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ACCT 2010 - Chapter 6
Reporting and Interpreting Sales Revenue, Receivables and Cash
Terms in this set (29)
List the criteria for revenue to be recognised (earned)
1. Price is fixed or determinable.
2. Collection is reasonably assures.
3. Persuasive evidence of a customer payment arrangement.
4. Goods/services are delivered/rendered.
The criteria is mostly met and revenue is usually recorded when the title, risks and rewards of ownership are transferred to the buyer.
FOB Shipping Point
- Title changes hands at shipment
- Buyer pays for the shipping
- Title changes hands on delivery
- Seller pays for shipping
Companies and revenue recognition policy
Most firms have a revenue recognition policy, which is in the notes of the consolidated financial statements
Credit Card Discount
Fee charged by credit card companies for its services
State reasons as to why a firm would allow the use of credit card payment
1. Increase customer traffic
2. Avoid losses due to bad checks
3. Receive money faster
4. To avoid costs of providing credit directly to consumers
Credit card payment example: A Adidas credit card sale on 2nd January was $3000. Credit Card discount was 3% (service fee). What is the journal entry?
Account Receivable (+A).....2910 (Dr)
Credit Card Discount (+XR)....90 (Dr)
Sales Revenue (+R, +SE)....................3000(Cr)
Payments on open accounts
- Some firms allow customers to pay on open accounts so consumers can pay the company in the future for the purchase
- They may be offered a discount as an incentive to pay early
A cash discount offered to consumers to encourage early payment of an account receivable
Read and Define: 2/10, n/30 (early payment incentive)
- "Two ten, net thirty"
- 2, (%) refers to the amount of discount if paid within the discount period
- 10, (no. of days) is the discount period
- n, is the full amount due if not paid within discount period
- 30, (no. of days) is the maximum credit period
When paying on an open account there are many steps. Example: Adidas sold a shoe on credit for $1000 with terms 2/10, n/30 on January 6th.
Account Receivable......1000 (Dr)
Sales Revenue.............................1000 (Cr)
If paid within 10 days:
Sales Discount..............20 (Dr)
Account Receivable.................1000 (Cr)
If paid after 30 days (max. credit period):
Account Receivable......................1000 (Cr)
Annual Interest Rate
1. Amount saved/Amount paid = Interest rate (for no. of days paying early)
2. Interest rate (no. of days) x (365/no. of days) = Annual Interest Rate
The bank interest rate should be less than the annual interest rate associated, this way customers are saving a substantial amount and should take the discount
Sales Returns and Allowances
- Firms can often be in a situation where their products are returned due to damages or because they are unwanted
- Recorded in a separate account
- Sales Returns and Allowances (+XR, -R, -SE): Contra-revenue account
Sales Returns & Allowances Example: (a) Adidas sold $1000 worth merchandise on credit on the 6th of July. Write down the journal entry.
Account Receivable......1000 (Dr)
Sales Revenue............................1000 (Cr)
Now proceed to the next card for part (b) of this question
Part (b) of previous question: Fontana shoes returned $500 of shoes to Adidas. The boots originally costed $300. All on July 8th.
Sales Returns & Allowances (+XR, -R, -SE)...500 (Dr)
Account Receivable (-A).....................................500 (Cr)
Merchandise Inventory (+A)........300 (Dr)
Cost of Goods Sold (-E, +SE).....................300 (Cr)
If the shoes were damaged after return, the second entry would not be recorded as its value would be $0 not $300 (there would be no addition to assets).
List all the contra-revenue accounts described so far
1. Credit-card discount
2. Sales Discount
3. Sales Returns and Allowances
GPM = Gross Profit/Net Sales
(Gross profit = Revenue - Cost of Goods Sold)
-Represents the % of total sales revenue that a company retains after incurring direct costs associated with producing goods sold
-Amount of each net sales dollar that was gross profit during the period
- $0.XXX dollars of each net sales dollar was gross profit
- Very important for startups
Account Receivable: Open accounts owed to the business by trade customers
Note receivable: Written promises that require another party to pay the business under specified conditions (time, amount, interest)
Trade receivable: created in the normal course of a business when a sale of merchandise/services occurs on credit
Non-trade receivable: arises from transactions other than normal sale of merchandise/services - e.g. A business loans money to one of the owners to help set up their house, or tax refunds from tax authorities, or employees owe their services for wages/salaries paid in advance
Bad Debt Expense
- The expense associated with estimated uncollectible account receivables
- Should be recorded in the same period in which the related sales are made
- Firms don't know how much of the account receivables is bad debt --> Solution: Allowance Method
- Under 'operating expenses' on the income statement
Bases bad debt expense on an estimate of uncollectible amounts
Step 1: Making end-of-period adjusting entry to record estimate bad debt expense
Step 2: Writing off specific accounts determined to be uncollectible during the period
What is a write-off?
Through the accounting period as bad debts become known, the specific amount must be removed from account receivable and charged to allowance for doubtful accounts
Allowance for doubtful accounts is what type of account?
It is a contra-asset account
Step 1: Bad debt expense example: Adidas estimated bad debt expense for 2009 is $63,000. Prepare the adjusting entry.
Bad debt expense (+E, -SE)...............63(Dr)
Allowance for doubtful acc. (+XA, -A).........63(Cr)
Step 2: Adidas' total write-offs for 2009 are $62,000. Prepare the journal entry for the write-off.
Allowance for doubtful acc. (-XA, +A)...63(Dr)
What are the effects of bad debt expense on the Income statement and Balance Sheet?
1. Net income decreases (due to + expense)
2. Shareholder's Equity and Assets decrease
What are the effects of a write-off on the Income statement and Balance Sheet?
No effect on both financial statement
What if a customer suddenly pays the amount that has been written off?
1. Simple reverse the previous journal entry
Account receivable (+A).....................63 (Dr)
Allowance for doubtful acc. (+XA, -A)...........63 (Cr)
2. Another journal entry for the cash received
Cash (+A).......................63 (Dr)
Account Receivable (-A).............63 (Cr)
Equations to calculate the balance in allowance for doubtful accounts
(Beg. Balance + Bad Debt Expense estimate) - Write offs = End balance Allowance for doubtful accounts
Bad debt expense = (End. Balance + Write offs) - Beg. Balance
Accounts Receivable Equation
Beg. Balance + Net Sales - Write offs - Cash Collections = Ending Balance of Account Receivable
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Sets found in the same folder
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