ch 8 bank recs., receivables, discounts

cash: most → least current liquid asset

• currency

• available funds on deposit at the bank (checking & savings accounts)

• money orders & checks (Certified/cashier’s/personal)

• petty cash funds

on the B/S, what will the final cash balance be composed of?

many general ledger accounts (ex. petty cash, checking, savings accts., etc.)

cash equivalents can be reported as __ or _

cash + ST investments

or

cash & cash equivalents + ST investments (excludes cash equivalents)

cash equivalents

short-term highly liquid investments (w/ original maturities of 3 months or less from date of purchase) that are both

• readily convertible to cash &

• very near maturity so that they present insignificant risk of value changes due to changes in interest rates

ex. of cash equivalents

T-bills, commercial paper, MM funds, CDs

features of treasury bills

no coupon pmts.

principal received @ end (full FV)

difference is interest

restricted cash

cash that is unavailable to pay current liabilities

(must be disclosed within the F/S)

must a restriction for cash be disclosed?

yes, within the F/S

cash could be restricted for…

• plant expansion

• retirement of LT debt

• compensating balances to support borrowings

a cash restriction could be or

formal (required by bank)

informal (board determined)

a cash restriction’s classification (current/LT) on the B/S depends on…

the purpose of restriction

(B/S) if a cash restriction is current, classify in..

current section, but segregate from regular cash (typically included in Other Assets)

(B/S) if a cash restriction is long-term, classify in..

long-term section (typically included in Other Assets)

formal cash restriction ex.

debt covenant (in loan arrangement, need to meet certain requirements. lenders do this to protect themselves. ex. you have to keep 100k in a separate acct w/ the lender bank)

ex. for a formal restriction for a debt covenant, where would the cash tied to it be reported?

on the B/S

bank overdrafts

occurs when a company writes a check for more than the amount in its cash account (negative balance occurs)

generally, an overdraft is reported as a…

current liability within A/P (the recipient won’t receive cash if not in your account, you owe them)

when may you offset against cash account for an overdraft?

when available cash is present in another account at the same bank where the overdraft occurred

how would your cash T-account look if you had an overdraft?

ending CR bal.

how often should bank reconciliations occur?

on a monthly basis

a bank reconciliation is an important tool for what?

internal control & determining the proper amt. of cash to report on the B/S

goal of a bank reconciliation

to reconcile btwn the acct. balance in the general ledger (balance per the books) & the account balance that’s reported in the bank statement (balance per the bank)

why will there typically be a diff. btwn the general ledger & acct bal. in bank statement?

timing differences

the balance in the general ledger acct. is known as the…

book balance

the balance in the bank statement is known as the…

bank balance

(bank reconciliation) what should appear in the general ledger acct. after adjustment (& therefore on B/S)?

adjusted cash balance

bank reconciliation steps

1. adjust ledger (book) balance for items in the bank statement that haven’t been recorded by the company (upon receipt of bank statement). record journal entries for any transactions not reflected in general ledger

2. adjust bank balance for items unaccounted for by the bank. this includes any transaction that hasn’t been processed by the bank but has been recorded in the general ledger

what might you adjust the ledger balance for? (step 1 bank reconciliation)

bank fees, NSF (insufficient funds), checks, interest earned, collections/payments by the bank on the company’s behalf, book errors

what might you adjust the bank balance for? (step 2 bank reconciliation)

deposits in transit, outstanding checks (haven’t been cashed yet), bank errors

outstanding checks

checks that haven’t been cashed yet

what might you add to the cash balance per books/ledger? (Step 1 bank reconciliation)

interest earned, collections of notes, book errors, etc.

what might you deduct from the cash balance per books/ledger? (Step 1 bank reconciliation)

NSF checks, fees, book errors, etc.

where is the adjusted cash balance per books/ledger reported? (Bank reconciliation)

cash on adjusted TB & B/S

what might you add to the cash balance per the bank? (Step 2 bank reconciliation)

deposits in transit

what might you deduct from the cash balance per the bank? (Step 2 bank reconciliation)

outstanding checks

deposits in transit

cash, checks, or digital payments that a company has received, recorded in its internal general ledger or cash book, but has not yet been processed or credited by the bank.

why do you deduct outstanding checks on the bank reconciliation

because the business has already subtracted the payment from its internal book balance, but the bank has not yet processed or deducted the money from the bank statement balance

once the ledger has been updated from step #1, what are the only reconciling items btwn the bank balance & book balance that’ll typically remain?

deposits in transit, outstanding checks, & bank errors

if a DR bal in the cash ledger acct isnt in the bank reconciliation, what should you do?

add it (deposit in transit) to the balance per the bank (step 2)

og NSF check entry (thought you received)

DR Cash

CR AR

NSF check entry (after check bounced & you didn’t actually receive money, undoing the process. ledger acct. must go down)

DR AR

CR Cash

bank fee expense entry

DR bank fee expense

CR cash

interest revenue entry

DR cash

CR interest revenue

what might you need to do if a check is cleared, but numbers are wrong?

make adjusting journal entry, & adjust adjusted cash bal per G/L

does a bank reconciliation actually alter the bank acct?

no, just explains why there’s a diff

should the adjusting cash bal. per the G/L match after steps 1 & 2?

yes

receivable

a claim to cash

receivables can be __ or _

trade

non-trade

informal receivable ex.

accounts receivable

formalized receivable ex.

note receivable that has interest & specified due dates associated w/ ith

how long are receivables?

they can be current, long-term, or a combo of both

for receivables, we’re concerned with…

recognition, valuation, & disposition

nontrade receivables

receivables unrelated to customer transactions

ex. of nontrade receivables

• advances to officers/employees/subsidiaries

• dividends & interest receivable

• deposits paid to cover potential damages or losses as a guarantee of performance or payment

• various claims (ex. insurance, tax refunds, carriers for damaged goods)

trade receivables

amounts owed by customers resulting from goods sold or services rendered as part of the normal course of business

ex. of trade receivables

AR

N/R (not as often)

recognition of AR

the recognition of revenue & the receivable occurs when the performance obligation has been satisfied

valuation of AR (informal)

• oral agreement (described by invoice term)

• short-term (no stated interest component & no PV calc. required)

  • typical terms: 30-60 days

• amt. recorded in the ledger is based on the transaction price but may be affected by certain adjustments due to discounts, returns, and allowances

how do you reduce the amt. of uncollectible accounts?

be selective abt who you’re allowing to pay w/ AR. assess credit risk. so you don’t lose out

common adjustments that affect valuation of A/R

• trade discounts

• cash/sales discounts

• sales returns & allowances

• allowance for doubtful accounts

trade discounts

discounts offered to avoid changing the retail price of a product. allow sellers to offer some customers a deeper discount than others. sale is recorded net of the discount

how is a sale that has a trade discount recorded?

net of the discount

what are trade discounts usually for?

bulk purchases

larger purchases = larger discount (usually)

is an accounting/journal entry required specifically to record a trade discount?

no; it’s already accounted for

ex. if you buy at least 500 units you get a 10% discount. record the journal entry for the sale of 1000 units (trade discount)

DR AR 9000

CR Sales Rev. 9000

are trade and sales discounts the same?

no

trade discounts are to encourage bulk purchases

sales discounts are to incentivize prompt payment

sales discounts

discounts offered by the seller to incentivize prompt payment of invoices

• considered variable consideration as the seller is not sure whether the customer will take advantage of the discount

why are sales discounts considered variable consideration?

the seller is not sure whether the customer will take advantage of the discount

what are the 2 methods to record sales discounts?

gross & net

how to interpret: sales terms of 2/10, net 60

2% discount if buyer pays in 10 days, or pay full amt. in 60 days

gross method (sales discounts)

records discounts when they’re taken by the buyer

net method (sales discounts)

assumes the buyer will take the discount, recording the original sale at the net amount & only records additional revenue if the sales discount is forfeited

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for gross method on date of sale

DR AR 5000

CR Sales Rev. 5000

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for net method on date of sale

DR AR 4900

CR Sales Rev. 4900

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for gross method if payment is made in 8 days

DR Cash 4900

DR Sales Discounts 100

CR AR 5000

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for net method if payment is made in 8 days

DR Cash 4900

CR AR 4900

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for gross method if payment is made after 10 days

DR Cash 5000

CR AR 5000

ex. selling merch. with a sale price of $5000 with terms of 2/10, net 60

journal entry for net method if payment is made after 10 days

DR Cash 5000

CR AR 4900

CR Sales Discounts Forfeited 100

Sales Discounts account

• contra-sales revenue account

• reduces sales revenue

• DR. bal.

• used in gross method

• reported in op. section of I/S

which sales discount method uses the Sales Discounts account?

gross method

Sales Discounts Forfeited account

• revenue account

• CR bal.

• net method

• reported in non-op section of I/S as other revenue (where interest revenue is)

which sales discount method uses the Sales Discounts Forfeited account?

net sales

where are Sales Discounts and Sales Discounts Forfeited reported on I/S?

• Sales Discounts: op. section

• Sales Discounts Forfeited: non-op. section (as other revenue, where interest rev. is)

the __ method is theoretically correct (sales discounts)

net (assuming most customers will take the discount, AR reported at NRV)

the net method matches sales discounts & sales discounts forfeited (if any) to…

the proper period (at time of sale vs. time of collection)

(net method) if a sales discount is not taken and “sales discount forfeited” is recorded, it’s treated as an..

“other revenue” item, similar to interest

how does using the net vs. gross method of sales discounts affect total revenue & classification on the I/S?

total revenue is the same under either approach

classification on the I/S differs (op. vs. non-op.)

the __ method is most often used in practice (sales discounts). why?

gross

• because of the immateriality of discounts & the high turnover of AR (how fast customers pay their invoices)

using the gross method reduces the risk of…

overstating revenue by a material amount at the end of the year

b/c of immateriality of discounts & high turnover of AR

sales rev. - discounts

net sales revenue