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35 Cards in this Set
- Front
- Back
Realization principle states to record revenue when
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the earning process is complete or virtually complete AND there is reasonable certainty as to the conductibility of the asset to be received
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Two adjustments to the sales revenue are
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1. Sales Returns & Allowances
2. Sales Discounts |
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Sales Returns result when
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goods are sold, but then returned to the seller
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Sales Allowance result when
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customers are dissatisfied with merchandiser and the seller allows a reduction from the selling price. Goods are not returned.
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Sales Discounts
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Offer a cash discount to a credit customer for the prompt payment of a balance due
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3/10, n/30
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3% discount if paid within 10 days; otherwise due in 30 days
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Sales Returns & Allowances; Sales Discounts characteristics
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Contra revenue account. Results in decrease to sales revenue. Normal balance is debit.
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Bad Debt Expense
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Customers who do not pay their bills. Estimate due to the matching concept.
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To record the bad debt expense estimate
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Debit - Bad Debts Expense,
Credit - Allowance for Doubtful Accounts. Estimated at the end of every year. adjust entry. |
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Allowance for doubtful accounts characteristics
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CONTRA ASSET ACCOUNT. Causes a decrease in assets. Normal balance is credit. Found on the balance sheet as a decrease to the accounts receivable.
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Allowance for doubtful accounts represents
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the amount of accounts receivable the company estimates it will not collect.
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Write off (define, journal entry)
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when company stops trying to collect the debt. Represent the actual bad debts of the company.
Debit allowance, credit accounts receivable (Increases contra asset, decreases asset) no effect overall |
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Write off char
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Can occur at any time in the year.
Debit Allowance for Doubtful Accounts Credit Accounts Receivable |
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Write off effect on bad expense
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The write off does NOT effect the bad debt expense. We simply eliminate the account receivable and reduce the allowance fir doubtful accounts.
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Write off effect on NRV
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NONE. Entry reduces both accounts rec and allowance, leaving the difference unchanged.
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NRV formula
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accounts rec - allowance
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Net Realizable value
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net amount the company expects to receive in cash from receivables
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Allowance for Doubtful Accounts is (at the end of the year)
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not closed
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Allowance t thing
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Debit: Write offs
Credit: Beginning balance, recoveries, bad debt expense |
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Two methods in estimating bad debt expense
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Percentage of sales
Percentage of receivables |
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Percentage of sales (also called..) + def
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Net credit sales method.
Bad debt expense is based on the % of current credit sales estimated to be uncollectible where the % is based on past experience/historic pattern. |
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Bad debt expense =
(Net credit sales method) |
Net credit sales X % expected uncollectible
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Percentage of receivables (also called..; definition)
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aging method. Requires an analysis of accounts receivable balances by the length of time they have been unpaid. Put the accounts receivable into categories by age, and assign a % expected to be unncollectible to each category (aging schedule)
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The total number from the aging schedule
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Represents the required credit balance in the allowance for doubtful accounts. Does not represent the bad debt expense estimate.
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T account for allowance with the aging schedule number
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Credit:Write offs
Debit:Beginning balance, recoveries, Bad debt expense(x) Bottom Credit: Ending balance (from aging schedule) |
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Unlike the net credit sales method, an existing balance in the allowance for doubtful accounts will
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effect the current years bad debt expense estimate
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Accounts Receivable turnover
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Measures the number of times, on average, the company collects its accounts receivable. How many times old receivables are collected and replaced by new receivables. Higher is better.
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Accounts receivable turnover formula
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Net sales revenue/Average accounts receivable
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Average collection period
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measures the number of days on average between making a sale on credit and collecting our cash from the customer. Lower is better
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Average collection period formula
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365/ accts receivable turnover ratio.
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Company returned $2000 worth of merchandise
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debit: sales returns and allowances $2000
credit: accounts receivable $2000 |
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Company paid bill (credit sale) of $4000 w a discount of $80
(3920) |
debit: cash $3920
sales discounts $80 credit: accounts receivable $4000 |
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After an effort, $2500 account receivable was written off as uncollectible.
+ effects |
debit: allowance for doubtful accounts $2500
credit: accounts receivable $2500 NO EFFECT ON NRV; cash flows, ni |
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Based on past experienced, the company estimated that 1% of the years credit sales of $246,000 will be uncollectible
($246,000*.01=$2460) + effects |
debit: bad debt expense $2460
credit: allowance for doubtful accounts $2460 ni- decrease nrv - decrease cash - none |
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Company paid the $2500 accounts previously written off
(recovery) |
debit: cash $2500
credit: allowance for doubtful accounts $2500 ni - none nrv- decrease cash - increase |