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Chapter 6

COM 270 Chapter Notes - Chapter 6: Market Liquidity, Subledger, Debits And Credits

Course Code
COM 270
Graham Chris

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cash: a company’s most liquid asset
-provides the resources necessary to meet their immediate, short-term
financial obligations
-includes physical cash on hand, amount in bank accounts, & customers’
cheques held for deposit
-cash equivalents: can easily be converted into known amounts of
cash, & matures in 90 days or less (ex. government treasury bills)
-measured in Canadian dollars - a stable monetary unit
-recorded at its face value at the reporting date
-value is assumed not to change
-asset most susceptible to theft
liquidity: how well positioned the company is in terms of having sufficient
enough cash, or current assets that will become cash, to pay the company’s
current liabilities as they become due
-assessed using cash & accounts receivables
internal control systems: set of policies & procedures established by an
enterprise, in order to:
(a) prevent loss &/or theft, both internally & externally
(b) protect & control all assets
(c) lay out rules for handling & recording assets
-key elements of an effective internal control system includes:
(1) physical controls - protect assets from theft, damage, etc.
(2) assignment of responsibilities - only 1 person is responsible for
each task
(3) separation of duties - ensure that individual employees can’t:
(i) authorize transactions
(ii) record transaction
(iii) have custody of the related asset
if properly followed, the only way theft or fraud could occur is
through collusion: 2+ employees work together to commit
(4) independent verification - 1 person checking the work of another
(5) documentation - provides evidence that the transaction occurred
provide an audit trail: transactions can be traced back to source
documents, if necessary
account receivables (trade receivables): amounts due from customers as a
result of sales of goods &/or services
-represents the right to receive payment at some future date
-typically due within 30 days ( current asset)
-allows for increased sales, & potentially, increased revenue
-there is usually some uncertainty that the customer will not pay
bad debt expenses: the result of customers who fail to pay their
account, as a result of paying on account
uncollectible accounts: accounts receivable that have been
deemed to be bad debt, at which they are generally uncollectible
if the amount of bad debt is material, it must be recorded & reflected
-reflected in statement of financial position at their carrying amount
carrying amount = gross accounts receivable - allowance doubtful accounts
-allowance for doubtful accounts (AFDA) (allowance for credit losses): a
contra account to account receivables, reflecting the estimated amount of
accounts receivable that will not be collected
uses the allowance method
-accounts receivable is a control account
control account: contains all of the overall amounts related to a
particular item in the financial statement, with all the relevant details
recorded in a sub-ledger
sub-ledger (subsidiary): contains all of the details about all of the
individual customer accounts
total of all customer accounts in the sub-ledger must equal the total of
the control account
- an entry cannot be made in one, but not the other
allowance method: estimate the amount that will not be collected during
the same period as the credit sales, instead of waiting until some time in the
future when the customer doesn’t pay
-there are 2 methods to estimate bad debts:
(i) percentage of credit sales method (income statement method):
based on info from the statement of income
bad debt expense is the function of total credit sales
bad debt expense = credit sales x appropriate historic %
% is based on collection history & management experience
emphasizes the matching of expenses with revenues
the existing balance in the AFDA does not affect the
calculation or the adjusting entry
(ii) aging of accounts receivable method (balance sheet method):
based on info from the statement of financial position
focuses on asset valuation
bad debt expense is a function of the AFDA account balance
based on the length of time that the receivables have been
4 step process:
(1) prepare an aging analysis using the info from the
accounts receivable sub-ledger
(2) apply historic rates for each sub-group
(a) less than 30 days
(b) 31-60 days
(c) 61-90 days
(d) greater than 90 days
(3) total the amounts (thought to be uncollectible) for
each group, in order to estimate the required AFDA
(4) determine the bad debt expense for the period !
(the amount that is required to bring the AFDA up to
the amount calculated in step 3)
-3 key transactions that may occur under the allowance method:
(2) establishing allowance & recording bad debt expenses
recorded in the contra-asset account, Allowances for
Doubtful Accounts
effects the statement of income (by increasing expenses), &
the statement of financial position (by reducing the carrying
amount of accounts receivable)
(2) writing off a specific receivable
write-off: the process of removing a specific customer’s
account receivable from a company’s books, once it is
deemed uncollectible
(3) recovering a receivable that had been written off
recovery: reinstatement & collection of an account
receivable that was previously written off
COM 270 - Chapter 6: Cash & Accounts Receivable
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