accounting unit 2 (chapters 4 and 6)

cost of goods sold (COGS)

an expense account representing the cost of the inventory that was sold

FIFO and LIFO

2 types of inventory costing methods

FIFO

first in first out; whichever inventory was purchased first, is the first to be sold

LIFO

last in first out; whichever inventory was purchased last, is the first to be sold

direct write off method and allowance method

2 methods of uncollectible receivables

uncollectible

refers to what we will not be collecting that money from that accounts receivable

direct write off methods

records bad debt expense only when an account is determined to be worthless (totally uncollectible); not in line with accrual basis accounting

allowance method

records bad debt expense by estimating uncollectible accounts at the end of the accounting period; proactively estimating the expense rather than waiting for the actual write off

bad debt expense (BDE)

operating expense on the income statement representing lost revenue due to not collecting the cash from the sale; it is an expense that decreases the net income (thereby offsetting the sales revenue that was recognized but not collected)

allowance for doubtful accounts (ADA)

a contra asset balance sheet account representing the portion of the accounts receivable that is not expected to be collected; only used for the allowance method; as a contra asset, it holds a negative balance and offsets against the accounts receivable balance; essentially a placeholder account for while we are proactively estimating uncollectable accounts before we know which accounts to write off

net realizable value (NRV)

the amount of accounts receivable that the balance sheet shows as the expected amount of receivables to be collected

net realizable value (NRV) for direct write off method

method where the NRV equals the accounts receivable balance

net realizable value (NRV) for the allowance method

method where the NRV equals the accounts receivable balance plus the negative ADA balance

direct write off method steps

allowance method steps

percentage of receivables method (ending balance for ADA)

accounts receivable balance x % that thinking will NOT receive

bad debt expense formula (BDE recorded)

[accounts receivable balance x X%] - current balance of the ADA balance

ADA increasing

increasingly negative, further from 0

ADA decreasing

closer to 0

write off, reinstatement

there is no impact to either the _______ or the _________ for the allowance method

estimate

the only time that the NRV gets impacted on the allowance method is during the _________

overstates

direct write off method ___________ the NRV of your receivables on your balance sheet

allowance

the estimate is only affected during the ____________ method

reinstate

basically removing/undoing the write off entry