Accounts Receivable

Which financial statements are affected by the sale of product?

• Income Statement: sales revenue and cost of goods sold

• Balance Sheet: accounts receivable and inventory

The Realization Principle

record revenue when:

• the earnings process is complete or virtually complete AND there is reasonable certainity as to the collectability of the asset to be received

• if the sale of goods or performances of service occurs prior to the receipt of cash, it is an accrued revenue and an account receivable is recorded

Sales Revenue

represents revenue earned from selling inventory

2 Adjustments to Sales Revenue

1. Sales Returns and Sales Allowances

2. Sales Discounts

Sales Returns

results when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for a credit or a refund

Sales Allowances

result when customers are dissatisfied with merch and the seller allows a reduction from the selling price. Goods are not returned in this case

Sales Discounts

• offer a cash discount to a credit customer for the prompt of a balance due

  • example: 3/10, n/10

  • this is read as ‘three, ten, net thirty’

  • its means a 3% discount is allowed on all payments within 10 days. After 10 days there is no discount available and the remaining balance is due in 30 days

Characteristics of Sale Returns and Allowances and Sales Discounts:

• both accounts are classified as contra rev accounts

• result in a dec to rev on income statement

• normal balance = debit

• both accts are subtracted from sales rev on the income statement to calculate net sales rev

Accounts Receivable

• represents cash owed to the company

• accounts receivable come about when the company makes a credit sale

• big issue when you sell goods on account

Bad Debt Expense

• classified as an expense account

• found on the income statement

• reduces net income

Allowance for Doubtful Accounts

• causes a decrease in assets

• classified as a contra asset account

• normal balance is a credit

• found on the balance sheet as a dec to the accounts rec

• represents the amount of accts rec the company estimates will not collect

What happens when the company makes the determination that a specific customer will not pay?

they must write-off the customers account receivable

Two Key Points of the Write Off entry:

1. Does NOT effect bad debt expense

   1. Bad Debt expense is estimated at the end of each year. Thus, when a specific account is written off we do not record bas debt expense again- this would be DOUBLE COUNTING

   2. Instead we eliminate the acct rec and reduce the allowance of doubtful accts

2. The write off of an acct rec has no effect on the net realizable value

Net Realizable Value Equation

accounts receivable - allowance for doubtful accounts

Recovery

• if a customer pays their bill after the company has written off their account receivable

Net Credit Sales Method

• bad debt expense is based on a % of current credit sales estimated to be uncollectible where the & is based on past experience

Bad Debt Expense Equation

net credit sales x % expected uncollectible

The Aging Method

• requires an analysis of accounts rec balances by the length of time they have been unpaid. The idea is longer a debt is outstanding the less likely it is to be paid

Allowance for Doubtful Accounts

T chart

• Debits

  • Write Offs

• Credits

  • beginning balance

  • recoveries

  • bad debt expense

__________________________

ending balance (from aging schedule)

Accounts Receivable Turnover

measures the number of items, on average, the company collects its accts receivable

Accounts Receivable Turnover Equation

net sales revenue/average accts receivable

Average Accts Receivable

Accts Rec at Jan 1st + Accts Receivable at Dec 31st / 2

Average Collection Period

measures the number of days, on average, between making a sale on credit and collecting our cash from the customer

Average Collection Period Equation

365/Accts Rec Turnover