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Chapter 7

Chapter 7 BU227.docx

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Wilfrid Laurier University
Carolyn Mac Tavish

BU227 Chapter 7 – Reporting and Interpreting Sales Revenue, Receivables, and Cash Week 6 Accounting for Sales Revenue -The revenue principle requires that revenues be recorded when the following conditions are met: 1. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods 2.The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold 3. The amount of revenue can be measured reliability 4. It is probable that the economic benefits associated with the transaction will flow to the entity 5. The cost incurred or to be incurred in respect of the transaction can be measured reliability -For sellers of goods, these criteria are most often met and sales revenue is recorded when title and risks of ownership pass ot the byer -Free on board shipping point – when goods are shipped, the title changes hands at shipment and the buyer normally pays for shipment -Free on board destination point – the title changes hands on delivery, and the seller normally pays for the shipment -Revenues from goods sold FOB shipping point are normally recognized at shipment and for destination vice versa -Service companies most often record sales revenue when they have provided services to the buyer -Many manufacturers recognize revenue at shipment -The appropriate amount of revenue to record is the cash equivalent sales price -Revenue from long-term service contracts is recognized most often by using the percentage of completion method Sales to Customers -Sales to customers are for cash and credit card -Sellers accept credit cards as payments for a variety of reasons -The credit card company charges a fee for the service it provides -Credit card discount – the fee charged by the credit card company for services Sales Discounts to Businesses -Sales/cash discount – a cash discount offered to encourage prompt payment of an account receivable 2/10,n/30 2 = discount percentage 10 = number of days in discount period n = Net (total sales less returns) 30 = Maximum credit period “The customer may deduct 2% from the invoice amount is cash payment is made within 10 days from the date of sale. If cash payment is not made within the 10 day discount period, the full invoice amount is due within a maximum of 30 days” -This encourages customers to pay quickly Sales Returns and Allowances -A reduction of gross sales revenues for return of or allowances for unsatisfactory goods -Accumulated in a separate account called “Sales Returns and Allowances” – must be deducted from gross sales revenue in determining net sales -The cost of sales related to what was returned would also be reduced BU227 Chapter 7 – Reporting and Interpreting Sales Revenue, Receivables, and Cash Week 6 Reporting Net Sales -On the company’s books, credit card discounts, sales discounts, and sales returns and allowances are accounted for separately to allow managers to monitor the costs of credit card use, sales discounts, and returns Sales revenue Less: Credit card discounts (contra revenue) Sales discounts (contra revenue) Sales returns and allowances (contra revenue) Net sales (reported on income statement) Measuring and Reporting Receivables Classifying Receivables -Classified in three common ways 1.Trade/non-trade receivables -A non-trade receivable arises from transactions other than the normal sale of merchandise or services -Trade receivables – open accounts owed to the business by trade customers 2. Account or note receivable -An account receivable is created when there is a sale of products and services on open account to customers or when a company expects to receive payments from other parties -Notes receivable – written promises that require another party to pay the business under specific conditions (amount, time, interest) -A note receivable is also classified as a financial asset 3. Current/non-current receivable -Depend on when the cash is expected to be collected Accounting for Bad Debts -The matching process requires the recording of bad debt expense in the same accounting period in which the related sales are made -Allowance method – bases bad debt on an estimate of uncollectible accounts -There are two primary steps in the allowance method 1. Estimating and recording of bad debts expense 2. Writing off specific accounts determined to be uncollectible during the period Recording Bad Debt Expense Estimates -Bad debt expense – the expense associated with estimated uncollectible trade receivables -Bad debt expense is in the category “Selling and general admin expenses” -It decreases profit and shareholder’s equity and in turn becomes a contra asset account as well -Allowance for doubtful accounts – a contra-asset account containing the estimated uncollectible trade receivables Impaired Receivables – Writing off Specific Uncollectible Accounts -When it is determined that a customer will not pay off their debt, the receivable is considered impaired -This journal entry does not affect any income statement accounts – it affects allowance for doubtful accounts (XA) and trades receivable – both going down the same amount BU227 Chapter 7 – Reporting and Interpreting Sales Revenue, Receivables, and Cash Week 6 Recovery of Accounts Previously Written Off -Increase trade rece
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