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CHAPTERFIVE
HomeworkP1 - Sales DiscountsP2 – Sales AllowanceP3 – Allowance Method of UncollectiblesP4 – Write Off UncollectiblesP8 – Notes Receivable
Credit Sales and discountsContra RevenuesAllowance methodsWrite Off A/RAging A/RDirect W/OReceivable AnalysisNotes ReceivablePercentage of Sales Method- Allowance
Accounts Receivable transactionsCredit Sales
Accounts Receivable (Amount of invoice) Sales Freight-out
Receive Payment Cash A/R
Contra Revenue AccountsSales DiscountSales ReturnsSales Allowances
DISCOUNTSTRADE DISCOUNTS
a reduction in the selling price of the item as a reward for buying large quantities.
SALES DISCOUNTS (pg 285)a reduction in the amount the customer needs
to pay as a reward for paying earlier than required
TERMS2/10 Net 30
2% if paid in 10 days, full amount in 30 days
1/15 Net 60
Sales Discount Transaction
Sales Discount exercisesDo E5-3, 5-4 page 246
Sales Returns & AllowanceSALES RETURNS
If it doesn’t work or your customer doesn’t want it, it can returned and the customer will get their money back
SALES ALLOWANCEIf you give a reduction in the price of the item
you sold and they keep the item.
Sales Returns & Allow transactionCredit Sale
A/R 1000 Sales 1000
Return Sales Return and Allowance 300 A/R 300
Customer Payment Cash 700
A/R 700
NET SALES SALES 1500-- Sales Returns & Allowances 300-- Sales Discount 10----------------------------------------- ------- NET SALES 1190
Sales Return and AllowanceExercise 5-6 page 247
When a customer cannot or will not pay the invoice.Four methods:
Direct Write off MethodAllowance Methods:
Percentage of ReceivablesAged A/RPercentage of Sales
Direct Write off MethodUse when you have only a few uncollectible
invoices and it occurs infrequently.
Transaction:Bad Debt Expense A/R
ALLOWANCE ACCOUNTSet aside of costs that will not occur until
the next period but revenue is recorded in current year.
Use when you have several customers who do not pay you and it happens frequently during the same year.
Can’t charge A/R because we don’t know which one will be uncollectible
Fraud Alert or Income ManipulatingIf overstate the uncollectible –understate
income and income taxDo not have to worry until the next year.If audited will need to provide an aged A/R to
prove your uncollectible A/C expense
Accounts usedUncollectible Account Expense
or BAD DEBT Expense Always a debit balance accountNon- Cash transaction
Allowance for uncollectible – Contra Asset AccountShould be a credit balance
Allowance t-account
___________________________________ Write off A/R | Setting up or adding to
| | 5000 4000 | ------------------------------------------------- 1000 BalanceWrote off less than estimated
___________________________________ Write off A/R | Setting up or adding to
| | 5000 7000 | ------------------------------------------------- 2000 BalanceWrote off more than estimated
Accounts ReceivableLess Allow.for Uncollectible Accts
= Net Receivables(Net realizable value)
Exercise 5-7 pg 247
Exercise 5-13 page 248Compare allowance method with the direct
write off method and the effect on income tax.
Aging MethodMore accurateUse if you do not have historical dataIt is the balance in the allowance account –
not the adjusting entry
See page 228 for Aging schedule
Exercise 5-11 page 248
Percentage of SalesPercentage of A/R --- Balance Sheet Method
Good because it is closest to net realized value Most accepted method
Percentage of Credit Sales – Income Statement Method
Good because better matched with revenue Only accepted if the amounts do not differ
significantly from Percentage of Receivables
Exercise E5-19 page 249
Receivable AnalysisGood to get when you first start the job or
higher a new person.Later show how you have helped to improve
A/R collections
Receivables turnover ratioAverage collection period
Receivables turnover ratio -- # of times during the year the Avg A/R is collected or turned over
Net Credit Sales Avg A/R
Higher the number of times, the better. Average collection period -- # of days A/R
balance is outstanding or how long did it take to collect A/R
Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R
Your Invoice terms are used to see if good or badIf Net 30 is terms you days should be around 30. 365 A/R Turnover
Exercise E5-14 page 249
More formal and legally bound form of credit sales. Usually a note is a loan that is signed and has an interest component .
Note TerminologyFace Value – Principle of the noteDue date- date it is to be paid back (DUH!!!)Payee – who is to receive the moneyMaker – who is to pay the moneyInterest rate- rate is in annual terms.
Note TransactionsA note for an accounts receivable Seller Buyer
Notes Receivable (N/R) A/P A/R Notes Payable (N/P)
Note is paid Cash N/P Interest Income Interest Expense N/R Cash
Interest CalculationsI=PRTInterest = Principle X rate X timeRate
12% = 1% month6% = .5% month18%= 1.5% month24% = 2% month
Principle is $10,000 rate is 12% time is 2 months the interest is: 10000 X 1% X 2 = $200
Exercise 5-16 pg 249
Interest Receivable Adjust EntryInterest earned but not yet paid - ACCRUAL
Adjusting Journal Entry – for the month of the yearInterest Receivable Interest Income
When note is paidCash N/R
Interest Receivable Interest Income
Exercise 5-18 page 249