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Final

COMMERCE 1AA3 Study Guide - Final Guide: Debits And Credits, Gross Profit, Cash Cash


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Study Guide
Final

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Accounting Final Exam Review
Chapter 5- Short Term investments and
Receivables
Account for Receivables
Estimate and Account for Uncollectible A/R
Selling on credit creates both a benefit and a cost:
oBenefit: customers who cannot pay cash immediately can buy on credit,
so company profits rise as sales increase
oCost: when a customer doesn’t pay, the debt has gone bad, so this cost
is commonly called a bad debts expense
a/r is reported in the financial statements at cost- allowance for uncollectible
accounts= net realizable value- the amount the company expects to collect
bad debts expense is an expense associated with the failure to collect
receivables
oit is usually reported as an operating expense on the income statement
the allowance account has a normal credit balance
Allowance Method
the allowance method is the best way to measure bad debts
this method records collection losses on the basis of estimates
the allowance amount is a contra account to a/r and shows the amount of
receivables that the company does not expect to collect
journal entry to record bad debts expense:
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obad debts expense
allowance for uncollectible accounts
Percentage of Sales Method
computes the uncollectible account expense as a percentage of revenue
takes an income statement approach because it focuses on the amount of
expense to be reported on the income statement
Aging of Receivables Method
this method is a balance sheet approach because it focuses on accounts
receivable
individual receivables from specific customers are analyzed based on how long
they have been outstanding
the accounts are listed in categories based on the number of days they have
been outstanding
the amount of a/r s divided further into 0-30 days, 31-60, 61-90, and over 90
days
adding up the total estimated uncollectible accounts for each column gives the
amount that should be recorded in the allowance account
the allowance account needs to be updated so take the estimated amount- the
amount already recorded in the allowance account
obad debts expense
allowance for doubtful accounts
Writing Off Uncollectable Accounts
entry:
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oAllowance for doubtful accounts
Accounts receivable
The write off has no effect on total assets ad no effect on net income because
no income statement account is affected
Direct Write off Method
The other, less preferable way to account for uncollectible receivables
Under this method, the company waits until it decides that a specific
customer’s receivable is uncollectible
Then bad debt expense is recorded and the customers account is written off as
follows:
oBad debts expense
Accounts receivable
This method is not appropriate because:
oThis method does not set up an allowance for uncollectible accounts and
so as a result, receivables are always reported at their full amount, which
is more than the business expects to collect= assets on the balance
sheet are overstated
oNet income is overstated in 2013 and understated in 2014
Sales Discounts
Businesses offer sales discounts for early payment in order to speed up cash
flow
E.g. 2/10, n/30
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