AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Accounts Receivable: Module 4 Slide 1 Hi everyone. Now that we’ve gone through the basic accounting for accounts receivable, let’s see if we can put it to test. Let’s take a look at example number 2 from our website problems. Here’s what it says. The following transactions relate to Betty DeRose, Inc. and there are five of them. You can see the five transactions. And they want us to do two things: one, for each transaction write the journal entry to record it; more importantly, number two, for each transaction indicate how it affects net income, the income statement, the net realizable value (the NRV) found on the balance sheet, and how does it affect the statement of cash flows?AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 Let’s go ahead and jump right in. and the very first transaction. On January 4th, Betty sold goods to MT Glass, a customer, in the amount of $2,500, and they sold goods to Sandy Beach, another customer, in the amount of 4,000. Both sales were made on credit. To record a credit sale, to make the entry to record selling goods on account, we debit the accounts receivable and we credit sales revenue. So we’ll debit our accounts receivable for the total, 6,500, credit the sales revenue for the total, 6,500. The entry’s pretty straightforward. A little bit tougher but more important, how does that entry affect the financial statements? How does it affect net income on the income statement? The net realizable value on the balance sheet? And the cash flows on the statement of cash flows? Look at that entry. Clearly it increases your net income. You are recording a revenue. Revenues increase income.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Probably the toughest effect to come up with, the NRV. The net realizable value is accounts receivable minus the allowance. You have no effect on the allowance; it’s not in that entry. And you’re increasing your accounts receivable. So we know that the NRV will also increase. The cash effect—look at that entry—there is none. Nowhere in that entry is cash. So no effect on cash flows.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Slide 3 Transaction number 2. On March 19th, Sandy Beach paid us the $4,000 she owed from the sale we made on January 4th. To record the collection of a credit sale, debit cash—you’re receiving your money—so we’ll debit cash four thousand. Credit the accounts receivable. That money is no longer owed to us so we reduce our accounts receivable by $4,000. How does that affect net income, the NRV, and our cash flow statement? Well again, look at that transaction. There are no revenues there; there are no expenses there. Cash and accounts receivable are both assets. There is no effect from that transaction on your net income. How does it affect the net realizable value? It decreases the NRV. Why? Well the NRV is accounts receivable minus the allowance. The allowance is not in that entry but you are reducing the accounts receivable. By reducing the accounts receivable you also decrease your net realizable value. I do know the cash flow statement is affected. We’re getting money; cash is in that entry. It’s anAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 inflow. And I also know that cash collected from customers represents an operating cash flow. So that is an operating inflow on the statement of cash flows.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 4 Transaction number 3. On September 27th, after a concerted effort to collect, after trying and trying and trying to collect, the $2,500 account receivable from MT Glass was written off as uncollectable. The entry to record a write-off, we just saw this in the previous module. Debit the allowance. We are reducing the allowance, and credit the accounts receivable. We are reducing our accounts receivable. How does that affect our financial statements? Again, there’s no effect on the income statement—no revenue there; no expense there. How does it affect the NRV? This is kind of the tricky one, the counterintuitive one. Remember a write-off has no effect on the net realizable value. So it decreases your accounts receivable and it decreases the allowance for doubtful accounts. Decreasing both sides of the subtraction, no effect on your NRV.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Finally, the cash flows, look at the entry. There is no cash in that entry, so there is no effect on your statement of cash flows.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 5 Let’s take a look at the next transaction. It says on December 31st, based on past experience, Betty has estimated 1% of the year’s credit sales of $246,000 will be uncollectable. Remember, bad debt expense is an estimate. And so we’re estimating 1% of 246,000. One percent of that, $2,460. To record the bad debt expense estimate, we know the adjusting entry. Debit bad debt expense; and we credit the allowance for doubtful accounts. How does the adjusting entry affect our financial statements? Here I have an expense recorded, the bad debt expense. Recording an expense increases the expense, thus decreasing your net income. Here I am crediting the allowance. I am putting into the allowance. I am increasing the allowance for doubtful accounts. By increasing the allowance, I am increasing what I am subtracting, thus decreasing my NRV. And there is no cash here in the adjusting entry, so there is no effect on the statement of cash flows.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 9 Slide 6 Final transaction, number 5. On March 8th of the next year, MT Glass, the customer we had previously written off, paid the $2,500 account receivable that we had written off back in September of the previous year. That’s called a recovery, when a customer that we’ve written off later pays us; it’s called a recovery. And to record a recovery we’ll debit cash and credit the allowance for doubtful accounts. The effect of that transaction on the financial statements: there’s no revenue there; there’s no expense there. We’ve got an asset and a contra