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ACC 100 (230)
Chapter 7

Chapters 7, 8, 9

8 Pages
182 Views

Department
Accounting
Course Code
ACC 100
Professor
Walter Krystia

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Chapter 7 Liquid Assets and Internal Control
Subsidiary Ledger: The detail for a number of individual items that collectively make up a
single general ledger account.
Control Account: The general ledger account that is supposed by a subsidiary account.
An account receivable signifies that an external party owes the entity money! A
trade account receivable represents the amount owed to the entity by a customer in
respect of revenue from the sale of goods / provision of services.
Credit Sales Disadvantages:
Slows inflow of cash
Risk of uncollectible accounts
Example:
Say in January of the following year, the company found out that one of their customers
declared bankruptcy. The company has an A/R from the customer of $40,000.
What should we do? - We have to write-off the balance because it has no future economic
benefit.
Assets = Liabilities + Shareholders
Equity
Accounts Receivable Bad Debt
Expense
-40,000 - 40,000
Potential uncollectible A/R balances
some A/R will be uncollectible
dont know which specific customers accounts will not be collected
management uses their knowledge (based on past experience, current economic
conditions and industry averages) to ESTIMATE the proportion that will go bad in the
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future
Helps us: determine a conservative realizable value for A/R on the Balance Sheet and
the Bad Debt Expense on the Income Statement.
Called the Allowance Method! Matching and Conservatism (two principles that best
reflect)
Allowance Method
Step 1: Estimate the proportion of the year-end A/R balance expected to go bad during the
NEXT 12 months.
Step 2: Record the amount estimated in the CURRENT year, against the CURRENT
income (matching principle)
Step 3: When a specific customers A/R is determined to be uncollectible, ‘write-off the
account against the Allowance Account do NOT impact the Income Statement)
Say management estimates that $30,000 of the existing A/R balance will go bad in the next
year how do we record this? Consider the nature & reality of what is going on how much
of the A/R is likely to be collected?
Assets = Liabilities + Shareholders
Equity
Allowance for Doubtful Accounts (Contra Asset) Bad Debt
Expense
- 30,000 -
30,000
On January 1, 20X2 a customer has declared bankruptcy. The outstanding A/R balance
for this customer was $20,000.
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Assets = Liabilities + Shareholders
Equity
Allowance for Doubtful Accounts
+20,000
Accounts Receivable
-20,000
Q: Why do we ADD the amount written-off to the Allowance for Doubtful Accounts account?
A: Because the normal balance in the Allowance account is NEGATIVE in comparison to
A/R (a ‘Contra Account is an off-setting amount). In order to reduce a negative number, we
have to ADD a positive number.
Approaches to Allowance Method
% of Net Credit Sales (Income Statement Approach)
Sales Method (net credit sales $2,340,000 x 2%)
Assets = Liabilities + Shareholders
Equity
Allowance for Doubtful Accounts Retained
Earnings
-46,800 -46,800
(Bad Debt Expense)
Under the Percentage of Credit Sales method the bad debt expense and the allowance for
doubtful accounts balances on the year end financial statements are DIFFERENT.
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Description
Chapter 7 Liquid Assets and Internal Control Subsidiary Ledger: The detail for a number of individual items that collectively make up a single general ledger account. Control Account: The general ledger account that is supposed by a subsidiary account. An account receivable signifies that an external party owes the entity money! A trade account receivable represents the amount owed to the entity by a customer in respect of revenue from the sale of goods provision of services. Credit Sales Disadvantages: Slows inflow of cash Risk of uncollectible accounts Example: Say in January of the following year, the company found out that one of their customers declared bankruptcy. The company has an AR from the customer of $40,000. What should we do? - We have to write-off the balance because it has no future economic benefit. Assets = Liabilities + Shareholders Equity Accounts Receivable Bad Debt Expense - 40,000 - 40,000 Potential uncollectible AR balances some AR will be uncollectible dont know which specific customers accounts will not be collected management uses their knowledge (based on past experience, current economic conditions and industry averages) to ESTIMATE the proportion that will go bad in the www.notesolution.com
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