Introductory Accounting

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Introductory Accounting

• ADMN 1107 Distance Education

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Cash
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Importance of controls

• Examples of Cash/Collections gone wrong
• Holiday Inn Electronic glitch (Search for this
  article from 2003 on the Internet if you wish)
• Petty Cash
• Lapping

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Bank Reconcilations

• The need for bank reconciliations
• Limitations of the bank reconciliation
• Importance of bank reconciliations
• Frequency
• Complications

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Bank Reconciliations

• Start with two columns
• Only amounts that require a journal entry is to
  be on the books side
• These represents adjustments to the book balance

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Bank Reconciliations

• Balance Per Books
• Deposits directly through bank
• /- Errors
• - Service Charges
• - NSF Cheques

• Balance Per Bank
• Outstanding deposits
• - Outstanding cheques

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Temporary Investments
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Temporary Investments

• Why do companies use temporary investments?

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Accounting for Temporary Investments

• Temporary investments are valued at the Lower of
  Cost and Market LCM
• The HB is silent on exactly how to do this
• Individual Approach
• Portfolio Approach

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Individual Investments

• Look at the market and cost of each investment at
  year end
• If market is below cost write the investment down
• Investment Losses (I/S) XX
• Inv. In ABC (B/S) XX

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Individual Approach

• Once an investment is written down it can NEVER
  be written back up
• Gains will be realized when the investment is
  finally sold

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Portfolio Approach

• Add total historical cost of all investments
• Add total market value of all investments
• Compare totals if MV lt Cost then set up an
  allowance for write down

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Portfolio Approach

• Investment Losses XX
• Allowance for W/D XX
• Should investments recover, it is possible to
  reverse the write-down
• You cannot reverse it to the point of moving the
  Allowance to a debit position

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Important Note

• In Canada, effective in 2006 there will be
  changes to temporary investments and a new
  section called comprehensive income will come
  into place

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Accounts Receivable
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Accounts Receivable

• Accounting for them is fairly straight forward
• Accounting for doubtful accounts is slightly more
  complicated
• Allowance Methods

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Allowance Methods

• Three basic methods
• Direct Write-off
• Income Statement Approach
• Balance Sheet Approach

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Direct Approach

• As receivables become uncollectible they are
  written off and expensed
• Bad Debt Expense is debited
• A/R is credited
• Not used much the real world

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Income Statement Approach

• The key thing to remember is that you want to
  adjust the allowance for doubtful accounts amount
  BY a certain amount
• We are not concerned with the Allowance for DA on
  the balance sheet
• Set as a percentage of credit sales or sales

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Income Statement Approach

• If we have sales of 2,000,000 and estimate that
  2 of sales will be uncollectible
• Debit Bad Debt Expense for 40,000
• Credit Allowance for Doubtful Accounts for 40,000

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Balance Sheet Approach

• The key thing to remember is that you want to
  adjust the allowance for doubtful accounts amount
  TO a certain amount
• The ending balance in the Allowance is key for us
  using this approach
• Can either be a percentage of total receivables
  of different percentages based on age of
  receivables i.e. 60 days versus 120

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Balance Sheet Approach

• You estimated that 2 of the A/R Balance of
  2,000,000 will be uncollectible
• There is a opening Allowance for D/A balance of
  5,000
• You WANT the balance to be 40,000
• The balance IS 5,000
• You need a journal entry OF 35,000

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Other A/R

• As A/R accounts are written off, we debit the
  Allowance for DA and credit the individual A/R
  account
• It is possible for the Allowance account to go
  into a debit position

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Notes Receivable
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Notes Receivable

• Most receivables are short term in nature and
  little extra accounting is necessary
• When customers dont pay businesses will
  sometimes create contracts with specific payment
  terms and interest rates

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Questions?