PRINCIPLES OF FINANCIAL ACCOUNTING

Chapter 8

Accounts Receivable Issues with bad debts Two methods

Direct write-off Allowance method

Advantage of allowance method Matches revenue with expense (adjusting

entry is required) More accurate balance on the balance sheet

(cash realizable value)

Write off of bad debt Direct write-off method

DR – +Bad debt expense CR – - A/R

Allowance method DR -- +Allowance for Doubtful

accounts CR – -A/R

Recovery of previously written off account Direct write-off

DR - +A/R CR – -Bad Debt Expense DR – +Cash CR – -A/R

Allowance method DR – +A/R CR – +Allowance for Doubtful Accounts DR – +Cash CR – -A/R

Allowance method calculation Percentage of A/R

Flat % on all receivables Aging

% times the amount still owed given the age of receivables (page 360)

Adjusting entry DR – +Bad debt expense CR – +Allowance for Doubtful Accounts NOTE – amount must be adjusted for the

existing balance in the Allowance for Doubtful Accounts account.

Notes Receivable Promissory note

Principal, interest, due date Simple interest calculation:

Principal x rate x time

Receivables analysis Credit risk ratio:

Allowance for Doubtful Accts/A-R Receivable turnover ratio:

Net Credit sales / Average net receivables

Average collection period: 365 / Receivables turnover ratio

Methods of speeding up cash-flow Using receivables as security on a

loan (assignment) Selling receivables (factoring) Accepting bank charge cards

Assignment E8-3 E8-5 E8-6 E8-13 BYP 8-1 BYP 8-9