CHAPTERFIVE

HomeworkP1 - Sales DiscountsP2 – Sales AllowanceP3 – Allowance Method of UncollectiblesP4 – Write Off UncollectiblesP8 – Notes Receivable

Credit Sales and discountsContra RevenuesAllowance methodsWrite Off A/RAging A/RDirect W/OReceivable AnalysisNotes ReceivablePercentage of Sales Method- Allowance

Accounts Receivable transactionsCredit Sales

Accounts Receivable (Amount of invoice) Sales Freight-out

Receive Payment Cash A/R

Contra Revenue AccountsSales DiscountSales ReturnsSales Allowances

DISCOUNTSTRADE DISCOUNTS

a reduction in the selling price of the item as a reward for buying large quantities.

SALES DISCOUNTS (pg 285)a reduction in the amount the customer needs

to pay as a reward for paying earlier than required

TERMS2/10 Net 30

2% if paid in 10 days, full amount in 30 days

1/15 Net 60

Sales Discount Transaction

Sales Discount exercisesDo E5-3, 5-4 page 246

Sales Returns & AllowanceSALES RETURNS

If it doesn’t work or your customer doesn’t want it, it can returned and the customer will get their money back

SALES ALLOWANCEIf you give a reduction in the price of the item

you sold and they keep the item.

Sales Returns & Allow transactionCredit Sale

A/R 1000 Sales 1000

Return Sales Return and Allowance 300 A/R 300

Customer Payment Cash 700

A/R 700

NET SALES SALES 1500-- Sales Returns & Allowances 300-- Sales Discount 10----------------------------------------- ------- NET SALES 1190

Sales Return and AllowanceExercise 5-6 page 247

When a customer cannot or will not pay the invoice.Four methods:

Direct Write off MethodAllowance Methods:

Percentage of ReceivablesAged A/RPercentage of Sales

Direct Write off MethodUse when you have only a few uncollectible

invoices and it occurs infrequently.

Transaction:Bad Debt Expense A/R

ALLOWANCE ACCOUNTSet aside of costs that will not occur until

the next period but revenue is recorded in current year.

Use when you have several customers who do not pay you and it happens frequently during the same year.

Can’t charge A/R because we don’t know which one will be uncollectible

Fraud Alert or Income ManipulatingIf overstate the uncollectible –understate

income and income taxDo not have to worry until the next year.If audited will need to provide an aged A/R to

prove your uncollectible A/C expense

Accounts usedUncollectible Account Expense

or BAD DEBT Expense Always a debit balance accountNon- Cash transaction

Allowance for uncollectible – Contra Asset AccountShould be a credit balance

Allowance t-account

___________________________________ Write off A/R | Setting up or adding to

| | 5000 4000 | ------------------------------------------------- 1000 BalanceWrote off less than estimated

___________________________________ Write off A/R | Setting up or adding to

| | 5000 7000 | ------------------------------------------------- 2000 BalanceWrote off more than estimated

Accounts ReceivableLess Allow.for Uncollectible Accts

= Net Receivables(Net realizable value)

Exercise 5-7 pg 247

Exercise 5-13 page 248Compare allowance method with the direct

write off method and the effect on income tax.

Aging MethodMore accurateUse if you do not have historical dataIt is the balance in the allowance account –

not the adjusting entry

See page 228 for Aging schedule

Exercise 5-11 page 248

Percentage of SalesPercentage of A/R --- Balance Sheet Method

Good because it is closest to net realized value Most accepted method

Percentage of Credit Sales – Income Statement Method

Good because better matched with revenue Only accepted if the amounts do not differ

significantly from Percentage of Receivables

Exercise E5-19 page 249

Receivable AnalysisGood to get when you first start the job or

higher a new person.Later show how you have helped to improve

A/R collections

Receivables turnover ratioAverage collection period

Receivables turnover ratio -- # of times during the year the Avg A/R is collected or turned over

Net Credit Sales Avg A/R

Higher the number of times, the better. Average collection period -- # of days A/R

balance is outstanding or how long did it take to collect A/R

Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R

Your Invoice terms are used to see if good or badIf Net 30 is terms you days should be around 30. 365 A/R Turnover

Exercise E5-14 page 249

More formal and legally bound form of credit sales. Usually a note is a loan that is signed and has an interest component .

Note TerminologyFace Value – Principle of the noteDue date- date it is to be paid back (DUH!!!)Payee – who is to receive the moneyMaker – who is to pay the moneyInterest rate- rate is in annual terms.

Note TransactionsA note for an accounts receivable Seller Buyer

Notes Receivable (N/R) A/P A/R Notes Payable (N/P)

Note is paid Cash N/P Interest Income Interest Expense N/R Cash

Interest CalculationsI=PRTInterest = Principle X rate X timeRate

12% = 1% month6% = .5% month18%= 1.5% month24% = 2% month

Principle is $10,000 rate is 12% time is 2 months the interest is: 10000 X 1% X 2 = $200

Exercise 5-16 pg 249

Interest Receivable Adjust EntryInterest earned but not yet paid - ACCRUAL

Adjusting Journal Entry – for the month of the yearInterest Receivable Interest Income

When note is paidCash N/R

Interest Receivable Interest Income

Exercise 5-18 page 249