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Chapter 8

by: Annie Danyluk

Chapter 8 ACCT 2010

Annie Danyluk
GPA 3.31
Financial Accounting Concepts
Professor Annieka C Philo

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About this Document

10-07-15 through 10-09-15 Notes included Allowance method pros and cons of extending credit methods of estimating bad debt percentage of credit sales method Aging of accounts receivable
Financial Accounting Concepts
Professor Annieka C Philo
Class Notes
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This 4 page Class Notes was uploaded by Annie Danyluk on Monday October 12, 2015. The Class Notes belongs to ACCT 2010 at Clemson University taught by Professor Annieka C Philo in Fall 2015. Since its upload, it has received 11 views. For similar materials see Financial Accounting Concepts in Accounting at Clemson University.


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Date Created: 10/12/15
Chapter 8 10072015 Pros and cons of extending credit 0 Advantages o Increases the seller s revenues Disadvantages 0 Increased wage cost Need more employees to look over that account 0 Bad debt cost Estimate in the correct period when we are going to get that cash 0 Delayed receipt of cash Example 0 During December the company made sales to the following customers 0 Sally 10000 0 Victor 5000 0 Paul 15000 0 Loser 1000 0 Total 31000 0 Should have been paid in December 0 If loser calls us and cannot pay and tells us in march We record it in December still bc of the principle Balance sheet 0 Less allowance for doubtful accounts 0 Contraasset that is tied to the Accounts receivable 0 Estimate of what we think we are not going to receive in cash Income Statement 0 New account bad debt expense Allowance method 0 Two step process 0 1 Make an end of period adjustment to record the estimated bad debts in the period credit sales occur 0 2 Remove quotwrite offquot speci c customer balances when they are known to be uncollectible Journal entries 0 First entry Debit bad debit expense Credit Allowance for doubtful accounts 0 Second entry Debit allowance for doubtful accounts 1000 Credit Accounts receivable 1000 Methods for estimating bad debts Two acceptable methods 0 Percentage of credit sales method 0 Aging of accounts receivable Percentage of credit sales method 0 The percentage of credit sales method estimates bad debt expenses by multiplying the historical percentage of bad debt losses by the current period s credit sales 0 Percentage of credit sales INCOME STATEMENT APPROACH Credit sales x historical loss rate Bad debt expense Aging of accounts receivable while the percentage of credit sales method focuses on estimating bad debt expense income statement approach 0 Aging example 0 Step 1 compute the expected allowance Accounts receivable 40000 Multiply by 3 uncollectible estimate 3 estimated allowance for bad debt 1200 0 Step 2 compare expected allowance to actual allowance Subtract actual allowance for bad debt 800 adjustment needed 400 o debit bad debt expense 400 0 credit allow for bad debt 400 10092015 Allowance method 0 Record end of period adjustment to establish bad debt 0 Debit bad debt expense Credit allowance for doubtful accounts 0 Two methods can be used 0 Percentage of credit sales Simpler IS approach Net sales x loss rate 0 Aging of Accounts receivable More accounts BS approach 0 Second step remove write off speci c customer that is known to be uncollectable 0 Debit allowance for doubtful accounts Credit accounts receivable Other issues 0 Revising estimates We may have to adjust the estimate 0 Accounts recoveries We wrote off a payment and now it is being paid Reverse the write off and record the collection of cash Debit accounts receivable a Credit allowance for doubtful accounts Debit cash a Credit accounts receivable Notes receivable and interest revenue 0 A company reports notes receivable if it uses a promissory note to document its right to collect money from another pa y 0 Accounts receivable doesn t charge interest notes receivable does KEY DIFFERENCE 1 Company lends money to another business 2 Company sells expensive items for which customers requires extended payment period 0 3 Company converts existing Accounts receivable into a note Calculating interest 0 lnterestlprincipal p x interest rate r x time t 0 Principal the amount of the note receivable 0 Interest rate The annual interest rate charged on the note 0 Time The time period for an interest calculation 1 establish the note debit Notes recievable 00 0 credit AR 2Accrue interest earned but not yet received 0 PRT l8000x6x212 3 record interest payment received 4 record principal payment received at maturity


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