BMGT 220, Chapter 8 Discussion

Kristian Sooklalkristiansooklal@yahoo.com443-797-4588 (cell) | 410-575-4719 (text)

Plan for today

• Quiz 6 back --- • Finish lecture material• Practice Problem• Practice Quiz• Quiz 7

• http://ksooklal.comuv.com/BMGT220/

Key Topics in Chapter 8• Accounts Receivable

• #1: Recognizing accounts receivable• #2: Valuing accounts receivable• #3: Disposing of accounts receivable

• Recognizing Accounts Receivable• Sales on accounts• Collection of cash

• Valuing Accounts Receivable• Bad Debts Expense• Direct Write-off Method

• Not acceptable for financial reporting purposes• Bad Debts Expense will show actual losses• Simple, Exact method

Key Topics in Chapter 8 (Continued)• Allowance Methods:

– Estimate Bad Debts in the period of the sales– Matching principle: matches sales with expenses– Reports accounts receivable on BALANCE SHEET at estimated value– 2 methods: % of sales vs. % of receivables

• Method #1: % of sales– Focuses on bad debt expense, ignores existing balance of allowance

for doubtful accounts– Matches expenses with revenues– Focus on Income Statement– Sales Bad Debts Expense

• Method #2: % of receivables– Focuses on Balance Sheet Relationships– Accurate valuation of receivable on balance sheet– Aging schedule– Consider existing balance

Key Topics in Chapter 8 (Continued)• Disposable of receivables

– Sell receivables for cash, minus a service charge• Bank Credit Sales

– Credit cards from third parties result in:• Cash• Service Expense• Sales

• Types of Journal Entries– Recognizing Accounts Receivable– Adjusting Entry– Write-off– Recovery– Cash Collection– Disposal– Bank Credit Card Sales

Useful Equations• Cash Realizable Value = Ending Accounts Receivable –

Ending Allowance for Doubtful Accounts• % of Sales method:

– Current Period Sales x Bad Debt % = Estimated Bad Debts Expense

• Average Collection Period in Days = Days In Period/Accounts Receivable Turnover

• Accounts Receivable Turnover = Net Credit Sales/Average Net Accounts Receivable

Journal Entries (Allowance Method)

• Original Sales/Accounts ReceivableAccounts Receivable 800

Sales 800• Write-off (Allowance)

Allowance for Doubtful Accounts 100Accounts Receivable--Aashima 100

• Write-off (Direct)Bad Debts Expense 100

Accounts Receivable—Aashima 100• Adjusting Entry (Allowance method only)

Bad Debts Expense 100Allowance for Doubtful Accounts 100

Journal Entries (Allowance Method)

• RecoveryReversal of Write-off

Accounts Receivable--Aashima 80Allowance for Doubtful Accounts 80

Cash Collection:

Cash 80Accounts Receivable 80

• Disposal of Accounts ReceivableCash 98Service Charge 2

Accounts Receivable--Aashima 100• Bank Credit Card Sales

Cash 98Service Charge 2

Sales 100