Short tem investments Marketable securities Easily converted into cash Most liquid asset after cash Expected to be held one year or less Categories Trading Securities Held for short time the sold Gain Investment increases Loss Investment decreases Can be debt or equity securities of another company Earn interest or dividend Amazon one share Dec 7 2011 195 32 Dec 31 2011 173 10 Jan 10 2012 179 34 Date Dec 7 2011 Accounts and explanation Investment in Amazon Stock Debit 195 32 1 00 22 22 179 34 15 98 Credit 195 32 1 00 22 22 195 32 Cash Purchased Investment Cash or dividend Receivable Dividend Revenue Recognize dividends earned Unrealized loss on investment Investment in Amazon stock Adjusted Investment to market value 195 32 173 10 22 22 Cash Loss on Sale of trading security Investment in Amazon Stock Sold investment in Amazon stock Income Statement Revenue Expenses Other revenue gains and losses Interest revenue Dividend Revenue Unrealized gain on investments Balance Sheet Current Assets Cash Short term investments at fair value 12 31 12 1 10 12 10 11 Available for sale securities Held to maturity securities Revenue Recognition Revenue recognized when earned Seller has transferred good or service to customer Price is fixed or determinable Collection reasonably assured Amount is cash value of goods or services transferred Impacted by shipping terms and payment incentive FOB Shipping Point Ownership changes hands Revenue Recognized when goods leave seller s shipping FOB Destination Ownership changes hands Revenue Recognized At point of delivery to customers Sales discounts Offered to customers to speed up cash flow when they pay us 2 10 n 30 2 discount if paid in ten days Full amount due in 30 days Date Oct 1 Accounts and explanation Accounts receivable Debit 1000 Credit Sales Revenue Sold merchandise Cash Sales Discount Paid invoice Accounts receivable Accounts and explanation Sales returns and allowances Accounts receivable Sales Returns and Allowances Returned unsatisfactory or damaged merchandise Date 1000 1000 Credit 980 20 Debit Customer returned damaged merchandise Net Revenue Gross Revenue 100 000 Sales discount 1000 Sales return 400 Net revenue 98 600 Receivables Third most liquid asset after cash and short term investment Monetary Claims against others Acquired mainly by Selling goods and services Accounts receivable or Lending money notes receivable Accounts Receivable Amounts collectible from customers Balance in general ledger Control account summarizes total amount due from all customers Subsidiary Ledger Separate account for each customer Notes Receivable More formal than accounts receivable Written promise to pay a sum at the maturity date Plus interest Also called promissory notes Internal Controls collections on account Separate cash handling and cash accounting duties Bookkeeper should not handle cash Should record from remittance advices Separate employee should open incoming mail and make deposit Another option lockbox Risks Benefit increase in sales cost run a credit check Design internal control system Keep close eye on customers Uncollectible receivables Benefit of selling on credit Customers that do not have cash can use credit Sales and profits increase Cost Company cannot collect from some customers The cost is called uncollectible expense Doubtful account expense or bad debt expense The Allowance Method Records collection losses based on company s collection experience Estimates uncollectible account expense Also sets up allowance for uncollectible accounts Contra account to accounts receivable Show amount of receivables expected not to be collected Net Realizable Value Accounts receivables allows for uncollectable accounts accounts receivable net Percent of sales Income statement approach Estimated uncollectible X Revenue Debit uncollectible account expense credit allowance for uncollectible accounts Aging of receivables Balance sheet approach Focuses on proper valuation of accounts receivable on the balance sheet Individual customer balances analyzed based on time outstanding Aging schedule Allowance for uncollectible accounts adjusted to equal amount from aging schedule Direct Write off Method Waits until a specific account is uncollectible to record the expense Inferior to allowance method Receivables reported at full amount Assets overstated on balance sheet Poor matching of uncollectible account expense against revenue Notes Receivable Current or long term assets Date 2012 6 1 Accounts and explanation Notes Receivable Debit XX Credit 12 31 3 1 2013 Cash Interest Receivable Cash Interest Revenue Notes Receivable Interest Receivable Interest revenue Interest Rates are usually expressed as an annual percent For time p1eriods less than a year fraction is used months 12 Often interest is computed on days x 365 Short term investments may be divided into held to maturity securities trading securities and available for sale securities True An unrealized gain occurs when a company sells trading security False means that investment has not been sold yet and this is market value A company will have an unrealized loss if the fair value of an investment is greater than its costs False unrealized loss occurs if fair value less than cost E5 21A part 1 Trading investment Eastern Corp intends to sell the stock in a short period of time Date Dec 15 Accounts and Explanation Short term cash investment 100x57 Debit 57000 Credit Cash Dec 31 Purchased investment Short term investment 1000x58 57000 Unrealized gain on investment Adjusted investment to market value 1 Balance sheet Current Assets Income Statement partial Other revenue and gains Short term investment a market value 58 000 ABC Company purchases a trading security for 12 000 The entry to record this transaction Debit Investment Credit Cash Unrealized gain on investment 1000 Date Jul 2 Jul 10 Jul 12 Accounts and Explanation Accounts receivable Accounts receivable Sales Revenue Sales Revenue Cash 800 16 Sales Discount 800x2 Accounts Receivable A Debit to the investment account An unrealized gain C fair value of the trading security is more than its cost E5 23A xx xx 1000 Debit 800 1500 784 16 XX xx xx xx 57000 100 Credit 800 1500 800 500 980 20 133 000 2500 2290 500 1000 183 000 133 000 2500 2290 150 000 150 000 3 000 Sales Revenue 1500 800 Less Sales returns and allowance ales discounts 20 16 Net Sales revenues 2300 500 36 1764 The allowances for uncollectible accounts normally have a credit balance 3 4