ACC 131 Seipp Week 7 Lecture Notes: 9/28-10/2
ACC 131 Seipp Week 7 Lecture Notes: 9/28-10/2 ACC 131
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This 4 page Class Notes was uploaded by Daniel Hemenway on Saturday October 3, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 37 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 10/03/15
ACC 131 Seipp 928102 Chapter 5 Sales and Receivables Timing of Revenue Recognition Accrualbasis accounting recognizes revenue when it is Realized or realizable which means that noncash resources have been exchanged for cash or receivables Earned which means the earnings process is substantially complete Criteria Set by the SEC The SEC maintains that revenue is realized or realizable and earned when the following criteria are met Persuasive evidence of an arrangement exists eg a contract or other proof of the details of the exchange Delivery has occurred or services have been provided The seller s price to the buyer is fixed and determinable Collectability is reasonably assured Amount of Revenue Recognized The appropriate amount of revenue to recognize is generally the cash received or the cash equivalent of the receivable Three changes to sales revenues include discounts returns and allowances Sales Discounts Sales Discount A price reduction usually expressed as a percentage of the selling price that companies may offer to encourage prompt payment This discount is a reduction of the normal selling price and is attractive to both the seller and the buyer For the buyer it is a reduction to the cost of the goods and services For the seller the cash is more quickly available and collection costs are reduced Standard notation Example Seller who expects payment in 30 days and offers a 2 discount if payment is made within 10 days would have the notation 210 n3O which is read 210 net 30 Most companies record the sale and the associated receivable at the gross prediscount amount of the invoice using the quotgross method When a discount is taken the amount of the discount is recorded in a contrarevenue account called sales discounts Debit it ACC 131 Seipp 928102 Sales Discounts cont Sales discounts must be distinguished from both trade and quantity discounts A trade discount is a reduction in the selling price granted by the seller to a particular class of customers A quantity discount is a reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered Example 929 Sold 30000 110 net 30 Accounts Receivable 30000 Sales 30000 Sales Returns and Allowances Occasionally a customer will return goods as unsatisfactory Sometimes a customer may agree to keep goods with minor defects if the seller is willing to make an allowance by reducing the selling price When goods or services arrive late or in some other way are rendered less valuable a customer may be induced to accept the goodsservices if a price reduction called a sales allowance is offered by the seller In these cases a contrarevenue account is used to record the price reduction it is called Sales Returns and Allowances Merchandise or goods returned to the seller are sales returns and are also recorded in the sales returns and allowances account Net Sales Revenue Sales Revenue Sales Returns and Allowances Example Made sale of 10000 210 n30 Accounts Receivable 10000 Sales 10000 Sales Returns and Allowances 400 Accounts Receivable 400 Cash 9408 Sales Discount 192 Accounts Receivable 9600 Cannot take discount on something after returns and allowances ACC 131 Seipp 928102 Types of Receivables Receivables are typically categorized along three different dimensions Accounts Receivable or Notes Receivable A note is a legal document given by a borrower to a lender stating the timing of repayment and the amount principal andor interest to be repaid Accounts receivable do not have a formal note Current or Noncurrent Receivables Although in practice both accounts and notes receivable are typically classified as current accounts receivable are typically due in 30 to 60 days and do not have interest while notes receivable have interest and typically are due in anywhere from 3 to 12 months Trade Receivables and Nontrade Receivables Trade Receivables are due from customers purchasing inventory in the ordinary course of business Nontrade Receivables arise from transactions not involving inventory Accounting for Bad Debts Net Realizable Value Realistic amount of money the company expects to coHect When customers do not pay their accounts receivable bad debts result also called uncollectible accounts There are three methods to record bad debt expense The direct writeoff method The allowance method Percentage of Credit Sales and Aging Method Direct WriteOff Method Record account as an expense at the time of the writeoff when it s deemed uncollectable Since accounts are often determined to be uncollectible in accounting periods subsequent to the sale period the direct writeoff method is inconsistent with the matching concept Can be used only if bad debts are immaterial under GAAP Allowance Method Allowance for Doubtful Accounts Account established to store the estimate of potentially uncollectible accounts Bad debt expense is recorded in the period of sale which allows it to be properly matched with revenues according to the matching concept The result is that bad debt expense is recognized before the actual default ACC 131 Seipp 928102 Allowance Method cont When a specific account is ultimately determined to be uncollectible under the allowance method it is written off by a debit to the allowance account and a credit to accounts receivable There are two methods used under the allowance procedure Percentage of Credit Sales Method Income Statement Aging Method Balance Sheet Percentage of Credit Sales Method Percentage of Credit Sales Method Using past experience a company estimates the percentage of the current period s credit sales that will eventually become uncollectible Total Credit Sales x Percentage of Credit Sales Estimated to Default Estimated Bad Debt Expense Aging Method Aging Method Bad debt expense is estimated by determining the collectability of the accounts receivable rather than by taking a percentage of total credit sales At the end of each accounting period the individual accounts receivable are categorized by age