Financial Accounting -- Cash and Internal Controls, Sales and Receivables

internal controls

attempt to eliminate the opportunity element of fraud and represents plans to safeguard the company’s assets, and improve the accuracy and reliability of accounting information

Bank reconciliation

1. reconcile bank’s cash balance, i.e cash transactions recorded by the company but are not yet recorded by its bank

2. reconcile the company’s cash balance, i.e cash transactions recorded by the bank but not the company, items that will increase and decrease company’s cash balance, and company errors

3. update the company’s cash account, i.e debit cash are items added to the balance and credit cash are items that subtract from the balance

credit sales / sales on account are recognised when

goods and services are provided to a customer in the current period and expected to collect cash in the future

accounts receivable

cash owed to the company by its customers from sales or services on account and is recorded at the time of the sale or service

non trade receivables

receivables that originate from sources other than customers

notes receivable

formal credit arrangements evidenced by written debt instruments

sales return when purchased goods are returned:

seller issues a cash refund if original sale was for cash, and reduce balance of accounts receivable

sales allowances when purchased goods are NOT returned

seller issues cash refund if original sale was for cash, and reduces balance of accounts receivable if original sale was on account

sales returns and sales allowances are CONTRA revenue accounts, meaning

revenue and current assets are reduced and are debited

contra revenues is NOT the same as contra expenses

both have normal debit balance and reduce the reported amount of net income, BUT contra revenues represent reduction of revenues, and contra expenses represents separate costs of generating revenue

trade discounts

reduction in list price of a product or service, is used to provide incentives to larger customers or certain consumer groups, AND recognised by recording revenue for lower amount

sales discount

offer a customer a reduction if payment is made within a specified period of time, is a contra revenue account and reported with total revenues in the income statement but with a negative balance

gross revenue

amount that is contractually agreed upon

net revenue

amount expected to receive

estimated uncollectible accounts 

reduce assets (accounts receivable) and increase expenses (bad debt expense)

bad debt expense

expense reported (debited) in the income statement (reported in the year prioir at the time of estimate) that is an estimate for amounts owed by customers that the business does not expect to collect; credit Allowance for Uncollectible Accounts

Allowance for Uncollectible Accounts

contra asset reported in the balance sheet and reduces the balance of account receivable

allowance for uncollectible accounts has a normal credit balance but is NOT a liability, and is simply a 

reduction in a related asset account

write-off accounts receivable

1. reduces the balance of accounts receivable → decreases an asset

2. reduces the balance of allowance for uncollectible accounts → decrease a CONTRA asset

3. net effect on total assets or net receivable is zero

Notes Receivable

written debt agreement or note and is a normal debit balance account, and classified as ASSET (current or non-current depending on the time until due date)

receivables turnover ratio equation

net credit ratio DIVIDED BY average accounts receivable

receivables turnover ratio definition

no. of times during a year the average accounts receivable balance is collected and indicates management’s ability to collect cash from customers in a timely manner

average of accounts receivable

opening (or closing balance of accounts receivable of the previous year and closing balance of accounts receivable

average collection period equation

365 days DIVIDED BY receivables turnover ratio

average collection period definition

no. of days the average accounts receivable balance is outstanding