ACC225 – Intro to Financial Accounting

1. ACC225 – Intro to Financial Accounting MODULE 6 FINANCIAL ASSETS - ACCOUNTS RECEIVABLE

2. GOALS FOR MODULE 6

3. GOALS FOR MODULE 6 • Introduce Sales on Credit - Retail vs. Business

4. GOALS FOR MODULE 6 • Introduce Sales on Credit - Retail vs. Business • Discuss Costs of Credit Sales

5. GOALS FOR MODULE 6 • Introduce Sales on Credit - Retail vs. Business • Discuss Costs of Credit Sales • Introduce Methods for Estimating Bad Debts

6. SALES ON CREDIT

7. SALES ON CREDIT • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30)

8. SALES ON CREDIT • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30) • Business to Individual - Consumer Protection Laws in effect. Often Sale made by Credit Card. Either Outside Company (e.g., VISA) or Company Processed (e.g., Lazarus)

9. SALES ON CREDIT • Business to Business - Often no formal contract beyond Purchase Order. Seller will have set payment terms (e.g., 2%/10, n30) • Business to Individual - Consumer Protection Laws in effect. Often Sale made by Credit Card. Either Outside Company (e.g., VISA) or Company Processed (e.g., Lazarus) • Because of Large volume, detail of individual accounts not kept in General Ledger. Maintained in subsidiary Accounts Receivable Ledger

10. COSTS OF CREDIT SALES

11. COSTS OF CREDIT SALES • Loss of Use of Money until Paid (Time value of Money)

12. COSTS OF CREDIT SALES • Loss of Use of Money until Paid (Time value of Money) • Processing costs. Fee paid to VISA or Mastercard Administrative costs if internal system.

13. COSTS OF CREDIT SALES • Loss of Use of Money until Paid (Time value of Money) • Processing costs. Fee paid to VISA or Mastercard Administrative costs if internal system. • Major Risk (not always a major cost) is Bad Debts

14. COSTS OF CREDIT SALES • Loss of Use of Money until Paid (Time value of Money) • Processing costs. Fee paid to VISA or Mastercard Administrative costs if internal system. • Major Risk (not always a major cost) is Bad Debts • Bad Debt occurs when a customer account cannot be collected. It is an expense arising from selling on credit.

15. COSTS OF CREDIT SALES • Loss of Use of Money until Paid (Time value of Money) • Processing costs. Fee paid to VISA or Mastercard Administrative costs if internal system. • Major Risk (not always a major cost) is Bad Debts • Bad Debt occurs when a customer account cannot be collected. It is an expense arising from selling on credit. • Matching Principle comes into consideration.

16. ESTIMATING BAD DEBTS

17. ESTIMATING BAD DEBTS • Major issue for all companies which sell on credit (and financial institutions which lend money)

18. ESTIMATING BAD DEBTS • Major issue for all companies which sell on credit (and financial institutions which lend money) • Allowance method (Contra account on B/S) is used and bad debts expected to occur in future must be estimated and expense recorded in I/S Accounts Receivable DR Allowance for Bad Debts CR Net Accounts Receivable

19. ESTIMATING BAD DEBTS • Major issue for all companies which sell on credit (and financial institutions which lend money) • Allowance method (Contra account on B/S) is used and bad debts expected to occur in future must be estimated and expense recorded in I/S • To aid in the identification of bad debts and in the estimation of future bad debts Accounts Receivable Aging is Prepared

20. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT

21. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on

22. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on Past Experience

23. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on Past Experience Similar Companies

24. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on Past Experience Similar Companies Economic Conditions

25. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on Past Experience Similar Companies Economic Conditions • Estimate % of Sales (or credit sales if there is a major difference) that are expected to become uncollectible.

26. ESTIMATING BAD DEBTS • FOCUS ON INCOME STATEMENT * Based on Past Experience Similar Companies Economic Conditions • Estimate % of Sales (or credit sales if there is a major difference) that are expected to become uncollectible. • Make entry to expense that amount each month or at end of year.

27. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD

28. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach

29. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach Past Experience

30. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach Past Experience Similar Companies

31. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach Past Experience Similar Companies Economic Conditions

32. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach Past Experience Similar Companies Economic Conditions • Estimate % of end of year open A/R that are expected to be uncollectible.

33. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - SIMPLE METHOD Using Same basis as income statement approach Past Experience Similar Companies Economic Conditions • Estimate % of end of year open A/R that are expected to be uncollectible. • Make adjustment to bring Allowance for Bad Debts up/down to that balance

34. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - COMPLEX METHOD

35. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - COMPLEX METHOD • Specifically identify problem accounts.

36. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - COMPLEX METHOD • Specifically identify problem accounts. • Age A/R and apply different % to total of each category of aging.

37. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - COMPLEX METHOD • Specifically identify problem accounts. • Age A/R and apply different % to total of each category of aging. • Obtain overall Estimate.

38. ESTIMATING BAD DEBTS • FOCUS ON BALANCE SHEET - COMPLEX METHOD • Specifically identify problem accounts. • Age A/R and apply different % to total of each category of aging. • Obtain overall Estimate. • Make adjustment to bring Allowance for Bad Debts up/down to that balance

39. A/R JOURNAL ENTRIES

40. A/R JOURNAL ENTRIES • Record Bad Debt Expense

41. A/R JOURNAL ENTRIES • Record Bad Debt Expense Bad Debt Expense DR

42. A/R JOURNAL ENTRIES • Record Bad Debt Expense Bad Debt Expense DR Allowance for Bad Debt CR REMEMBER: Accounts Receivable DR Allowance for Bad Debts CR Net Accounts Receivable

43. A/R JOURNAL ENTRIES • Record Bad Debt Expense Bad Debt Expense DR Allowance for Bad Debt CR • Write off Uncollectible Account Allowance for Bad Debt DR

44. A/R JOURNAL ENTRIES • Record Bad Debt Expense Bad Debt Expense DR Allowance for Bad Debt CR • Write off Uncollectible Account Allowance for Bad Debt DR Accounts Receivable CR

45. A/R JOURNAL ENTRIES • Recover Previously Written Off Account

46. A/R JOURNAL ENTRIES • Recover Previously Written Off Account Accounts Receivable DR

47. A/R JOURNAL ENTRIES • Recover Previously Written Off Account Accounts Receivable DR Allowance for Bad Debt CR

48. A/R JOURNAL ENTRIES • Recover Previously Written Off Account Accounts Receivable DR Allowance for Bad Debt CR Cash DR

49. A/R JOURNAL ENTRIES • Recover Previously Written Off Account Accounts Receivable DR Allowance for Bad Debt CR Cash DR Accounts Receivable CR

50. SUMMARY • Accounts Receivable usually consist of many individual accounts maintained in subsidiary ledger