CHAPTER
7
Selling a Product
or a Service
Learning Objective 1
Understand the three
basic types of
business activities:
operating, investing,
and financing.
Discuss the Major Activities of a
Business
Operating Activities:
Discuss the Major Activities of a
Business
Investing Activities:
Discuss the Major Activities of a
Business
Financing Activities:
Review the Three Major Activities
of a Business
Operating Activities
Financing Activities
Investing Activities
Financial Statement
Summary and Review
Learning Objective 2
Use the two revenue
recognition criteria to
decide when the
revenue from a sale or
service should be
recorded in the
accounting records.
Revenue Recognition
When:
And:
Discuss Recognition Concerns
As a practical matter, how do most
companies handle recognition?
record sales when goods are shipped to
customers.
recognize credit sales as revenues before
cash is collected.
recognize revenues from services
when the service is performed,
not necessarily when cash is
received.
Revenue Recognition
On January 1, Formal Apparel
sold 20 top hats for cash and
another 25 for credit. Each hat
sold for $200. How should the
$9,000 of revenue be recorded?
Credit Sale and Collection
On January 10, Mountain Mining sold
Edison Excavation $2,000 of equipment
on account. Mountain Mining received
payment on February 1. What entries
are made?
Learning Objective 3
Properly account
for the collection
of cash and
describe the
business controls
necessary to
safeguard cash.
Discuss the Complications with
Revenue Recognition
Sales Discounts
Sales Returns and Allowances
Uncollectible Accounts
What Do These Sales Discount
Terms Mean?
2/10, n/30
1/10, n/30
2/10, EOM
1/15, EOM
Credit Sale and Collection
Tidy Paint Supplies sold $1,000 of equipment
on account on January 3. The terms of the
sales agreement are 2/10, n/30. What are the
collection entries if paid on January 10 or on
February 15?
What Are Contra-Revenue Accounts?
How Are Sales Returns and
Allowances Reported?
Example: Sales Return
On January 10, Handy Man Hardware
sold $2,500 of equipment during its
annual sale. One week later, $250 of
equipment was returned. What are the
entries?
Review the Control of Cash.
Learning Objective 4
Record the
losses resulting
from credit
customers who
do not pay their
bills.
What Are Receivables?
Example: Accounts Receivable
On January 10, Carson Cameras sold
$1,000 of equipment on account. The
terms of the agreement are 2/10, n/30.
Payment was received on January 30.
What are the entries?
Discuss Uncollectible Accounts.
Review The Direct Write-Off
Method
Discuss The Allowance
Method
Reversing Written-off Receivables
What are the entries if the credit customer eventually pays?
Estimating Uncollectible
Accounts Receivable
What are the three methods?
Explain the Percentage of Credit
Sales Method
Explain the Percentage of Total
Receivables Method
Estimating Uncollectible Accounts
Receivable
AS A PERCENTAGE OF CREDIT
SALES
AS A PERCENTAGE OF TOTAL
RECEIVABLES
Amount of uncollectibles = a Amount of uncollectibles = a
percentage of total
straight percentage of the
current year’s credit sales.
receivables balance at
period’s end.
Based on experience of prior
years, modified for changes Focus is on estimating total
expected in current year.
bad debts existing at
Any existing balance in
period’s end.
Allowance for Bad Debts is The ending balance in
not considered in the
Allowance for Bad Debts is
adjusting entry to record
the amount of total
bad debt expense.
receivables estimated to be
uncollectible.
Estimating Uncollectible
Accounts Receivable
AS A PERCENTAGE OF
CREDIT SALES
AS A PERCENTAGE OF
TOTAL RECEIVABLES
In practice, a company
should consider both
techniques to ensure that
each yields roughly
consistent results.
Uncollectible Accounts Allowance
Norm’s Tools had credit sales of $100,000. The
current accounts receivable balance is $30,510.
The allowance for bad debts balance is $350.
Historically, 10 percent of the accounts receivable
ending balance is not collected. What is the
adjusting entry?
Bad Debt
Expense
Allowance for
Bad Debts
350 Bal.
End. Bal. 2,701
3,051 End. Bal.
Review Aging Accounts
Receivable
Uncollectible Accounts Expense
Copy That had credit sales during the year of
$200,000. Using the aging method and the data
on the aging receivables worksheet, determine
the journal entry needed. The beginning
balance for Allowance for Bad Debts is $150.
Aging Receivables Worksheet
Age
Balance
Current. . . . . . . . . . $10,000
1-30 days. . . . . . . .
4,000
31-90 days. . . . . . .
2,100
Over 90 days. . . . .
1,000
$17,100
Percentage
Estimated to be
Uncollectible Amount
1.5%
$ 150
4.0
160
20.0
420
40.0
400
$1,130
Uncollectible Accounts Expense
Copy That had credit sales during the year of
$200,000. Using the aging method and the data
on the aging receivables worksheet, determine
the journal entry needed. The beginning
balance for Allowance for Bad Debts is $150.
Bad Debt
Expense
Allowance for
Bad Debts
150 Bal.
End. Bal.
980
1,130 End. Bal.
Learning Objective 5
Evaluate a
company’s
management of its
receivables by
computing and
analyzing
appropriate financial
ratios.
%
Comment on Assessing Management
of Receivables
Comment on Assessing
Management
of Receivables
Management of Receivables
Adjust It Square had net credit sales of
$150,000 during 2001. The accounts
receivables increased $5,000 to $40,000
during the same time. Calculate the accounts
receivable turnover ratio and the average
collection period.
Accounts Receivable Turnover:
Average Collection Period:
Learning Objective 6
Match revenues and
expenses by
estimating and
recording future
warranty and service
costs associated with
a sale.
Discuss Customer Service Costs
Comment on Warranty Costs
Expanded Material
Learning Objective 7
Reconcile a checking
account.
2000
Bank Statement
The Big Bank
Bank Statement
January 30, 2001
Cash Balance, January 1, 2001
+ Deposits
– Checks processed
Cash Balance, January 30, 2001
2000
What Causes Differences Between
the Bank Statement and the Cash
Account?
Define and Explain the Bank
Reconciliation
Bank Reconciliation
Bal per bank stmt $14,422
Additions to Bank Bal
Deposit in Transit
3,100
Total
$17,522
Deductions from bank
Balance
Outstanding Checks
#631
$326
#631
426
#634
185
(937)
Adj. Bank Bal
$16,585
Bal per Books
$13,937
Additions to book bal
Direct deposit $3,200
Interest
60 3,260
Total
$17,197
Deductions from book bal
Service charge $
7
Bank transfer
425
Error recording Ck
#630(Jones wages) 180
(612)
Adj. Book Bal
$16,585
This Completes Chapter 7