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PRINCIPLES OF FINANCIAL ACCOUNTING

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)

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PRINCIPLES OF FINANCIAL ACCOUNTING

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  1. PRINCIPLES OF FINANCIAL ACCOUNTING Chapter 8

  2. 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)

  3. 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

  4. 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

  5. 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.

  6. Notes Receivable • Promissory note • Principal, interest, due date • Simple interest calculation: • Principal x rate x time

  7. 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

  8. Methods of speeding up cash-flow • Using receivables as security on a loan (assignment) • Selling receivables (factoring) • Accepting bank charge cards

  9. Assignment • E8-3 • E8-5 • E8-6 • E8-13 • BYP 8-1 • BYP 8-9

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