ACC 221 1st Edition Lecture 16 Outline of Previous Lecture- Section 15: Cash Reconciliation and Accounts Receivable  Cash Reconciliation Wrap Upo Non-Sufficient Funds (NSF) Checkso Company Error in Accounting System Accounts Receivable o Not Getting Paido Direct Write-off Method o Allowance Method Outline of Current Lecture - Section 16: Allowance and Notes Receivable  Cash Allowanceo Write-off entrieso Adjusting Entrieso Systemo Reinstating an account Adjusting Entrieso Accounts Receivableo Adjusting Allowance Account Note Receivableo Legally Binding ContractsCurrent Lecture- Section 16: Allowance and Notes Receivable Allowanceo 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 ledgero 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. Allowanceo 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 credito 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 Entrieso Accounts Receivable  How much money from the accounts receivable will not be collected?  Calculating estimate:- Single Percent methodo Balance of account receivable X estimated % = estimated amount of accounts receivable that will not be paid backo Percentages are reasonable stable over periods of time, so this can be fairly accurate- Aging methodo Takes into consideration the age of each individual account and assigns each its own percentage, depending on what time frame it falls undero 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 accountso 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 allowanceo Must bring allowance back to having a credit balanceo Dr. Bad debt expense 3,000, Cr. Allowance 3,000 to bring the balance back to credito 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 expectedo Dr. Bad Debt 17,000, Cr. Allowance 17,000- Adjusting entries will have an impact on the income statement, but write-offs will not.  Note Receivableo 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 noteo Swap the assets accounto Dr. Note Receivable, Cr. Accounts receivable- Adjusting entry for interesto (Amount borrowed X interest rate) / Period of monthso Dr. Interest receivable, Cr. Interest Expense- Day customer pays off noteo 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