Accounting Chapter 6

Front 1

Revenue Principle Requirements

Back 1

States that revenues be recorded when:
 Goods have been delivered or services have been rendered.
 The price for the goods or services is known.
 Collection from the customer is reasonably assured.

Front 2

Reporting Net Sales

Back 2

Companies record credit card discounts, sales discounts, and sales returns and allowances separately to allow management to monitor these transactions. Credit card discounts, sales discounts, and sales returns and allowances are contra-revenue accounts, deducted from sales revenue in the income statement to arrive at net sales.

Front 3

Net Sales Equation

Back 3

Sales Revenue
Less: Credit Card Discounts
Sales Discounts
Sales Returns and Allowances
---------------------------
Net Sales

Front 4

Sales on Account

Back 4

When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase. In most cases the customer is offered a small discount to pay cash within a short period after the sale.

Front 5

Sales Discounts

Back 5

Customers, purchasing on open account,are usually offered a sales discount to encourage early payment.

The sales discount terms are typically written as: 2/10, n/30 or “two ten, net thirty.”

Front 6

Sales Returns

Back 6

Full refund given when customers return undamaged merchandise

Front 7

Sales Allowance

Back 7

Sales Allowance given when a customer returns damaged but usable merchandise. The seller may offer the customer a reduction from the original selling price to entice the customer to keep the damaged merchandise.

Front 8

What happens for sales returns or allowances?

Back 8

For either type of return, the seller debits sales returns and allowances which is a contra revenue account.

Front 9

Measuring and Reporting Accounts Receivable

Back 9

Accounts receivable are amounts owed to the business on open account. There are two types of receivables:
 Trade receivables are amounts owed to the business for credit sales of goods, or services.
 Nontrade receivables are amounts owed to the business for other than business transactions. For example, personal loans to employees are nontrade receivables.

Front 10

Bad Debts

Back 10

Bad debts result from credit customers who will not pay the amount they owe, regardless of collection efforts.

Front 11

Accounting for Bad Debts

Back 11

The allowance method attempts to match bad debts expense in the period with the related revenue. This method has two advantages:
 It adheres to the matching principle because the bad debts expense is recorded in the period of the sale, and
 It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.

Front 12

Net Realizable Value

Back 12

Because we do not want to overstate assets, we must show accounts receivable at its net realizable value on the balance sheet.

Net realizable value is the amount of accounts receivable that we actually think we will collect.

Front 13

Balance Sheet Disclosure Equation

Back 13

Accounts Receivable
Less: Allowance for doubtful accounts
-----------------------------
Net realizable value of accounts receivable

Front 14

Writing Off Uncollectible Accounts

Back 14

When it is clear that a specific customer’s account receivable will be uncollectible, the amount should be removed from accounts receivable and charged to allowance for doubtful accounts.

Front 15

Methods for Estimating Bad Debts

Back 15

There are two methods from which to choose:
 Percentage of credit sales method, and
 Aging of accounts receivable method.

Front 16

Percentage of Credit Sales

Back 16

Using the percentage of credit sales method, a bad debt percentage is based on records of actual uncollectible accounts from prior years’ credit sales. The focus is on determining the amount to record on the income statement as bad debt expense.

Net Credit Sales
X % Bad Debt loss rate
------------------
Amount of journal entry

Front 17

Aging of Accounts Receivable

Back 17

When using the aging of accounts receivable method to arrive at an estimate of bad debt expense, the focus is on determining the desired balance in allowance for doubtful accounts on the balance sheet.

Front 18

Cash and Cash Equivalents

Back 18

Cash includes currency, coins, and amounts on deposit in bank accounts, checking accounts, and savings accounts. Cash equivalents are short-term, highly liquid investments that are easily converted into a known amount of cash, are close to maturity, and are not sensitive to interest rate changes. Cash and cash equivalents are usually combined on the balance sheet.

Front 19

Internal Control of Cash: Policies and Procedures

Back 19

An internal control system is a collection of policies and procedures that safeguard assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.
Specifically, internal controls should assist companies in maintaining adequate accounting information, ensure that all transactions are legitimate and properly authorized, and detect or prevent the unauthorized use of company assets.
Of all assets, cash is the most susceptible to theft and fraud. For that reason, effective cash controls are essential.

Front 20

Internal Control of Cash: Separation of Duties

Back 20

Separation of duties is one internal control practice that companies use to protect cash. The person handling cash should not be responsible for recording cash transactions. All disbursements should be duly authorized.

Front 21

Internal Control of Cash: Additional

Back 21

In addition to separation of duties, internal controls for cash include:
Bank Reconciliations, Bank Approval, Check Signatures, Pre-numbered Checks, Payment Approval, and Daily Deposits.

Front 22

Bank Reconciliation

Back 22

A bank reconciliation explains the difference between the cash balance in the general ledger account and the amount shown on the bank statement. A bank reconciliation will identify any errors that need to be corrected by the company or the bank.

All reconciling items on the book side require an adjusting entry to the cash account.

Front 23

Receivables Turnover

Back 23

The receivables turnover ratio tells us the number of times per year a company can convert its accounts receivable into cash. For any company, the higher the turnover, the faster the cash collection on accounts receivable.

Receivables Turnover= Net Sales / Average Net Trade Receivables