Minimum Wage Economics & Accounting for Bad Debts

Living Wage vs. Minimum Wage

• Discussion opened with students estimating the annual income needed for a “good life” in Texas.

  • Estimates ranged from $75\,000$ to $160\,000$ per year depending on lifestyle expectations (house, car ≤10 yrs old, restaurants once per month, vacations 2–4× yr, land ownership, business ambitions).
  • Instructor emphasized the difference between a living wage (covers basic needs) and a minimum wage (entry-level pay designed mainly to start a career, not sustain full household expenses).

• Standard work-year math reviewed:

  • Standard hours: $40 \text{ hr/wk} \times 52 \text{ wk} = 2\,080 \text{ hr/yr}$.
  • At $7.75$ per hour → $2\,080 \times 7.75 = 16\,120$ annual gross.
  • At $20$ per hour → $2\,080 \times 20 = 41\,600$ annual gross.
  • None of the “good life” estimates matched these minimum-wage totals, demonstrating the gap.

Purpose & Consequences of Minimum Wage

• Original legislative intent: protect workers from extreme exploitation (e.g., $40$ hr/week for $\$1$ during early abuses).
• Modern intent (per instructor):
  1. Give newcomers a starting point to learn workplace skills.
  2. Teach budgeting, timeliness, communication, and tax exposure while expenses are low (often living with parents).
• Minimum wage is thus not meant to provide a full living wage—it is “entry-level training wheels.”

California Case Study

• Recent increase to $\$20$ minimum wage reportedly eliminated 18,000 jobs (study cited Friday).
• Mechanism: higher wage → higher labor cost → businesses automate, downsize, relocate (Texas, Florida, Tennessee examples).
• Key lesson: always ask for “unintended consequences” of any policy.

Cost-of-Living Comparison: California vs. Texas

• Student testimony:
  • California imposes incremental fees/taxes: street parking on weekends, beach fire-pit removal, zoo parking, etc.
  • Homeless presence in public spaces (e.g., Starbucks) reduces perceived quality of life.
  • Despite higher salaries, after-tax purchasing power felt lower than in Texas.

Career & Life Planning Advice

• Seek the intersection of:
  1. What you enjoy (intrinsic motivation).
  2. What the market will pay for (economic reality).
• Example: Son wanted medicine; GPA $3.2$ barred med/PA school → Firefighter → Now taking accounting to run family tax firm—ultimately higher income & flexibility.
• Evaluate majors for both passion and employment prospects; avoid degrees that don’t convert to jobs.

Core Accounting Principles Refresher

• Revenue Recognition: record revenue when earned (goods delivered/services performed), not when cash received.
• Matching (Expense Recognition): record expenses in the same period as the revenues they helped generate.
• These principles underlie all subsequent receivable & bad-debt topics.

Accounts Receivable (AR) Basics

• Credit sale JE (assuming perpetual system):
  • Debit Accounts Receivable (AR).
  • Credit Sales Revenue.
• Collection JE:
  • Debit Cash.
  • Credit AR.

Subsidiary Ledger vs. Control Account

• General Ledger holds a control account for total AR.
• Separate subsidiary ledger tracks each customer; total of subs ledgers = control balance.
• Never post directly to control; always post in detail → software rolls up automatically (maintains “debits = credits” integrity).

Sales via Credit Cards

• Example: $100 credit-card sale with 4 % fee.
  • Cash received $96$.
  • Credit-card expense (fee) $4$.
  • Credit Sales $100$.
• Merchants accept fees to (1) boost sales volume, (2) outsource collection risk.
• In practice, cash often received later → record Receivable from CC Co. instead of Cash until funds settle.

Bad Debts (Uncollectible Accounts)

• Inevitable portion of credit sales; magnitude depends on underwriting rigor.
• Construction companies often 0 % bad debt due to liens; retail/consumer credit higher.

TWO GAAP METHODS

1. Direct Write-Off (non-GAAP unless immaterial)

• Write off only when specific account proven uncollectible.
• Violates matching: revenue recorded earlier, expense later (often different fiscal periods).

2. Allowance Method (GAAP mandatory if material)

• Step 1: Estimate bad debt each period via adjusting entry.
  • Debit Bad-Debt Expense.
  • Credit Allowance for Doubtful Accounts (AFDA) – a contra-asset.
• Step 2: When a specific account is deemed uncollectible:
  • Debit AFDA.
  • Credit AR (customer-specific).
  • No expense recognized at this stage (already recorded in Step 1).
• Step 3 (if customer later pays):
  1. Reinstate AR (reverse Step 2).
  2. Record cash receipt (Debit Cash, Credit AR).
  • Two-step reinstatement preserves accurate customer history.

Estimating Bad-Debt Expense

A. Percent-of-Sales Approach

• Formula: $\text{Bad-Debt Expense} = \text{Credit Sales} \times \text{Bad-Debt \%}$.
• Example: $400\,000 \times 0.006 = 2\,400$ expense.
• Weakness: ignores existing AFDA balance; estimate drift can accumulate.

B. Aging-of-Receivables Approach (Preferred)

• Steps:

  1. Categorize AR by age buckets (Current, 1–30 d, 31–60 d, 61–90 d, >90 d).
  2. Apply escalating uncollectible % to each bucket.
  3. Sum to get desired ending AFDA balance.
  4. Adjust AFDA to reach that balance (entry amount = Desired – Existing AFDA).

• Example Table (MusicLand):

  • Current: $37\,000 \times 2\% = 740$
  • 1–30 d: $6\,000 \times 5\% = 300$
  • 31–60 d: $4\,000 \times 10\% = 400$
  • 61–90 d: $3\,000 \times 25\% = 750$
  • >90 d: $900 \times 40\% = 360$
  • Total Desired AFDA = 2\,550 (book used $2\,270$; differences stem from rounded numbers).

• Adjusting Entry Illustration (assuming existing AFDA credit $200$):

  • Debit Bad-Debt Expense $2,050$.
  • Credit AFDA $2,050$ → New AFDA balance $2,250$ (matches desired).

Journal Entry Cheat-Sheet (Allowance Method)

Key Takeaways & Practical Implications

• Minimum wage ≠ living wage; it’s a launch pad to develop skills + experience.
• Policy changes (e.g., wage hikes) cause ripple effects—always consider indirect outcomes (job loss, relocation).
• In career planning, chase passion that pays—the sweet spot grows lifetime satisfaction and income.
• In accounting:
  • Apply Revenue/Expense Matching consistently.
  • Use Allowance Method for realistic receivable valuation and compliant reporting.
  • Understand both estimation techniques; aging schedule is more self-correcting and informative.
• Soft skills (punctuality, work ethic, interpersonal respect) learned in early minimum-wage jobs often matter more than the wage itself for long-term success.