Accounts Receivable (Sales Revenue & Accounts Receivable)
Sales Revenue
Represents revenue that we earned from selling inventory
2 financial Statement ratios relating to Accounts Receivable
1) Accounts Receivable turnover 2) Average collection period
Allowance for doubtful accounts
1) Causes a decrease in assets (Contra Asset) 2) Normal Balance is a credit 3) Found on balance sheet as a decrease to accounts receivable *Represents the amount of account receivable, that the company estimates it will not be able to collect.
Characteristics of Sales Returns & Allowances and Sale Discounts
1) Classified as Contra Revenue Account 2) Result in dcecrese of revenue (specifically sales revenue) 3) Normal balance = Debit
Bad debt expense
1) Expense account 2) Found on the income statement 3) Reduces net income
Reasons for Sales Discounts
1) Increase Sales 2) Speed up the collection of cash 3) Minimize the liklihood of bad debts
2 key points about the write off entry
1) It does NOT effect bad debt expense (that would be double counting) 2) The write-off of an account receivable has no effect on the net receivable value (NRV) --> reduces both accounts receivable and allowance of doubtful accounts equally.
Companies use two acceptable methods in estimating bad debt expense
1) Percentage of Sales (Net Sales method) 2) Percentage of receivables (Aging method) *both decisions are GAAP; the choice is up to management
Two adjustments to Sales Revenue (these will cause a decrease to our sales revenue)
1) Sales Returns & Allowances 2) Sale Discounts
Sales Discounts
A cash discount that is given to a credit customer for the prompt payment of a balance due Ex: 3/10, n/30 ===> 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 the next 30 days.
Net Realizable Value (NRV)
Accounts Receivable - Allowance for doubtful accounts = Net Realization Value
T- Account for aging method
Allowance for doubtful Accounts Write-offs Beginning Balance Recoveries Bad Debt Expense (X) Ending Balance (from aging schedule) *We set up an algebra eqaution solving for X, which is bad dept expense.
Sales Allowances (Part of Sales Returns & Allowances on income statement)
Customer is dissatisfied with the purchase of merchandise and the seller allows a reduction from the selling price (Goods are not returned, but discounted)
Sales Return (Part of Sales Returns & Allowances on income statement)
Customer is dissatisfied with the purchase of the merchandise and are allowed to bring it back for a refund (Goods sold, then later returned to seller)
Recovery Account
Customer pays bill after the company has already written-off their account receivable
To record Bad Debt Expense entries...
Debit: bad debts expense Credit: Allowance for doubtful accounts * The above entry is made at the end of year, making it an adjusting entry.
Recording of a Recovery
Debit: Cash Credit: Allowance for doubtful accounts
Average Collection Period
Equation: 365 / Accounts Receivable Turnover = Average Collection Period * Measures the number of days on average between making a sale on credit and collecting cash from the customer - Lower is better (the lower the number, the fewer days between making sales and collecting cash from those sales)
Accounts Receivable turnover
Equation: Net Sales Revenue / Average Accts. Receivable = Accounts Receivable turnover Equation for Average Accounts Receivable formula... Accounts Receivable (Jan 1) +Accounts Receivable (Dec 31) / 2 = Average Accounts Receivable
Which Financial Statement accounts are affected? We are accounting for the sale of our product
Income Statement - 1) Sales Revenue 2) Cost of goods sold Balance Sheet - 1) Accounts Receivable 2) Inventory
Accounts Receivable
Money (cash) owed to the company. Happens when the company makes a credit sale (i.e., a sale on account)
Net Credit Sales method
Net Credit Sales * % expected uncollectible = Bad Dept Expense * % expected uncollectible is based on historical pattern
Big issue when you sell goods on account
Not all customers pay their bills.. (Not everyone pays)
Aging Method
Require an analysis on accounts receivable balance that says the longer that the money has been owed, the more likely the money will not be payed. *We put the accounts receivable into categories of age Sum(accounts receivable * %) ===> This does not represent bad debt expense estimate.. -Rather, the # represents the end of year balance in the allowance for doubtful accounts
Net Sale revenue
Sales Revenue - Sales Returns & Allowances - Sale Discounts = Net Sale Revenue - Cost of goods sold = Gross Profit
Write-off
The company is no longer actively trying to collect the cash from the customer Debit: Allowance for doubtful accounts Credit: Accounts Receivable *can happen at any time of the year *Write-offs represent the actual bad debts of the company
What do we record when customers don't pay their bills?
The company will record BAD DEBT EXPENSE each year
In which year should bad debt expense recorded in?
The same year that you make the sale (Matching Concept). We don't know who is not going to pay, so we have to ESTIMATE. Which means Bad Debt Expense is an ESTIMATION. We have to estimate it BECAUSE of the MATCHING CONCEPT.
Accounts Receivable turnover
This ratio is an indication of how many times during a year a company is 'turning over' or collecting its receivables. *measures how many old receivables are collected and replaced with new receivables -Higher is better (higher the number, the faster we are getting cash from customers)
