Transcript Chapter 6 Reporting ad Interpreting Sales Revenue and

Chapter 6
Reporting and Interpreting Sales
Revenue and Accounts
Receivable
Acct 2301
Zining Li
Key Terms
• Sales revenues
–
–
–
–
Sales returns
Sales discount ( 2/10, n/30)
Credit card discount
All of these three are contra-revenue accounts
• Accounts receivable
– Allowance for doubtful account (contra-asset account)
– Net realizable value of A/R
– Bad debt expense
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Accounting for Sales Revenue
Sales (revenue) reported on the Income Statement are
net of credit card sales discount, sales discount, and sale
returns.
Sales Revenue
Less: Credit card discounts (a contra-revenue account)
Sales discounts (a contra-revenue account)
Sales returns and allowances (a contra-revenue account)
Net Sales (reported on the income statement)
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Accounting for Credit Card Discount
Assume the credit card company charges a fee
of 3%
When sales of $1,000 are made by credit card
purchases:
Dr. Cash
$970
Dr. Credit-card discount
30
Cr: Sales Revenue
$1,000
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Accounting for Sales Discount
Suppose the credit term is 2/10, n/30
When sales of $1,000 are made on account
Dr. Accounts Receivable
$1,000
Cr: Sales Revenue
$1,000
When customers pay within 10 days, they enjoy 2% discount
Dr. Cash
$980
Dr. Sales Discount
20
Cr. Accounts Receivable
$1,000
When customers pay after 10 days, they have to pay the full amount
Dr. Cash
$1,000
Cr. Accounts Receivable
$1,000
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Accounting for Sales Returns
When sales of $1,000 are made on account
Dr. Accounts Receivable
$1,000
Cr: Sales Revenue
$1,000
When returns of $150 are made
Dr. Sales Return
$150
Cr. Accounts Receivable
$150
When customers pay off the rest
Dr. Cash
$850
Cr. Accounts Receivable
$850
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E6-3: Clem Retailers
• Nov 20: sold two items of merchandise to Customer B, who charged
the $350 sales price on her visa card. Visa charges Clem a 2%
credit card fee
• Nov 25: sold 20 items of merchandise to Customer C at an invoice
price of $4,500 (total); terms 3/10, n/30.
• Nov 28: sold 10 identical items of merchandise to Customer D at an
invoice price of $9,000 (total); terms 3/10, n/30.
• Nov 29: Customer D returned one of the items purchased on Nov
28th; the item was defective and credit was given to the customer
• Dec 06: Customer D paid the account balance in full
• Dec 20: Customer C paid in full for the invoice of Nov 25
Required:
1. Provide journal entries for above transactions when necessary.
2. Assume that Sales Returns and Allowances, Sales Discounts, and Credit
Card Discounts are treated as contra-revenues, determine the net sales for the
two months ended December 31, 2011
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Nov 20--- Dr. Cash
$343
Dr. Credit-card discount
7
Cr: Sales Revenue
350
Note: COGS will also be recorded at the time of sales.
Nov 25--- Dr. Acct. Receivable
Cr: Sales Revenue
$4,500
Nov 28--- Dr. Acct. Receivable
Cr: Sales Revenue
$9,000
4,500
Nov 29--- Dr. Sales returns and allowance $900
Cr: Acct. Receivable
9,000
900
Note: COGS will also be adjusted at the time of sales returns.
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Dec 06--- Dr. Cash
Dr. Sales discount
Cr: Acct. Receivable
$7,857
243
Dec 20--- Dr. Cash
Cr: Acct. Receivable
$4,500
8,100
4,500
Sales revenue ($350 + $4,500 + $9,000)
$13,850
Less: Sales returns and allowances (1/10 x $9,000 from D)
900
Less: Sales discounts (9/10 x $9,000 from D x 3%)
243
Less: Credit card discounts ($350 from B x 2%)
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Net sales
$12,700
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Measuring and Reporting Accounts
Receivable
• Accounts receivable vs. Notes receivable
• Net Realizable Value of A/R
Accounts Receivable
Less: Allowance for doubtful accounts (a contra-asset
account)
= Net Realizable Value of Accounts Receivable
• Allowance for doubtful accounts
– contra-asset account
– the estimated amount of uncollectible A/R
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Accounting for Bad Debt Expenses
• An adjustment to account for expenses for
potential default accounts receivable
• Bad debt expenses are estimated and
recorded in the same accounting period
when credit sales are made;
• NOT at the time when some accounts
receivable are determined to be
uncollectible.
• Matching Principle
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Accounting for Bad Debt Expenses
• Journal entry to record Bad Debt Expense:
Dr. Bad Debt Expense $XX
Cr. Allowance for doubtful accounts $XX
• Effects on financial statements:
– Net income is decreased;
– Assets are decreased,
– Shareholders’ Equity is decreased
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Methods for Estimating the Amount
of Bad Debt Expense
• Sales Method
– The amount of bad debt expense is a percentage of
credit sales generated in current accounting period
• Accounts Receivable Method
– The amount of doubtful accounts is estimated based
on the balance and age of accounts receivable at the
end of the accounting period
– The amount of bad debt expense is then a plug-in
number
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Sales Method
Example: During Oct. 2006, total credit sales revenue was
$20,000. The company estimates 1% of this credit sale
to be uncollectible. On Dec 2nd, the account receivable
of $3,000 for Oct 2006 credit sales was determined to be
uncollectible.
• Assuming the company prepares its financial statement
at Oct. 30st, provide the journal entry to record the bad
debt expense.
• What is the effect on the financial statements of
recording bad debt expense?
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Accounts Receivable Method
• The amount of doubtful accounts is
estimated as a percentage of the balance
of accounts receivable at the end of the
accounting period.
• The amount of bad debt expense is then a
plug-in number.
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Steps in Accounts Receivable Method
• Estimate the dollar amount of uncollectible accounts
based on a percentage of the ending balance of
accounts receivable;
• The estimated uncollectible accounts (from step1) is the
(desired) ending balance of allowance for doubtful
accounts;
• Bad Debt Expense
= Ending balance of allowance for doubtful accounts
– the pre-adjustment balance of allowance for doubtful
accounts.
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Example: Accounts Receivable Method
• Following is the summary of transactions that Cart Corp. had in year
2005 and year 2006. Year 2005 was the first year of operations.
Please determine and record the bad debt expense for both years.
• In Year 2005:
– Provided $5,000 services on account;
– Collected $4,000 cash from accounts receivables;
– Adjusting entry booked to reflect the estimate of 5% of ending A/R
balance to be uncollectible.
• In Year 2006:
– Provided $6,000 services on account.
– Collected $4,500 cash from accounts receivables.
– Adjusting entry booked to reflect the estimate of 5% of ending A/R
balance to be uncollectible.
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Aging Schedule of A/R
• In estimating the percentage of
uncollectible accounts receivable, the age
of each account receivable is taken into
consideration;
• A higher percentage is used to estimate
the uncollectible amount for an older
accounts receivable;
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Example: Aging Schedule of A/R
Age of Accounts
Balance of
Accounts
Receivable
Estimate of
Percentage that
will Prove
Uncollectible
0.5%
0 - 30 days
500,000
31 - 60 days
120,000
1.0%
61 - 90 days
40,000
5.0%
More than 90
days
30,000
10.0%
Estimated
Uncollectible
Accounts
At the beginning of the year, the company had a credit balance in
the Allowance for Doubtful accounts of $4,000. Prepare the
adjusting journal entry to recognize the company's bad debt
expense for the year.
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Write-off of Uncollectible Accounts
• No expenses are recorded when certain A/R are
found to be uncollectible (why ?)
• Rather, the balance of A/R is reduced by the
amount of uncollectible accounts (why?)
• Allowance for doubtful accounts is also reduced
by the same amount (why?)
Dr. Allowance for doubtful accounts
Cr. Accounts Receivable
$$
$$
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Example of writing off A/R
Suppose Dart Corp. had a beginning balance of A/R of
$20,000 and allowance of $1,500. During a period,
it had credit sale of $5,000, collections of A/R of
$8,000. It estimates its bad debt expense based on
2% of credit sales. During the period, a customer
failed to pay off the account of $980 he owed and
the company wrote the account off.
• Please provide the journal entry to record the write-off
• Provide the T-accounts of A/R and the Allowance account.
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Determine the bad debt expense for year 2006 and net
realizable value of A/R at 12/31/2006
In Year 2005:
• Provided $5,000 services on account;
• Collected $4,000 cash from accounts receivables;
• Adjusting entry booked to reflect the estimate of 5% of
ending A/R balance to be uncollectible.
In Year 2006:
• Wrote off $120 of accounts receivable
• Provided $6,000 services on account.
• Collected $4,500 cash from accounts receivables.
• Adjusting entry booked to reflect the estimate of 5% of
ending A/R balance to be uncollectible.
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One more exercise …
During the period, a company had $2,000,000 in credit sales.
The Company assumes that approximately 1% of total
sales on account will prove uncollectible. At the beginning
of the year, the company had a credit balance in the
Allowance for Doubtful accounts of $4,000. During the
year, the company wrote-off $2,300 of identified
uncollectible accounts.
•
•
Prepare the adjusting journal entry to recognize the
company's bad debt expense for the year;
Determine the ending balance of accounts receivable and
the allowance for doubtful accounts.
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Effect of Change in A/R on
Cash vs. Net Income
Cash Sale
Credit Sale
Cash
collection
form A/R
Accounts
Receivable
Sales
Revenue
Cash
collected
from
customers
Net
Income
Cash from
operations
N/A
Increase
Increase
Increase
Increase
Increase
Increase
N/A
Increase
N/A
Decrease
N/A
Increase
N/A
Increase
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How to infer Cash Flows from Sales
Revenue and Changes in A/R
• Cash collected from customers = Sales revenue –
increase in A/R
• Cash collected from customers = Sales revenue +
decrease in A/R
• Cash from operations = Net Income – increase in A/R
• Cash from operations = Net Income + decrease in A/R
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Accounts Receivable Turnover
Net Sales
Average Net Accounts Receivable
• How many times accounts receivable was
created and collected during the period
• Efficiency of accounts receivable management
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