Ch 6 Reporting and Interpreting Sales Revenue Receivables and Cash 04 20 2014 Net Sale Sales Revenue earned from customers discounts returns and allowances Ways to motivate customers to buy products 1 Allow them to pay with credit card 2 Provide business customers discounts for early payment 3 Allow returns under certain circumstances These 3 methods affect how we compute net sales Credit Card sales to customers Why provide this option increases customer traffic avoids costs of providing credit directly to customers lowers losses due to bad checks and fraudulent credit cards receive money faster Credit Card Companies charge a fee Ex 3 fee 3 000 of sales to customers who paid with credit card Sales Revenue 3 000 Less CC discount 90 3 000 x 0 03 NET SALES 2910 Journal Entry Cash A 2910 CC Discount 90 Sales Revenue 3 000 Sales Discounts to Businesses Why provide this option get cash earlier less risk competitive advantage Full price is due within 30 days n 30 If customer pays within 10 days there will be a 2 discount 2 10 Ex Sales of 1 000 in terms 2 10 n 30 customer pays within discount period Sales Revenue 1 000 Less Sales Discount 20 1 000 x 0 02 NET SALES 980 Journal Entry Cash 980 Sales Discount 20 Accounts Receivable 1 000 Should a company take the discount Even if it is only 2 Lets take a look at annual savings 365 days 20 days 30 full price days 10 within discount days 18 25 18 25 x 2 0 365 x 100 36 5 You would save 36 5 each year if you pay within the discount period Sales Returns and Allowances When something is returned it is written on an account called Sales Returns and Allowances return 10 Ex Sales Revenues od 2 000 each item was sold for 50 and customer Sales Revenue 2 000 Less Sales Return and Allowances 500 10 x 50 NET SALES 1 500 Journal Entry Accounts Receivable 2 000 Sales Revenue 2 000 Sales Returns and Allowances 500 Accounts Receivable 500 SALES REVENUES Less CC Discounts Less Sales Discounts Less Sales Returns and Allowances NET SALES Accounting for Bad Debts Each customer has an individual A R account At the end of the period the company doesn t know whose customer s A R account are bad debts They use Allowance Method to measure bad debt expense Allowance Method making end of period adjusting entry to record estimated bad debt writing off specific accounts determined to be uncollectible Journal Entry to record bad debt estimate Bad Debt Expense E SE xxx Allowance for Doubtful Accounts XA A xxx We can t credit A R because we have no way of knowing which customer account receivable is involved Allowance for doubtful accounts is a contra asset account it reduces assets When we identify which customers A R will NOT be collected we write off the amount Journal Entry to record write off Allowance for doubtful Accounts XA A xxx A R A xxx The effect on Assets is ZERO Estimating Bad debts 1 Percentage of credit sales method Based on the historical percentage of credit sales that result in bad debts Ex Credit sales of 1 500 000 expected losses of 1 Bad Debt Expense 1 500 000 x 0 01 15 000 Bad Debt Expense 15 000 Allowance for D A 15 000 2 Aging of Accounts Receivable As accounts receivable become older and more over due it is less likely that they will be collected due and over 90 days past due The A R are split into 3 categories Not yet due up to 90 days past Ex Not yet due 2 Up to 90 days past 10 Over 90 days 30 Beginning Allowance 21 692 there were write offs of 13 692 Aged A R Accounts X Estimated Estimated Amount Total uncollectible Uncollectible Not Yet due 115 000 Up to 90 Over 90 69 000 46 000 X X X 0 02 0 1 0 3 ESTIMATED ENDING BALANCE FOR ALLOWANCES D A 23 000 2 300 6 900 13 800 Allowance D A Beginning Balance Bad Debt Expense Write offs Ending Balance 21 692 Bad Debt Expense 13 692 23 000 Bad Debt Expense 23 000 13 692 21 692 15 000 Bad Debt Expense 15 000 Allowance D A 15 000 Or if they give you a current balance to get to bad debt expense you just subtract current balance from estimated ending balance What is the net amount of accounts receivable that will be reported on the balance sheet 115 000 69 00 46 000 230 000 230 000 23 000 207 000 04 20 2014 04 20 2014
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