Class Notes (836,866)
United States (324,796)
Accounting (82)
ACCT 1201 (41)

ACCT Chapter 6 Condensed (Day 2).docx

5 Pages
Unlock Document

ACCT 1201
Ronen Gal-or

Chapter 6 Condensed (Day 2) I. Revenue Recognition Principle II. Credit Card Discounts, Sales Discounts, and Sales Returns and Allowances III. Gross Profit Percentage IV. Bad Debt Expense and Allowance for Doubtful Accounts V. Receivable Turnover Ratio VI. Report, control, and safeguard cash III. Gross Profit Percentage = Gross Profit ÷ Net Sales Revenue – Cost of Goods Sold / Revenue Measures Company’s ability to charge premium prices and produce goods and services at low cost. Ceteris Paribus, ↑gross profit = ↑ net income MC Example A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine. Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers? A. Current assets increase and gross profit increases. B. Current liabilities aren't affected and stockholders' equity isn't affected. C. Current assets increase and stockholders' equity increases. D. Current liabilities increase and gross profit is not affected. IV. Bad Debt Expense and Allowance for Doubtful Accounts Direct Method: directly write off A/R when know that the customer will not make payment NOT GAAP Dr. Bad Debt Expense Cr. Accounts Receivable When an asset isn’t useful it becomes an expense. Allowance Method: two-step process, 1) make the end of the period adjusting entry to record estimated Bad Debt Expense (adjusting entry) 2) write off specific accounts GAAP A. Accounting for Bad Debts - When a company sells on credit, it knows that some of these customers will NOT pay their debts. Matching principle requires recording of bad debt expense in the same accounting period in which the related sales are made, BUT At end of the period of sale, the company does not know which customers will not pay Allowance Method of accounting for Bad Debts 1. Make the end-of-period adjusting entry to record estimated Bad Debt Expense 2. Write off specific accounts determined to be uncollectible during the period Allowance method at work… (1) On December 15, 2010, the company recorded $150,000 sales on credit. Dec. 15 Dr. Accounts Receivable 150,000 Cr. Sales Revenue 150,000 (2) On December 31, 2010, the company estimated bad debt expenses of $15,000. A. Make the end-of-period adjusting entry to record estimated bad debt expense Dec. 31 Dr. Bad Debt Expense 15,000 Cr. Allowance for Doubtful Accounts (AFDA) 15,000 Allowance for Doubtful Accounts = contra-asset account containing the estimated uncollectible accounts receivable. Allowance for Doubtful Accounts is always subtracted from the balance of the asset Accounts Receivable. Bad Debt Expense = Selling Expense in Classified Income statement. (3) On January 12, 2011, collect $100,000 worth of accounts receivable. Jan. 12 Dr. Cash 100,000 Cr. Accounts Receivable 100,000 (4) After many collection attempts, the Company determined on June 15, 2011 that it would not collect $10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account. B. Write off specific accounts determined to be uncollectible during the period Jun. 15 Dr. AFDA 10,000 Cr. Accounts Receivable 10,000 BALANCE SHEET at 12/15 at 12/31 at 1/2 Cash 0 0 100,000 A/R 150,000 150,000 50,000 Less AFDA 0 15,000 15,000 Net A/R 150,000 135,000 35,000 When you write off specific accounts using the allowance method, what happens to net A/R? Nothing. (5) On July 16, Pendant Publishing called to say that they have had financial problems but can afford to pay $7,000 to settle their $10,000 debt in full. Vandolay Industries agreed to these terms, and reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day. Jul. 16 Dr. Accounts Receivable 7,000 Settle debt of Cr. AFDA 7,000 10K for 7K (reverse prior entry)
More Less

Related notes for ACCT 1201

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.