chapter 7.docx

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Department
Financial Accounting
Course
MGAC02H3
Professor
Douglas Kong
Semester
Fall

Description
Chapter 7 Non-trade receivables are amounts owed to the business for other than business transactions. Companies accept credit cards for several reasons: 1. To increase sales. 2. To avoid providing credit directly to customers. 3. To avoid losses due to bad checks. 4. To avoid losses due to fraudulent credit card sales. 5. To receive payment quicker Accounting for Bad Debts Matching process requires the recording of bad debt expense in the same accounting period in which the related sales are made. In order to record, we must the allowance method to estimate the expected amount of bad debts. The two steps are: 1) estimate and record bad debts expense 2) writing off specific accounts that are uncollectable  Recording bad debts expense: Dr Bad debts expense; Cr AFDA  Writing off an account: Dr AFDA; Cr trade receivable  Recovery of write off: Dr Trade receivable; Cr AFDA Dr cash; Cr trade receivable Ending AFDA = Beginning AFDA + bad debt expense – write offs Trade receivable = Old trade receivable – ending AFDA Estimating bad debts 1) Aging of trade receivables – estimates uncollectible accounts based on the age of each trade receivable. Most commonly used because it is more accurate. The balance we get from the aging analysis will be the ending balance on AFDA. We then compute bad debts expense and record it. 2) Percentage of sales – bases bad debt expense on the historical perspective of credit sales that result in bad debts. This is simpler to apply and is used on a weekly or monthly basis. Bad debts expense = Credit sales x Bad debt rate A prudent measure of trade receivables means a larger amount of bad debt expense and a larger ADFA balance. Receivables turnover = Net sales / Average net trade receivables This ratio reflects how many times average trade receivables were recorded and collected during the period. Higher the ratio, faster the collection. Ways to control receivables and reduce bad debts 1) Require approval of customers’ credit history by a personal independent of the sales functions 2) Monitor the age of trade receivables and contact customers with overdue payments 3) Reward both sales and collection workers for speedy collections so that they work as a team Cash management 1) Accurate accounting so that reports of cash flows and balances may be prepared 2) Controls to ensure that enough cash is on hand to meet a) current operating needs b) maturing liabilities and c) unexpected emergencies 3) Separatio
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