ACC 221 1st Edition Lecture 16 Outline of Previous 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 Outline of Current Lecture Section 16 Allowance and Notes Receivable Cash Allowance o Write off entries o Adjusting Entries o System o Reinstating an account Adjusting Entries o Accounts Receivable o Adjusting Allowance Account Note Receivable o Legally Binding Contracts Current Lecture Section 16 Allowance and Notes Receivable Allowance o Write off entry Know the individual and amount of money that they owe Dr Allowance Cr Accounts receivable May only include accounts receivable if you know both the individual and specific amount because you have to adjust the sub ledger o Adjusting entry This occurs before the financial statements at the end of the accounting period Must calculate an estimate of how much money is not paid 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 Dr Bad Debt Expense Cr Allowance o System Most individuals buying on credit will end up paying Dr Cash Cr Accounts Receivable Increase cash receivable when someone buys on credit Decrease accounts receivable when someone pays off the amount borrowed on credit o Reinstating an account When you reinstate an account that has previously been written off you are bringing the individual and money owed back into the accounts receivable because it is now likely that you will get your return Must reverse the transaction used when you wrote off the account Dr accounts receivable Cr Allowance Once they have paid back what is owed proceeds like any other customer paying off their debt Dr Cash Cr Accounts Receivable Adjusting Entries o Accounts Receivable How much money from the accounts receivable will not be collected Calculating estimate Single Percent method o Balance of account receivable X estimated estimated amount of accounts receivable that will not be paid back o Percentages are reasonable stable over periods of time so this can be fairly accurate Aging method o Takes into consideration the age of each individual account and assigns each its own percentage depending on what time frame it falls under o Older the account less likely it is to be turned into cash Ex 0 30 days 2 75 30 60 days 4 6 moves to 14 30 and 50 o Adjusting allowance account The estimate is for what we should use as our ending balance for the Allowance account which represents the amount of the accounts receivable account that we are not expecting to collect Allowance balances in the credit side of account Must adjust to reflect the amount you are estimating for the following accounting period If ending balance is 16 000 credit for Allowance and you estimate the following period s balance as 10 000 you must adjust the accounts o Dr Allowance 6 000 Cr Bad debt 6 000 If estimated balance is 12 000 and you exceed that amount by ending with 15 000 that did not pay back the accounts receivable you will end with a debit balance of 3 000 in the allowance o Must bring allowance back to having a credit balance o Dr Bad debt expense 3 000 Cr Allowance 3 000 to bring the balance back to credit o To create the new expected amount of allowance you must add this adjusting entry to your new estimated amount Say we are estimating 14 000 for the next period we would add adjusting and expected o Dr Bad Debt 17 000 Cr Allowance 17 000 Adjusting entries will have an impact on the income statement but writeoffs will not Note Receivable o Legally binding contracts Person agrees to pay the full amount owed plus interest in order to extend the time of paying back the loan Entries Day customer signs note o Swap the assets account o Dr Note Receivable Cr Accounts receivable Adjusting entry for interest o Amount borrowed X interest rate Period of months o Dr Interest receivable Cr Interest Expense Day customer pays off note o Dr Cash Cr Note Receivable After 4 months three things are being paid for when paying off Entire amount of loan Interest for the first three months Interest for final month
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