Chapter 7

Sales on Credit

Accounts Receivable Debit

Sales Credit
(Credit Sales)

Cash Debit

Accounts Receivable Credit

(Collection of Credit Sales)

Interest on Credit Sales

Accounts Receivable Debit

Interest Revenue Credit

Sales on Bank Credit Card

Cash Debit

Credit Card Expense Debit

Sales Credit

Bad Debts

Customers who may not pay their account

Uncollectible amounts

Two methods Direct Write Off and Allowance

Direct Write Off Bad Debt Recording

Bad Debts expense Debit

Accounts Receivable Credit

Direct Write Off Recovering Bad Debt

Accounts Receivable Debit

Bad Debts Expense Credit

(Reinstate account)

Cash Debit

Accounts Receivable Credit

(Record full payment)

Allowance Method

At the end of each period, estimate total bad debts expected to be realized from that period’s sales

Allowance Method - Recording Bad Debts Expense

Bad Debts Expense Debit

Allowance for Doubtful Accounts Credit

Allowance Method - Writing Off Bad Debt

Allowance for Doubtful Accounts Debit

Accounts Receivable Credit

Allowance Method - Recovering Bad Debt

Accounts Receivable Debit

Allowance for Doubtful Accounts Credit

(Reinstate account)

Cash Debit

Accounts Receivable Credit

(Record Payment)

Estimating Bade Debts Expense Methods

Percent of Sales and Accounts Receivable

Percent of Sales Method

Current Period Sales * Bad Debt% = Estimated Bad Debts

Percent of Receivables Method

Total Estimated Bad Debts Expense - Previous Balance in Allowance Accounts = Current Bade Debts Expense

Aging of Accounts Receivable

Balance +- Bad Debts Expense = Bad Debts Expense

+ If current balance is debit

- If current balance is credit

Interest Computation

Principal of Note * Annual interest rate * Time expressed in fraction of year = Interest

Example:

$1000 × 12% * 90/360 = $30

Notes Receivable

A promissory note that is to promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date

Recording Notes Receivable

Notes Receivable Debit

Sales Credit

Notes Receivable in Acceptance of Past Due Receivable

Cash Debit

Notes Receivable Debit

Accounts Receivable Credit

Recording a Honored Note

Cash Debit

Notes Receivable Credit

Interest Revenue Credit

Recording a Dishonored Note

Accounts Receivable Debit

Interest Revenue Credit

Notes Receivable Credit

Recording End of Period Interest Adjustment

Interest Receivable Debit

Interest Revenue Credit

Recording collection of note at maturity

Cash Debit

Interest Receivable Credit

Interest Revenue Credit

Notes Receivable Credit