LATER, OFFICEMART!…HELLO, APPLIANCE CENTER, INC! Lesson 7-1, page 193 Appliance Center is a merchandising business organized as a corporation What’s NEW on our NEW Chart of Accounts on page 193??

To one degree or another, many business transactions result in the extension of credit. The availability of credit entices customers to make a purchase decision. Credit sales include: Purchases of inventory and supplies on account Sales to customers directly by the vendor (Appliance Center) offering credit indirectly through a bank or credit card company Extending credit is costly: Credit providers (Appliance Center and/or Visa) must conduct investigations of credit worthiness and monitor collection activities Creditor must forego alternative uses of money while credit is extended Occasionally, a creditor will get burned when the borrower refuses or is unable to pay. DOING BUSINESS “ON CREDIT” Lesson 7-1, page 194

ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS Lesson 7-1, page 194 Selling on account requires care on the seller’s part…we should investigate the customer’s credit rating to check out the track record of paying back loans of all kinds Regardless of care, some customers will not pay …uncollectible accounts (aka bad debts) When the specific person’s account is believed uncollectible, the account is no longer an asset Canceling the balance is “writing off the account” We can estimate or wait until we know WHO won’t pay Either way, we keep trying to get our money …it should be canceled and removed from the assets of the business, …even though the customer still owes us the money When sales are made on account, the asset account “Accounts Receivable” is increased with a debit. The amount stays here until it is paid or until it is specifically known to be uncollectible (Who is not paying?)

RECORDING UNCOLLECTIBLE ACCOUNTS EXPENSE — DIRECT METHOD uaac Lesson 7-1, page 196 An uncollectible account is closed by transferring the balance to a general ledger account - Uncollectible Accounts Expense Nov. 15 – Wrote off James Nordquist’s past due account as uncollectible, $ Memorandum No The direct method is usually used in smaller businesses with very few accounts receivable relationships

Lesson 12-1, page 274 The total of all vendor account balances in the accounts payable ledger is = to the balance of the controlling account, “Accounts Payable” CONTROLLING ACCOUNT

$12,000 $11,050 We have to tell the controlling A/R account to go down because I no longer expect to receive the money $50.00 We have to tell James Nordquist’s account to go down because we now know he will not pay us (stop expecting $) James Nordquist Nov. 15 – Wrote off James Nordquist’s past due account as uncollectible, $ Memorandum No. 21 WHAT’S UP WITH THE / ? A/R TOTAL -0-

COLLECTING A WRITTEN-OFF ACCOUNT — DIRECT METHOD uaac COLLECTING A WRITTEN-OFF ACCOUNT — DIRECT METHOD uaac Lesson 7-1, page Make an entry to reopen the account. 2 2.Make an entry to record the cash receipt. Sometimes a written-off account is collected later. When the account is written off, it is recorded as an expense. When it is later collected, it is classified as “other revenue”. “Collection of Uncollectible Accounts” is closed to Income Summary + revenue  + This entry is required so we are maintaining complete records. What if James wants more credit later?

SUMMARY OF DIRECT METHOD uaac When we determine WHO will not pay: DR. Uncollectible Accounts Expense CR. Accounts Receivable / Dead Beat’s name If we wind up collecting after all: DR. Accounts Receivable / Not-so-dead-beat-after-all’s name CR. Collection of Uncollectible Accounts & DR. Cash CR. Accounts Receivable GJ CRJ

Work Together 7-1 (p198, wb241,242) & On Your Own 7-1 (p198, wb243,244) Work Together 7-1 (p198, wb241,242) & On Your Own 7-1 (p198, wb243,244) 1

WT 1

OYO 1

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE Lesson 7-2, page 199 (GAAP) – Matching Expenses with Revenue – Uncollectible Accounts should be recorded in the same fiscal period in which the sales revenue is received At the time sales on account are made, there is no way to know for sure which customers will not pay – but we DID MAKE THE SALE So we estimate based on past history of uncollectible accounts… allowance method of recording losses from uncollectible accounts Allowance Method 1: Percentage of Sales method Allowance Method 2: Percentage of Accounts Receivable method (contra asset) Regardless of the method used, the adjustment (example) is: (Debit U ncollectible Accounts Expense ( + ); Credit A llowance for Uncollectible Accounts ( + )

PERCENTAGE OF SALES METHOD – Allowance Method 1 Lesson 7-2, page 200 Percentage of sales method – assumes that a percentage of each sales dollar (cash & on account) will become uncollectible (still don’t know who) Net Sales X Percentage = Estimated Uncoll. Accounts Expense $133, X 0.5% = $ ADJUSTMENT USING PERCENTAGE OF SALES METHOD Before the adjustment, a balance of $25.87 is in Allowance for Uncollectible Accounts …this balance is what is left from estimates from sales in previous fiscal periods but not yet identified by customer The new balance, $592.30, is an estimate of the total A/R that WILL become uncollectible. (previous years’ sales and now THIS year’s sales) (contra asset) Sales -Discount -Returns

PERCENTAGE OF ACCOUNTS RECEIVABLE Allowance Method 2 - AGING OF ACCOUNTS RECEIVABLE PERCENTAGE OF ACCOUNTS RECEIVABLE Allowance Method 2 - AGING OF ACCOUNTS RECEIVABLE Lesson 7-2, pages 201,202 Percentage of accounts receivable method – assumes that a percentage of accounts receivable at fiscal year-end will become uncollectible Analyzing accounts receivable according to when they are due is called aging accounts receivable Mails reminders Special Attempts Stop Selling

ADJUSTMENT USING PERCENTAGE OF ACCOUNTS RECEIVABLE Allowance Method 2 - AGING ACCOUNTS RECEIVABLE 1.Compute an estimate for each age group. 1 2.Compute the total estimate. 2 3.Compute the addition to the allowance account. 3 Lesson 7-2, page 201 Dr: Uncollectible Accounts Expense Cr: Allowance for Uncollectible Accounts X = is already in the account. We need it to be a TOTAL of We adjust for the DIFFERENCE = Adjustment amount

WRITING OFF AN UNCOLLECTIBLE ACCOUNT - ALLOWANCE METHOD aaaa Lesson 7-2, page 203 When a specific customer account is thought to be uncollectible, DIRECT METHOD contra asset  - - …because it is no longer estimated, but is considered actual …don’t “Allow” for it anymore

COLLECTING A WRITTEN-OFF ACCOUNT - ALLOWANCE METHOD aaaa Lesson 7-2, page Reopen the account. That goes back into what we expect NOT to receive. 2 2.Record the cash receipt. + contra asset +

SUMMARY OF ALLOWANCE METHOD aaaa When we determine WHO will not pay: DR. Allowance for Uncollectible Accounts CR. Accounts Receivable / Dead Beat’s name If we wind up collecting after all: DR. Accounts Receivable / Not-so-dead-beat-after-all’s name CR. Allowance for Uncollectible Accounts & DR. Cash CR. Accounts Receivable GJ CRJ

Work Together 7-2 (p205, wb245,246) & On Your Own 7-2 (p205, wb247,248) Work Together 7-2 (p205, wb245,246) & On Your Own 7-2 (p205, wb247,248) 1-4

WT ADJUSTMENT IS ALWAYS THESE ACCOUNTS UNCOLLECTIBLE ADJUSTMENT? When you use the % of A/R method (aging), you must subtract what is already in the account 1-4

OYO OYO 1-4

OYO 1-4

CALCULATING THE ACCOUNTS RECEIVABLE TURNOVER RATIO Lesson 7-3, page 206 Appliance Center needs cash to purchase additional merchandise to sell and to pay for operating expenses If people don’t pay on time, too much money is in accounts receivable and unavailable for other uses …so businesses analyze how frequently customers make their payments so they can adopt new procedures as needed One way to analyze the efficiency of a business is to calculate the accounts receivable turnover ratio - the number of times the average amount of accounts receivable is collected during a specified period A four step process…should feel familiar… The ratio is a measure of the liquidity of A/R – the higher the better

1 Compute the beginning and ending book value of accounts receivable – the difference between the balance of A/R and its contra account, Allowance for Uncollectible Accounts CALCULATING THE ACCOUNTS RECEIVABLE TURNOVER RATIO Lesson 7-3, page 206 Beginning$50,329.14$1,416.83$48,912.31–= Ending$45,462.79$1,363.88$44,098.91–= Total Accounts Receivable Allowance for Uncollectible Accounts Book Value of Accounts Receivable –=

2 Compute the average book value. CALCULATING THE ACCOUNTS RECEIVABLE TURNOVER RATIO Lesson 7-3, page 206 ($48,912.31$44,098.91)$46, =  2 Beginning Book Value of Accounts Receivable Ending Book Value of Accounts Receivable Average Book Value of Accounts Receivable +=  2 2

3 Compute the accounts receivable turnover ratio. CALCULATING THE ACCOUNTS RECEIVABLE TURNOVER RATIO Lesson 7-3, page 206 $330,312.85$46, times  = Net Sales on Account Average Book Value of Accounts Receivable Accounts Receivable Turnover Ratio  = This can be done monthly, quarterly, or yearly

4 Compute the average number of days for payment. CALCULATING THE ACCOUNTS RECEIVABLE TURNOVER RATIO Lesson 7-3, page  = Days in Year Accounts Receivable Turnover Ratio Average Number of Days for Payment  = Appliance Center’s customers are taking an average of 51 days to pay their accounts in full Compare this to your terms and make adjustments as necessary

ANALYZING ACCOUNTS RECEIVABLE TURNOVER RATIOS Lesson 7-3, page 207 If the A/R turnover ratio is not favorable, the company may: 1 – Send statements of account more often, requesting prompt payment 2 – Not sell on account to any customer who has an account for which payment is overdue more than 30 days 3 – Encourage more cash sales and fewer sales on account 4 – Conduct a more rigorous credit check on new customers before extending credit to them Generally a favorable trend

Work Together 7-3 (p208, wb249) & On Your Own 7-3 (p208, wb251) Work Together 7-3 (p208, wb249) & On Your Own 7-3 (p208, wb251) 1-7

÷ 8.7 = ? WT

OYO 365 ÷ 5.8 =

Nice try