ACC225 Intro to Financial Accounting

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ACC225 Intro to Financial Accounting

• MODULE 6
• FINANCIAL ASSETS -
• ACCOUNTS RECEIVABLE

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GOALS FOR MODULE 6

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GOALS FOR MODULE 6

• Introduce Sales on Credit - Retail vs. Business

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GOALS FOR MODULE 6

• Introduce Sales on Credit - Retail vs. Business
• Discuss Costs of Credit Sales

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GOALS FOR MODULE 6

• Introduce Sales on Credit - Retail vs. Business
• Discuss Costs of Credit Sales
• Introduce Methods for Estimating
• Bad Debts

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SALES ON CREDIT

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SALES ON CREDIT

• Business to Business - Often no formal contract
  beyond Purchase Order. Seller will have set
  payment terms (e.g., 2/10, n30)

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SALES ON CREDIT

• Business to Business - Often no formal contract
  beyond Purchase Order. Seller will have set
  payment terms (e.g., 2/10, n30)
• Business to Individual - Consumer Protection Laws
  in effect. Often Sale made by Credit Card. Either
  Outside Company (e.g., VISA) or Company Processed
  (e.g., Lazarus)

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SALES ON CREDIT

• Business to Business - Often no formal contract
  beyond Purchase Order. Seller will have set
  payment terms (e.g., 2/10, n30)
• Business to Individual - Consumer Protection Laws
  in effect. Often Sale made by Credit Card. Either
  Outside Company (e.g., VISA) or Company Processed
  (e.g., Lazarus)
• Because of Large volume, detail of individual
  accounts not kept in General Ledger. Maintained
  in subsidiary Accounts Receivable Ledger

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COSTS OF CREDIT SALES

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COSTS OF CREDIT SALES

• Loss of Use of Money until Paid (Time value of
  Money)

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COSTS OF CREDIT SALES

• Loss of Use of Money until Paid (Time value of
  Money)
• Processing costs. Fee paid to VISA or Mastercard
• Administrative costs if internal system.

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COSTS OF CREDIT SALES

• Loss of Use of Money until Paid (Time value of
  Money)
• Processing costs. Fee paid to VISA or Mastercard
• Administrative costs if internal system.
• Major Risk (not always a major cost) is Bad Debts

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COSTS OF CREDIT SALES

• Loss of Use of Money until Paid (Time value of
  Money)
• Processing costs. Fee paid to VISA or Mastercard
• Administrative costs if internal system.
• Major Risk (not always a major cost) is Bad Debts
• Bad Debt occurs when a customer account cannot
  be collected. It is an expense
  arising from selling on credit.

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COSTS OF CREDIT SALES

• Loss of Use of Money until Paid (Time value of
  Money)
• Processing costs. Fee paid to VISA or Mastercard
• Administrative costs if internal system.
• Major Risk (not always a major cost) is Bad Debts
• Bad Debt occurs when a customer account cannot
  be collected. It is an expense arising from
  selling on credit.
• Matching Principle comes into consideration.

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ESTIMATING BAD DEBTS

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ESTIMATING BAD DEBTS

• Major issue for all companies which sell on
  credit (and financial institutions which lend
  money)

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ESTIMATING BAD DEBTS

• Major issue for all companies which sell on
  credit (and financial institutions which lend
  money)
• Allowance method (Contra account on B/S) is used
  and bad debts expected to occur in future must be
  estimated and expense recorded in I/S
• Accounts Receivable DR
• Allowance for Bad Debts CR
• Net Accounts Receivable

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ESTIMATING BAD DEBTS

• Major issue for all companies which sell on
  credit (and financial institutions which lend
  money)
• Allowance method (Contra account on B/S) is used
  and bad debts expected to occur in future must be
  estimated and expense recorded in I/S
• To aid in the identification of bad debts and in
  the estimation of future bad debts Accounts
  Receivable Aging
• is Prepared

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on
• Past Experience

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on
• Past Experience
• Similar Companies

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on
• Past Experience
• Similar Companies
• Economic Conditions

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on
• Past Experience
• Similar Companies
• Economic Conditions
• Estimate of Sales (or credit sales if there is
  a major difference) that are expected to become
  uncollectible.

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ESTIMATING BAD DEBTS

• FOCUS ON INCOME STATEMENT
• Based on
• Past Experience
• Similar Companies
• Economic Conditions
• Estimate of Sales (or credit sales if there is
  a major difference) that are expected to become
  uncollectible.
• Make entry to expense that amount each month or
  at end of year.

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach
• Past Experience

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach
• Past Experience
• Similar Companies

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach
• Past Experience
• Similar Companies
• Economic Conditions

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach
• Past Experience
• Similar Companies
• Economic Conditions
• Estimate of end of year open A/R that are
  expected to be uncollectible.

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - SIMPLE METHOD
• Using Same basis as income statement approach
• Past Experience
• Similar Companies
• Economic Conditions
• Estimate of end of year open A/R that are
  expected to be uncollectible.
• Make adjustment to bring Allowance for Bad Debts
  up/down to that balance

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - COMPLEX METHOD

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - COMPLEX METHOD
• Specifically identify problem accounts.

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - COMPLEX METHOD
• Specifically identify problem accounts.
• Age A/R and apply different to total of each
  category of aging.

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - COMPLEX METHOD
• Specifically identify problem accounts.
• Age A/R and apply different to total of each
  category of aging.
• Obtain overall Estimate.

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ESTIMATING BAD DEBTS

• FOCUS ON BALANCE SHEET - COMPLEX METHOD
• Specifically identify problem accounts.
• Age A/R and apply different to total of each
  category of aging.
• Obtain overall Estimate.
• Make adjustment to bring Allowance for Bad Debts
  up/down to that balance

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A/R JOURNAL ENTRIES

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A/R JOURNAL ENTRIES

• Record Bad Debt Expense

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A/R JOURNAL ENTRIES

• Record Bad Debt Expense
• Bad Debt Expense DR

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A/R JOURNAL ENTRIES

• Record Bad Debt Expense
• Bad Debt Expense DR
• Allowance for Bad Debt
  CR
• REMEMBER
• Accounts Receivable DR
• Allowance for Bad Debts CR
• Net Accounts Receivable

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A/R JOURNAL ENTRIES

• Record Bad Debt Expense
• Bad Debt Expense DR
• Allowance for Bad Debt
  CR
• Write off Uncollectible Account
• Allowance for Bad Debt DR

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A/R JOURNAL ENTRIES

• Record Bad Debt Expense
• Bad Debt Expense DR
• Allowance for Bad Debt
  CR
• Write off Uncollectible Account
• Allowance for Bad Debt DR
• Accounts Receivable
  CR

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A/R JOURNAL ENTRIES

• Recover Previously Written Off Account

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A/R JOURNAL ENTRIES

• Recover Previously Written Off Account
• Accounts Receivable DR

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A/R JOURNAL ENTRIES

• Recover Previously Written Off Account
• Accounts Receivable DR
• Allowance for Bad Debt
  CR

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A/R JOURNAL ENTRIES

• Recover Previously Written Off Account
• Accounts Receivable DR
• Allowance for Bad Debt
  CR
• Cash
  DR

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A/R JOURNAL ENTRIES

• Recover Previously Written Off Account
• Accounts Receivable DR
• Allowance for Bad Debt
  CR
• Cash
  DR
• Accounts Receivable
  CR

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SUMMARY

• Accounts Receivable usually consist of many
  individual accounts maintained in subsidiary
  ledger

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SUMMARY

• Accounts Receivable usually consist of many
  individual accounts maintained in subsidiary
  ledger
• Estimation of Uncollectible Accounts and Bad
  Debts major emphasis of Receivable Accounting