1. Chapter 6 Reporting and Interpreting Sales Revenue and Accounts Receivable
Acct 2301
Zining Li

2. Key Terms Sales revenues Accounts receivable 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

3. 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)

4. 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
Cr: Sales Revenue $1,000

5. 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
Cr. Accounts Receivable $1,000
When customers pay after 10 days, they have to pay the full amount
Dr. Cash $1,000

6. 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

7. 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

8. Nov Dr. Cash $343
Dr. Credit-card discount
Cr: Sales Revenue
Note: COGS will also be recorded at the time of sales.
Nov Dr. Acct. Receivable $4,500
Cr: Sales Revenue ,500
Nov Dr. Acct. Receivable $9,000
Cr: Sales Revenue ,000
Nov Dr. Sales returns and allowance $900
Cr: Acct. Receivable
Note: COGS will also be adjusted at the time of sales returns.

9. Dec Dr. Cash $7,857
Dr. Sales discount
Cr: Acct. Receivable ,100
Dec Dr. Cash $4,500
Cr: Acct. Receivable ,500
Sales revenue ($350 + $4,500 + $9,000) $13,850
Less: Sales returns and allowances (1/10 x $9,000 from D)
Less: Sales discounts (9/10 x $9,000 from D x 3%)
Less: Credit card discounts ($350 from B x 2%)
Net sales $12,700

10. 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

11. 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

12. 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

13. 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

14. 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?

15. 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.

16. 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.

17. Example: Accounts Receivable Method
Following is the summary of transactions that Cart Corp. had in year 2005 and year 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.

18. 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;

19. Example: Aging Schedule of A/R
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.

20. 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 $$
Cr. Accounts Receivable $$

21. 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.

22. 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.

23. 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.

24. Effect of Change in A/R on Cash vs. Net Income

25. 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

26. 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