ACC 221 1st Edition Lecture 15 Outline of Previous Lecture Section 14 Review Cash Account Cash Accounts o Uses Bank Balance is Wrong o Deposits Outstanding o Check Outstanding Company Balance is Wrong o Service Charges o Collection of a Note Outline of Current Lecture Section 15 Cash Reconciliation and Accounts Receivable Cash Reconciliation Wrap Up o Non Sufficient Funds NSF Checks o Company Error in Accounting System Accounts Receivable o Not Getting Paid o Direct Write off Method o Allowance Method Current Lecture Section 15 Cash Reconciliation and Accounts Receivable Cash Reconciliation Wrap up o Non Sufficient Funds NSF Checks Occurs when a customer bounces a check written to the company When this occurs we write down the check in the company accounting system and go to deposit the check Once at the bank the bank will record the entry being debited into your cash account and then immediately credited out leaving a net 0 impact on the cash account This is because the bank cannot leave the money in your account as the individual has not paid you We must reconcile our account to match the bank so we take the money from the bounced check out of our cash account Dr Accounts Receivable Cr Cash These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute We do not take the funds out of sales revenue because we have already completed the work and still intend to get paid for that work o Company error in accounting system When doing this maintain the mindset of the bank reconciliation affecting the cash account The company has made an error into the accounting system and must fix the issue These errors may include Lowering cash too much Lowering Cash too little Depositing too much Depositing too little o Generally occurs by either miscalculation or making a mistake in transcribing the amount mixing up the numbers Original entry lower cash too much o Dr Rent Expense Cr Cash Correcting Entry o Dr Cash Cr Rent Expense Accounts Receivable o Not getting paid Accounts receivable buying on account and paying later This is considered an asset only if it is very likely that we will be receiving our payment What happens when we are no longer going to receive money o Must remove from assets Tracking who gives us money Even if more than one person owes us money only ever have one accounts receivable account Sub ledger account to keep track of individual customers dates of transactions and the amounts that they owe acts as a support system for accounts receivable o Direct Write off method When someone buys on account it is assuming that they are credit worthy and will pay off the amount owed Dr Accounts Receivable Cr Service revenue In this particular case if a customer is supposed to pay within 20 days and doesn t pay we may call send notices and even threaten to send a collections officer may lose about 30 of amount owed but still better than 0 o If the person requires more time may be able to convert the accounts receivable into a note so the company can collect interest and be guaranteed a return File bankruptcy must take money owed out of accounts receivable because we no longer expect to collect the money or consider it an asset Must remove customer amount and entries from sub ledger Direct write off method is not a generally accepted accounting principle Violates the matching principle expenses and revenue will not match as this would cause them to potentially be written in different accounting cycles o Allowance method Combine estimates with actual numbers Evaluate how old an accounts receivable is and determine how much money you don t believe we will be able to collect Bad debt may determine how well the company s collection methods are working and may cause credit availability to tighten for customers if there is too much bad debt o 2 loans are getting old few months totaling 12 000 Estimate that about 6 000 will not pay but do not know who or for sure that they will not o End of the year record this estimate Dr bad debt expense Cr Allowance of uncollectable accounts Allowance of uncollectable accounts is a contra account in the assets section working against accounts receivable Generally accepted accounting principle because allowance method allows expense to be in same cycle as revenue and has little impact on the system and balance sheets o Accounts receivable allowance of uncollectable accounts net realizable value o Acts as two separate lines on journal Writing off entry as allowance Now know who and how much is not being paid Dr Allowance of uncollectable accounts Cr Accounts Receivable Lower both accounts receivable and allowance