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OSU ACCTMIS 2300 - 212SEMAccountsReceivablem1

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AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Accounts Receivable: Module 1 Slide 1 Hi everyone. In this set of modules we’re going to talk about one main theme.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 And that theme is accounting for our product. Now I have a question for you. Whenever we sell our product which financial statement accounts are affected? Which accounts on the financial statements are going to be impacted, are going to have a change in their balance whenever we sell goods to customers? Well on the income statement we’re gonna record both sales revenue and the cost of goods sold. On the balance sheet we’ll record our accounts receivable and we’re gonna have to reduce the inventory. When we sell it to customers we no longer own that inventory. In this set of modules we’re going to specifically focus on the sales revenue and the related accounts receivable. At a future point in time we’ll deal with the cost of goods sold and the inventory. So for now this is our topic, accounting for the sales revenue and accounting for the accounts receivable.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 3 And in this particular module I want to start by talking about our sales revenue. And any time we talk about revenue we need to remember the basic idea of the realization principle. Remember what the realization principle is. It’s one of our generally accepted accounting principles that says we are to record revenue based on two criteria. You record revenue when the earnings process is complete or virtually complete, and there is reasonable certainty as to the collectability of the asset we are going to receive. In virtually all situations that asset is cash. So record revenue when we’ve completed or virtually completed our end of the deal and there’s a pretty good certainty that we will in fact be paid for what we did. Now the idea of the earnings process being complete. The earnings process is complete at the point where the goods are sold or services are provided to customers even if the customer doesn’t pay us theAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 cash at that point in time. So the earnings process is viewed as done when we complete our end of the agreement.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 Slide 4 Now when we think about this realization principle and we think about what we just talked about and that is the earnings process is complete whenever we do our end of the deal even if the other side, the other party, does not pay us. That means whenever that happens, whenever goods are sold or services are performed and we are not paid, we will still record the revenue. We learned that that is referred to as an accrued revenue. So we will still record the revenue and we will need to record an account receivable, related account receivable to the revenue that has been earned even though the customer has not paid us.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 5 Now let’s talk a little bit about the sales revenue. Now sales revenue represents revenue that we’ve earned from selling inventory to customers. It represents the selling price of the inventory that we sell to customers. We know that that is a revenue account; the name kind of gives it away. And we know that it appears on the income statement. It is usually the first thing you are going to see on an income statement. There are two accounts that serve as adjustments to the sales revenue, two things that appear on the income statement that will cause a decrease to our sales revenue: sales returns and allowances and sales discounts. And I’d like to talk a little bit about each of those.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Slide 6 Sales returns. Sales returns result whenever we sell goods to customers and then they decide later that they don’t want that inventory and they bring it back to us. So sales returns represent goods that were sold that were later returned to the seller. An allowance results when we sell goods to a customer and the customer is dissatisfied with those goods, but instead of returning the goods we give them a discount off the price. We say well look, you owe us $100. We know you’re not all that happy with the goods. How about if you just give us $70? So that would represent a sales allowance. On an income statement you will typically see sales returns and sales allowances lumped into one big account, referred to as sales returns and allowances. Those are pretty straightforward.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 7 The sales discounts, it’s a little bit more involved. Sales discounts represent a cash discount that is given to your credit customer for early payment of their balance. By paying off the balance due early they may be entitled to what’s called a sales discount. An example of a discount term would be as you see on the slide right now—3/10, n/30. The way in which you would say that, you would read that as three, 10, net 30. More importantly, what it means is that a 3% discount is given to the customer if they pay their balance within 10 days of purchasing the goods. So if you pay the balance within 10 days of buying the goods, you would get a 3% discount. Otherwise, the net amount, no discount allowed, is due within 30 days of purchasing the goods from the seller. So three, 10, net 30. Pay within 10 days, get a 3% discount. Otherwise the full amount, the entire amount is due, no discount allowed within 30 days of purchase.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 9 And when you think about why a company would offer sales discounts to its customers I think there’s lots of reasons. At first we say this doesn’t make any sense. We are selling goods to customers and we’re giving them a discount for paying us? Why? Why? That doesn’t make any sense at all. But when you think about this there are a couple of good reasons that we can come up with for offering discounts to customers. One, is it may increase our sales. By giving customers the ability to pay early and earn a discount, that may entice some folks to buy goods for us.


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OSU ACCTMIS 2300 - 212SEMAccountsReceivablem1

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