CHAPTER
FIVE
Homework
 P1 - Sales Discounts
 P2 – Sales Allowance
 P3 – Allowance Method of Uncollectibles
 P4 – Write Off Uncollectibles
 P8 – Notes Receivable
 Credit Sales and discounts
 Contra Revenues
 Allowance methods
 Write Off A/R
 Aging A/R
 Direct W/O
 Receivable Analysis
 Notes Receivable
 Percentage of Sales Method- Allowance
Accounts Receivable transactions
 Credit Sales



Accounts Receivable (Amount of invoice)
Sales
Freight-out
 Receive Payment


Cash
A/R
Contra Revenue Accounts
 Sales Discount
 Sales Returns
 Sales Allowances
DISCOUNTS
 TRADE DISCOUNTS
 a reduction in the selling price of the item as a reward
for buying large quantities.
 SALES DISCOUNTS (pg 285)
 a reduction in the amount the customer needs to pay as
a reward for paying earlier than required
TERMS
 2/10 Net 30
 2% if paid in 10 days, full amount in 30 days
 1/15 Net 60
Sales Discount Transaction
 Credit Sales – no discount until paid


A/R
500
Sales
500
 Payment – Discount is recorded when paid



Cash
Sales Discount(2%)
A/R

490
10
500
(take it out for the amount you put it in)
Sales Discount exercises
 Do E5-3, 5-4 page 246
Sales Returns & Allowance
 SALES RETURNS
 If it doesn’t work or your customer doesn’t want it, it can
returned and the customer will get their money back
 SALES ALLOWANCE
 If you give a reduction in the price of the item you sold
and they keep the item.
Sales Returns & Allow transaction
 Credit Sale


A/R
Sales
1000
1000
 Return


Sales Return and Allowance
A/R
 Customer Payment

Cash

A/R
700
700
300
300
NET SALES

SALES
1500
 -- Sales Returns & Allowances
300
 -- Sales Discount
10
 ----------------------------------------- ------
NET SALES
1190
Sales Return and Allowance
 Exercise 5-6 page 247
When a customer cannot or will not pay the invoice.
Four methods:
Direct Write off Method
Allowance Methods:
Percentage of Receivables
Aged A/R
Percentage of Sales
Direct Write off Method
 Use when you have only a few uncollectible invoices
and it occurs infrequently.
 Transaction:
 Bad Debt Expense

A/R
ALLOWANCE ACCOUNT
 Set aside of costs that will not occur until the next
period but revenue is recorded in current year.
 Use when you have several customers who do not pay
you and it happens frequently during the same year.
 Can’t charge A/R because we don’t know which one
will be uncollectible
 Fraud Alert or Income Manipulating
 If overstate the uncollectible –understate income and
income tax
 Do not have to worry until the next year.
 If audited will need to provide an aged A/R to prove your
uncollectible A/C expense
Accounts used
 Uncollectible Account Expense
 or BAD DEBT Expense
 Always a debit balance account
 Non- Cash transaction
 Allowance for uncollectible – Contra Asset Account
 Should be a credit balance
 Setting up or adjusting entry - 2009

Bad Debt Expense 5000

Uncollectible Account Expense

5000
Effects Net Income
 Writing off bad A/R in 2010

Uncollectible Account Expense 4000

A/R

Does not effect net income
4000
Allowance t-account
 ___________________________________
Write off A/R
| Setting up or adding to
|
| 5000
4000
|
------------------------------------------------1000 Balance
Wrote off less than estimated
 ___________________________________
Write off A/R
| Setting up or adding to
|
| 5000
7000
|
------------------------------------------------2000
Balance
Wrote off more than estimated
Accounts Receivable
Less Allow.for Uncollectible Accts
= Net Receivables
 (Net realizable value)
Exercise 5-7 pg 247
 Exercise 5-13 page 248
 Compare allowance method with the direct write off
method and the effect on income tax.
Aging Method
 More accurate
 Use if you do not have historical data
 It is the balance in the allowance account – not the
adjusting entry
 See page 228 for Aging schedule
 Exercise 5-11 page 248
Percentage of Sales
 Percentage of A/R --- Balance Sheet Method


Good because it is closest to net realized value
Most accepted method
 Percentage of Credit Sales – Income Statement
Method


Good because better matched with revenue
Only accepted if the amounts do not differ significantly from
Percentage of Receivables
 Exercise E5-19 page 249
Receivable Analysis
 Good to get when you first start the job or higher a new
person.
 Later show how you have helped to improve A/R
collections
Receivables turnover ratio
Average collection period
 Receivables turnover ratio -- # of times during the year
the Avg A/R is collected or turned over


Net Credit Sales
Avg A/R
 Higher the number of times, the better.
 Average collection period -- # of days A/R balance is
outstanding or how long did it take to collect A/R
 Average collection period -- # of days A/R balance is
outstanding or how long did it take to collect A/R
 Your Invoice terms are used to see if good or bad
 If Net 30 is terms you days should be around 30.


365
A/R Turnover
 Exercise E5-14 page 249
More formal and legally bound form of credit sales. Usually a
note is a loan that is signed and has an interest component .
Note Terminology
 Face Value – Principle of the note
 Due date- date it is to be paid back (DUH!!!)
 Payee – who is to receive the money
 Maker – who is to pay the money
 Interest rate- rate is in annual terms.
Note Transactions
 A note for an accounts receivable

Seller


Notes Receivable (N/R)
A/R
Buyer
A/P
Notes Payable (N/P)
 Note is paid



Cash
Interest Income
N/R
N/P
Interest Expense
Cash
Interest Calculations
 I=PRT
 Interest = Principle X rate X time
 Rate
 12% = 1% month
 6% = .5% month
 18%= 1.5% month
 24% = 2% month
 Principle is $10,000 rate is 12% time is 2 months the
interest is: 10000 X 1% X 2 = $200
 Exercise 5-16 pg 249
Interest Receivable Adjust Entry
 Interest earned but not yet paid - ACCRUAL
 Adjusting Journal Entry – for the month of the year
 Interest Receivable

Interest Income
 When note is paid
 Cash

N/R
Interest Receivable
Interest Income
Exercise 5-18 page 249