90 likes | 298 Views
PRINCIPLES OF FINANCIAL ACCOUNTING. Chapter 8. Accounts Receivable. Issues with bad debts Two methods Direct write-off Allowance method Advantage of allowance method Matches revenue with expense (adjusting entry is required)
E N D
PRINCIPLES OF FINANCIAL ACCOUNTING Chapter 8
Accounts Receivable • Issues with bad debts • Two methods • Direct write-off • Allowance method • Advantage of allowance method • Matches revenue with expense (adjusting entry is required) • More accurate balance on the balance sheet (cash realizable value)
Write off of bad debt • Direct write-off method • DR – +Bad debt expense • CR – - A/R • Allowance method • DR -- +Allowance for Doubtful accounts • CR – -A/R
Recovery of previously written off account • Direct write-off • DR - +A/R • CR – -Bad Debt Expense • DR – +Cash • CR – -A/R • Allowance method • DR – +A/R • CR – +Allowance for Doubtful Accounts • DR – +Cash • CR – -A/R
Allowance method calculation • Percentage of A/R • Flat % on all receivables • Aging • % times the amount still owed given the age of receivables (page 360) • Adjusting entry • DR – +Bad debt expense • CR – +Allowance for Doubtful Accounts • NOTE – amount must be adjusted for the existing balance in the Allowance for Doubtful Accounts account.
Notes Receivable • Promissory note • Principal, interest, due date • Simple interest calculation: • Principal x rate x time
Receivables analysis • Credit risk ratio: • Allowance for Doubtful Accts/A-R • Receivable turnover ratio: • Net Credit sales / Average net receivables • Average collection period: • 365 / Receivables turnover ratio
Methods of speeding up cash-flow • Using receivables as security on a loan (assignment) • Selling receivables (factoring) • Accepting bank charge cards
Assignment • E8-3 • E8-5 • E8-6 • E8-13 • BYP 8-1 • BYP 8-9