uncollectible

invoice

a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and payment terms.

Percentage of Credit Sales Method

bases bad debt expense on the historical percentage of credit sales that result in bad debts

Key point 1

companies record an asset and revenue when they sell goods or services to their customers on account, expecting collection in the future. Once the receivable is collected, the balance of accounts receivable is reduced.