Unit 14 November 5, 2018

Making Sales on Credit Sales Rep Credit Manager Credit Check Credit Report Credit Reporting Agency Credit Rating or Credit Score Credit Limit

How do you know who owes what? Making Sales on Credit How do you know who owes what? Accounts Receivable Sub-Ledger

A/R Subledger

A/R Subledger Accounts Receivable Sub-Ledger: Customer Branson Co. B-002

A/R Subledger Accounts Receivable Sub-Ledger: Customer Zeus Company Z- 002 Accounts Receivable Sub-Ledger: Customer Alpha-Beta Supply A-121 Accounts Receivable Sub-Ledger: Customer Greene Inc. G-016 Accounts Receivable Sub-Ledger: Customer Branson Co. B-002 16632

Making Sales on Credit Accounts Receivable T-Account Accounts Accounts Receivable Sub-Ledger $136,769 $136,769

A/R Subledger Accounts Receivable Sub-Ledger: Customer Branson Co. B-002 16632 $20,650

Accounts Receivable $136,769

Making Sales on Credit Sales Rep Credit Manager Collections Manager Credit Check Credit Report Credit Reporting Agency Credit Rating Credit Limit Collections Manager Dunning Notice

UNCOLLECTIBLE ACCOUNT BAD DEBT

DIRECT WRITE-OFF METHOD ACCOUNT CANCELED 16632 Aug 31 Bad Debt Write-Off and Account Closure 20650

ACCRUAL ACCOUNTING MATCHING PRINCIPLE Under GAAP, companies can only use the Direct Write-Off Method if their bad debts are immaterial, or very rare. ACCRUAL ACCOUNTING MATCHING PRINCIPLE “Expenses should be matched to the period in which their related revenue is earned.”

If the revenue is earned in January, the expense should be recorded in January. “Expenses should be matched to the period in which their related revenue is earned.”

CONTRA-ASSET ACCOUNT

2% OF REVENUE THREE WAYS OF CALCULATING THE AMOUNT OF THE ACCRUAL 1. PERCENTAGE OF SALES $310,000 $6,200 $6,200 2% OF REVENUE An adjusting entry is made at the end of the period, for a set percentage of revenue.

An adjusting entry is made at the end of the period, THREE WAYS OF CALCULATING THE AMOUNT OF THE ACCRUAL 1. PERCENTAGE OF SALES 2. PERCENTAGE OF ACCOUNTS RECEIVABLE BALANCE $310,000 $510,000 $9,000 2% OF A/R $9,000 $10,200 An adjusting entry is made at the end of the period, such that the Allowance account balance becomes a set percentage of the A/R balance.

90 DAYS THREE WAYS OF CALCULATING THE AMOUNT OF THE ACCRUAL 1. PERCENTAGE OF SALES 2. PERCENTAGE OF ACCOUNTS RECEIVABLE BALANCE 3. AGED ACCOUNTS RECEIVABLE 90 DAYS An adjusting entry is made at the end of the period, such that the Allowance account always contains the actual amount of Accounts Receivable which are more than given amount past due.

THREE WAYS OF CALCULATING THE AMOUNT OF THE ACCRUAL 1. PERCENTAGE OF SALES 2. PERCENTAGE OF ACCOUNTS RECEIVABLE BALANCE 3. AGED ACCOUNTS RECEIVABLE $7,713 $7,713 $8,913 An adjusting entry is made at the end of the period, such that the Allowance account always contains the actual amount of Accounts Receivable which are more than given amount past due.

2. PERCENTAGE OF ACCOUNTS RECEIVABLE BALANCE THREE WAYS OF CALCULATING THE AMOUNT OF THE ACCRUAL 1. PERCENTAGE OF SALES An adjusting entry is made at the end of the period, for a set percentage of revenue. 2. PERCENTAGE OF ACCOUNTS RECEIVABLE BALANCE An adjusting entry is made at the end of the period, such that the Allowance account balance becomes a set percentage of the A/R balance. 3. AGED ACCOUNTS RECEIVABLE An adjusting entry is made at the end of the period, such that the Allowance account always contains the total of Accounts Receivable which are more than given amount past due.

NOTE: We have been ACCRUING for doubtful accounts! We have NOT YET written off ANY account receivable!

NOTE: We have been ACCRUING for doubtful accounts! We have NOT YET written off ANY account receivable! In a future period, when the Credit Manager decides an account really is uncollectible, we write off the receivable … to the ALLOWANCE account. $4,600 $4,600

In a future period, when the Credit Manager decides an account really is uncollectible, we write off the receivable … to the ALLOWANCE account. $4,600 $4,600

Questions about Bad Debts?

NOTES RECEIVABLE More Formal In Writing Carries Interest Specific Payback (Maturity) Date Often has collateral or security Sometimes it is just a new loan from us to someone. Sometimes it is converted from an overdue receivable

NOTES RECEIVABLE Event: Issue of a Note, providing cash to a borrower

NOTES RECEIVABLE Event: Converting A/R into a Note 6000

NOTES RECEIVABLE Event: Recognizing Interest Income from a Note $60

NOTES RECEIVABLE Event: Borrower paid off the Note $6060 $60 $6060

Questions about Notes Receivable?

CREDIT CARD SALES CASH SALES Cash (or A/R) $1600 Revenue $1600

CREDIT CARD SALES Cash from Credit Card issuer $1568 Credit Card Transaction Fee $32 SELLING EXPENSE Revenue $1600

Questions about Credit Card Sales?

Homework Assignment 14