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ACTG 1P91 Lecture Notes - Income Statement

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Linda Stillabower

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Class #7! ! ACTG 1P91! October. 25th, 2011
Looking at the balance sheet and the relationship to income statements
Balance Sheet!!!!!!Income Statement
AR!!!!----------->!!!Bad Debt
Fixed Asset!!!----------->!!!Amortization
Let’s say I am a Credit Manager
- Should I be 100% Certain.. NO
- Maximize Revenue subject to Cost
- For example: If 100% certain $10M incoming
- If 95% certain meaning 5% wont pay then possible $100M incoming
Recognize!->!Cost!->!Credit Policy
!!!!!Bad Debts
Methods of Accounting - Bad Debt
1. Direct Write Off - does not meet with matching and conservatism principle
a. OK when accounts are immaterial
b. OK when in an industry that it does not commonly occur in such as Hydro
2. Allowance method
a. 2 estimation methods can be used
i. % of Credit Sales - income statement result, bad debt expense account
ii. Aging Accounts Receivable - balance sheet result, allowance account itself
!0-30, 30-60, 60-90 etc.
!Percentage of people that will not pay increases as we go along using industry,
!economy, company averages.
However, if money is received after it is written off then use Recovery on Uncollectible
Accounts which is a contra expense account.
You do not know who will no be able to pay you back hence, Allowance for Doubtful
Accounts and Bad Debt Expense Both go up therefore Assets and SE goes down.
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