PRINCIPLES OF FINANCIAL ACCOUNTING

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Presentation transcript:

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) More accurate balance on the balance sheet (cash realizable value)

Write off of bad debt Direct write-off method Allowance method DR – +Bad debt expense CR – - A/R Allowance method DR -- +Allowance for Doubtful accounts CR – -A/R

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

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.

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

Receivables analysis Credit risk ratio: Receivable turnover ratio: Allowance for Doubtful Accts/A-R Receivable turnover ratio: Net Credit sales / Average net receivables Average collection period: 365 / Receivables turnover ratio

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

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