
3 Transactions
› Initial purchase
› Period End Adjustment
› Sale of Investment

Year of Purchase
› Balance Sheet
 Market Value of Investment
› Income Statement
 Unrealized Gain or Loss
 Dividend Revenue (if received)

Year of Sale
› Balance Sheet
 Investment balance is removed -0› Income Statement
 Gain or Loss on Sale
 Based on Ending Market Value from previous period

3 Transactions
› Issuance of Note
› Accrual of Interest
› Collection of Note

Year of Issuance
› Balance Sheet
 Note Receivable owed to Company
 Interest Receivable
› Income Statement
 Interest Revenue for Accrued Interest

Year of Collection
› Balance Sheet
 Note Receivable is collected -0 Interest Receivable is collected -0› Income Statement
 Interest Revenue for partial period
Represents Amount owed from Customers
 Allowance for Doubtful Accounts

› Contra- Asset Account
› Represents Amount we Expect NOT to collect
from Customers

Net Accounts Receivable or Net Realizable
Value
› Accounts Receivable – Allowance for Doubtful
Accounts
› Represents what we Expect to collect

Matching Principle Requires Estimate
› Expense: Amount of Sales NOT collected

Two Estimation Techniques:
› % of Sales
› Aging of Accounts Receivable

One Non-Estimation Technique
› Direct-Write Off

Estimates the amount of the Expense
› Amount of Credit Sales that we expect NOT
to collect
› Once computed (Credit Sales x %)
 Uncollectible Accounts Expense xxxxxx
 Allowance for Doubtful Accounts
xxxxxxx

Estimates the Amount of Receivables we
expect NOT to collect
› That is a definition of what?
› Once Computed:
 You have estimated the ENDING Balance of
the Allowance for Doubtful Accounts
 Determine the Beginning Balance
 Make the adjustment
 Usually
 Uncollectible Accounts Expense xxxxxx
 Allowance for Doubtful Accounts xxxxxxx
We know with Certainty that we won’t
be collecting a certain account:
 Reduce the Allowance Account &
 Reduce the Accounts Receivable
Account

› Allowance for Uncollectible Accounts xxxxx
› Accounts Receivable
xxxx

Acid-Test
› Similar to Current Ratio but….
› (Cash + ST Investments + Accounts
Receivable) / Current Liabilities

Day’s Sales in Receivable
› Average Accounts Receivable / Day’s Avg.
Sales