BMGT 220, Chapter 8 Discussion Kristian Sooklal (cell) | (text)

Plan for today Quiz 6 back ---  Finish lecture material Practice Problem Practice Quiz Quiz 7

Key Topics in Chapter 8 Accounts Receivable #1: Recognizing accounts receivable #2: Valuing accounts receivable #3: Disposing of accounts receivable Recognizing Accounts Receivable Sales on accounts Collection of cash Valuing Accounts Receivable Bad Debts Expense Direct Write-off Method Not acceptable for financial reporting purposes Bad Debts Expense will show actual losses Simple, Exact method

Key Topics in Chapter 8 (Continued) Allowance Methods: – Estimate Bad Debts in the period of the sales – Matching principle: matches sales with expenses – Reports accounts receivable on BALANCE SHEET at estimated value – 2 methods: % of sales vs. % of receivables Method #1: % of sales – Focuses on bad debt expense, ignores existing balance of allowance for doubtful accounts – Matches expenses with revenues – Focus on Income Statement – Sales  Bad Debts Expense Method #2: % of receivables – Focuses on Balance Sheet Relationships – Accurate valuation of receivable on balance sheet – Aging schedule – Consider existing balance

Key Topics in Chapter 8 (Continued) Disposable of receivables – Sell receivables for cash, minus a service charge Bank Credit Sales – Credit cards from third parties result in: Cash Service Expense Sales Types of Journal Entries – Recognizing Accounts Receivable – Adjusting Entry – Write-off – Recovery – Cash Collection – Disposal – Bank Credit Card Sales

Useful Equations Cash Realizable Value = Ending Accounts Receivable – Ending Allowance for Doubtful Accounts % of Sales method: – Current Period Sales x Bad Debt % = Estimated Bad Debts Expense Average Collection Period in Days = Days In Period/Accounts Receivable Turnover Accounts Receivable Turnover = Net Credit Sales/Average Net Accounts Receivable

Journal Entries (Allowance Method) Original Sales/Accounts Receivable Accounts Receivable 800 Sales800 Write-off (Allowance) Allowance for Doubtful Accounts 100 Accounts Receivable--Aashima100 Write-off (Direct) Bad Debts Expense 100 Accounts Receivable—Aashima100 Adjusting Entry (Allowance method only) Bad Debts Expense 100 Allowance for Doubtful Accounts100

Journal Entries (Allowance Method) Recovery Reversal of Write-off Accounts Receivable--Aashima 80 Allowance for Doubtful Accounts80 Cash Collection: Cash80 Accounts Receivable80 Disposal of Accounts Receivable Cash98 Service Charge2 Accounts Receivable--Aashima100 Bank Credit Card Sales Cash 98 Service Charge2 Sales100