Week 8/9, Chap6
Accounting 1A, Financial
Accounting
Reporting and Interpreting Sales
Revenue, Receivables, and Cash
Instructor: Michael Booth
Learning Objectives
Analyze a company’s performance based on
return on equity, assets and its components.
Return on Equity (ROE)
Return
=
on
Equity
Net Income
Average Stockholders’ Equity1
ROE measures how much the firm
earned for each dollar of
stockholders’ investment.
Note:
1(beginning
equity + ending equity) ÷ 2
ROE Profit Driver Analysis
11.3%
=
$169,022
$7,000,000
×
$169.022
$1,493,774
Net Income
Net Sales
×
Asset
Turnover
Net Sales
Average
Total Assets
$7,000,000
$2,050,912
×
Financial
Leverage
Average
Total Assets
Average
Stockholders’
Equity
×
Net Income
Average
Stockholders’ =
Equity
Net Profit
Margin
×
=
×
ROE
$2,050,912
1,493,774
Return on Equity (ROA)
Return
=
on
Assets
Net Income
Average Total Assets
ROA measures how much the firm earned for
each dollar of investment.
It is the broadest measure of profitability and
management effectiveness, independent of
financing strategy.
Note:
1(beginning
Total Assets + ending Total Assets) ÷ 2
ROA Profit Driver Analysis
$169,022
$2,050,912
8.2%
Net Profit
Margin
=
Net Income
Net Sales
=
$169,022
$2,990,520
×
Asset
Turnover
Net Sales
Average
Total Assets
×
Net Income
Average
Total Assets
=
×
ROA
$2,990,520
$2,050,912
Profit Driver Analysis
1. Net profit margin. Net profit margin is Net Income ÷ Net Sales. It measures how much of every sales
dollar is profit. It can be increased by
a. Increasing sales volume.
b. Increasing sales price.
c .Decreasing cost of goods sold and operating expenses.
2. Total asset turnover (efficiency). Total asset turnover is Net Sales ÷ Average Total Assets. It measures how
many sales dollars the company generates with each dollar of assets. It can be increased by
a. Collecting accounts receivable more quickly.
b. Centralizing distribution to reduce inventory kept on hand.
c. Consolidating production facilities in fewer factories to reduce the amount of assets necessary to generate
each dollar of sales.
Profit Drivers and Business Strategy
High-value or product-differentiation.
Rely on R&D and product promotion to convince
customers of the superiority of your product.
Low-Cost.
Rely on efficient management of accounts receivable,
inventory and productive assets to produce
high asset turnover.
Learning Objectives
Apply the revenue principle to determine the
accepted time to record sales revenue for
typical retailers, wholesalers, manufacturers,
and service companies.
Accounting for Sales Revenue
The revenue principle requires that
revenues be recorded when earned:
Goods or services
have been delivered.
Amount of customer
payments known.
Collection is
reasonably assured.
Learning Objectives
Analyze the impact of credit card sales, sales
discounts, and sales returns on the amounts
reported as net sales.
Reporting Net Sales
Companies record credit card discounts, sales
discounts, and sales returns and allowances
separately to allow management to monitor
these transactions.
Sales revenue
Less: Credit card discounts
Sales discounts
Sales returns and allowances
Net sales
Credit Card Sales to Consumers
Companies accept credit cards for several reasons:
1. To increase sales.
2. To avoid providing credit directly to customers.
3. To avoid losses due to bad checks.
4. To avoid losses due to fraudulent credit card sales.
5. To receive payment quicker.
When credit card sales are made, the
company must pay the credit card
company a fee for the service it provides.
Credit Card Sales
When credit card sales are made, the
company must pay the credit card
company a fee for the service it provides.
When companies
allow
customers to
purchase
merchandise on
an open
account, the
customer
promises to pay
the company in
the future for
the purchase.
Sales on Account
Sales Discounts
2/10, n/30
Read as: “Two ten, net thirty”
When customers purchase on open account,
they may be offered a sales discount to
encourage early payment.
Sales Discounts
2/10, n/30
Discount
Percentage
# of Days in
Discount
Period
Otherwise,
the Full
Amount Is
Due
Maximum
Days in
Credit
Period
To Take or Not Take the Discount,
That is the Question
With discount terms of 2/10,n/30, a customer
saves $2 on a $100 purchase by paying
on the 10th day instead of the 30th day. Note:
discount period is 20days (30 days – 10 days)
Interest Rate for 20 Days =
Amount Saved
Amount Paid
Interest Rate for 20 Days =
$2
$98
= 2.04%
365 Days × 2.04% = 37.23%
20 Days
Sales Returns and Allowances
Debited for damaged
merchandise.
Debited for returned
merchandise.
Contra revenue
account.
Sales Returns & Allowance
After we post the entry to the T-accounts, the
account balances look like this:
Sales Returns &
Allowance
Revenue
$ Amount
of return
$ Sales
Accounts Receivable
$ Amount
of return
Reporting Net Sales
Companies record credit card discounts,
sales discounts, and sales returns and allowances
separately to allow management
to monitor these transactions.
Sales revenue
Less: Credit card discounts
Sales discounts
Sales returns and allowances
Net sales
Learning Objectives
Analyze and interpret the gross
profit percentage.
Gross Profit Percentage
Gross Profit
Percentage
=
Gross Profit
Net Sales
In 2014, Gaiam Q2 reported gross
profit of $36,150,000 on sales of
$57,220,000.
A higher gross profit results in
higher net income. Gross Profit
indicates amount per $ remaining
from each sale for operational
expense and peripheral expense.
Gross Profit Percentage
Gross Profit
Percentage
Gross Profit
Percentage
=
Gross Profit
Net Sales
=
$36,500
$57,220,000
=
64%
All other things equal, a higher gross
profit results in higher net income.
Gaiam
64.0%
2014 Gross Profit Comparisons
Industry
S & P 500
5.4%
35.5%
In class Exercises
The following summarized data were provided by the records of Slate, Incorporated,
for the year ended December 31, 2014:
Required:
1.Based on these data, prepare an income statement (showing both gross profit
and income from operations).
2.What was the amount of gross profit margin? What was the gross profit
percentage ratio? Explain what these two amounts mean.
Learning Objectives
Estimate, report, and evaluate :
•Effects of uncollectible accounts receivable
(bad debts) on financial statements.
Measuring and Reporting
Receivables
Accounts
Receivable
Trade receivables are
amounts owed to the
business for credit
sales of goods, or
services.
Nontrade receivables
are amounts owed to
the business for
other than business
transactions.
Measuring and Reporting
Receivables
Accounts receivable are
created when companies
have sales to customers
on open accounts.
Notes receivable are
written promises from
another party to pay with
specified terms.
Trade receivables are
amounts owed to the
business for credit sales of
goods, or services.
Nontrade receivables are
amounts owed to the
business for other than
business transactions.
Balance Sheet Classifications
Current (short term)
Noncurrent (long term)
Measuring and Reporting Receivables –
Notes Receivable
$1,200
Term
Sixty days
Principal
the order
of
Goleta, CA
January 5, 2014
Payee
after date I promise to pay to
Pacific BioDiesel
One thousand two hundred --------------------------------- Dollars
Payable at
Interest
Rate Goleta
Bank
of America,
Maker
CA
12%
Value received with interest at
per annum
No. 10242 Due
March 6, 2015
Due Date
Jorda Evans
Ben Lomond Feed
Accounting for Bad Debts
Bad debts result from credit customers
who will not pay the business the
amount
they owe, regardless of collection
efforts.
Accounting for Bad Debts
Bad Debt
Expense
Matching
Principle
Record in same
accounting
period.
Sales
Revenue
Accounting for Bad Debts
Most businesses record an estimate of
the bad debt expense by an adjusting
entry at the end of the accounting period.
Recording Bad Debt Expense
Estimates
SunSolar estimated bad debt expense
for 2014 to be $504,000.
Prepare the adjusting entry.
GENERAL JOURNAL
Date
Dec. 31
Description
Debit
Credit
Recording Bad Debt Expense
Estimates
SunSolar estimated bad debt expense
for 2014 to be $504,000.
Prepare the adjusting entry.
Bad Debt Expense
is normally
classified as a
GENERAL
JOURNAL
and is closed at year-end.
Date selling expense
Description
Debit
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Contra asset account
Credit
504,000
504,000
Allowance for Doubtful Accounts
Balance Sheet Disclosure
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable
Amount the business
expects to collect.
Writing Off Uncollectible Accounts
When it is clear that a specific customer’s
account receivable will be uncollectible, the
amount should be removed from the
Accounts Receivable account and charged to
the Allowance for Doubtful Accounts.
Writing Off Uncollectible Accounts
Sun Solars’ total write-offs for
2014 were $876,000.
Prepare a summary journal
entry for these write-offs.
GENERAL JOURNAL
Date
Description
Debit
Credit
Writing Off Uncollectible Accounts
Sun Solars’ total write-offs for
2013 were $876,000.
Prepare a summary journal
entry for these write-offs.
GENERAL JOURNAL
Date
Description
Allowance for Doubtful Accounts
Accounts Receivable
Debit
Credit
876,000
876,000
Writing Off Uncollectible Accounts
Before the write-off:
• Sun Solars’ Accounts Receivable
balance was $11,000,000
• Allowance for
Doubtful Accounts
balance was $1,000,000 (after the
allowance increase of $504,000)
What is the effect of total write-offs of
$876,000 had on these accounts.
Writing Off Uncollectible Accounts
Before WriteOff
Accounts receivable
$ 11,000,000
Less: Allow. for doubtful accts.
1,000,000
Net realizable value
$ 10,000,000
After WriteOff
$ 10,124,000
124,000
$ 10,000,000
Notice that the total write-offs of $876,000 did not
change the net realizable value nor did it affect any
income statement accounts.
Writing Off Uncollectible Accounts
Before the write-off:
• Sun Solars’ Accounts Receivable
balance was $10,660
• Allowance for
Doubtful Accounts
balance was $1,200
What is the effect of total write-offs of
$1,150 had on these accounts.
Writing Off Uncollectible Accounts
Accounts receivable
$
Less: Allow. for doubtful accts.
Net realizable value
$
Before Write-Off
10,660
1,200
9,460
After WriteOff
$
9,510
50
$
9,460
Notice that the total write-offs of $1,150 did not
change the net realizable value nor did it affect any
income statement accounts.
Methods for Estimating Bad Debts
• Percentage of credit sales
• Aging of accounts receivable
Percentage of Credit Sales
Bad debt percentage is based
on actual uncollectible accounts
from prior years’ credit sales.
Focus is on determining the amount to
record on the income statement as
Bad Debt Expense.
Percentage of Credit Sales
Net credit sales
 % Bad debt loss rate
Amount of journal entry
Percentage of Credit Sales
In 2014, XYZ Companyhad credit sales of
$127,660. Past experience indicates
that bad debts are one percent (1%) of
sales.
What is the estimate of bad debts expense
for 2014?
$127,660 × .01 = $1,280
Now, prepare the adjusting entry.
Percentage of Credit Sales
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Debit Credit
1,280
1,280
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –
PERCENTAGE OF CREDIT SALES RECEIVABLE METHOD
Part 1 – During 2015, Santa Cruz Operations reported $300,000 in sales. The company’s allowance for
doubtful accounts has an unadjusted credit balance of $12,000 at December 31, 2015. Based on prior
experience, management estimates that 2.5% of sales will result in bad debts. Prepare the required
adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+ Bad Debt Expense (E) –
+
Stockholders’ Equity
- Allowance for Doubtful Accounts (xA) +
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit
balance of $400. Prepare the required adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+ Bad Debt Expense (E) –
+
Stockholders’ Equity
- Allowance for Doubtful Accounts (xA) +
Now let’s discuss
another method that is
used to account for
uncollectible accounts.
Aging of Accounts Receivable
Focus is on determining the desired
balance in the Allowance for Doubtful
Accounts on the balance sheet.
Aging Schedule
Each customer’s account is aged by
breaking down the balance by showing
the age (in number of days) of each part
of the balance.
Aging Schedule
Days Past Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total
Not Yet
Due
$ 1,200
1-30
$ 235
300
50
Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750
325
$ 1,830
325
$10,660
31-60
$
$ 3,500
$ 2,550
$ 1,540
$ 1,240
Based on past experience, the business
estimates the percentage of uncollectible
accounts in each time category.
Aging Schedule
Days Past Due
Not Yet
Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
$ 1,200
1-30
$ 235
300
31-60
$
Zak, R.
Total
% Uncollectible
$ 3,500
0.01
$ 2,550
0.04
50
325
$ 1,830
0.10
Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750
$ 1,540
0.25
$ 1,240
0.40
These percentages are then multiplied
by the appropriate column totals.
Note: based on historical past
experience
325
$10,660
Aging Schedule
Days Past Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total
% Uncollectible
Estimated
Uncoll. Amount
Not Yet
Due
$ 1,200
1-30
$ 235
300
31-60
$
50
$ 3,500
0.01
$ 2,550
0.04
325
$ 1,830
0.10
$
$
$
35
102
183
Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750
$ 1,540
0.25
$ 1,240
0.40
$
$
385
496
The column totals are then added to
arrive at the total estimate of
uncollectible accounts of $1,201.
325
$10,660
$ 1,201
Aging of Accounts Receivable
Days Past Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total
% Uncollectible
Estimated
Uncoll. Amount
Not Yet
Due
$ 1,200
1-30
$ 235
300
31-60
$
50
$ 3,500
0.01
$ 2,550
0.04
325
$ 1,830
0.10
$
$
$
35
102
183
Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750
$ 1,540
0.25
$ 1,240
0.40
$
$
385
496
325
$10,660
$ 1,201
Record the Dec. 31, 2014, adjusting entry assuming
that the Allowance for Doubtful Accounts currently
has a $50 credit balance.
Aging of Accounts Receivable
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Post.
Ref.
Debit
Credit
1,151
1,151
1,201 Desired Balance After posting, the
Allowance
50 Credit Balance
account would
$ 1,151 Adjusting Entry
look like this . . .
Aging of Accounts Receivable
Adjusting entry Year End
Allowance for Doubtful Accounts
50
Notice that the balance
after adjustment is equal
to the estimate of $1,201
based on the aging
analysis performed
earlier.
1,151
1,201
Balance at
12/31/2014
before adj.
2014 adjustment
Balance at
12/31/2014
after adj.
Aging of Accounts Receivable
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
- Allowance Account Credit Balance
Amount of Journal Entry
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
+ Allowance Account Debit Balance
Amount of Journal Entry
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –
AGING OF ACCOUNTS RECEIVABLE METHOD
Part 1 – During 2015, Santa Cruz Operations reported $300,000 in sales. The company’s allowance for
doubtful accounts has an unadjusted credit balance of $12,000 at December 31, 2015. Santa Cruz
OperationsIndustries accountants prepared the following Aging of Accounts Receivable:
Customer
Total
Alpha Sales
$ 700
Gamma Manufacturing Co.
11,900
Delta Shipping Corp.
2,200
Epsilon Industries
6,000
Theta Manufacturing
1,800
Zeta Industries
600
Other customers
136,800
Totals
$160,000
Number of days unpaid
0-30
30-60
60-90 Over 90
$ 700
$ 11,900
$ 2,200
$ 6,000
1,800
600
88,100 26,900
9,800 12,000
$100,000 $30,000 $12,000 $18,000
Santa Cruz Operations accountants believe that receivables 0-30 days old have a 4% chance of
noncollection. Receivables 30-60 days old have a 10% chance of noncollection. Receivables 60-90 days
old have a 20% chance of noncollection. Receivables over 90 days old have a 40% chance of
noncollection. The company’s allowance for doubtful accounts has an unadjusted credit balance of
$12,000. Prepare the required adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+ Bad Debt Expense (E) –
+
Stockholders’ Equity
– Allowance for Doubtful Accounts (xA) +
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit
balance of $400. Prepare the required adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+ Bad Debt Expense (E) –
+
Stockholders’ Equity
– Allowance for Doubtful Accounts (xA) +
Learning Objectives
Analyze and interpret the accounts receivable
turnover ratio and the effects of accounts
receivable on cash flows.
Receivables Turnover
Receivables
Turnover =
Net Sales
Average Net Trade Receivables
Gaiam reported 2014 net sales of $262,943.
December 31, 2013, receivables were $25,324 and
December 31, 2014, receivables were $30,157.
This ratio measures how many times
average receivables are recorded and
collected for the year.
Receivables Turnover
Receivables
Turnover =
Net Sales
Average Net Trade Receivables
Receivables
$262,943
=
Turnover
($25,324 + $30,157) ÷ 2
= 9.48
This ratio measures how many times average
receivables are recorded and collected for the year.
2008 Receivables Turnover Comparisons
Gaiam
9.48
Revelon
7.57
Mary-Kay
6.51
Avg Days Receivable Outstanding
Gaiam:
Avg Days Sales = # days in year
Outstanding
A/R Turn
= 365 /9.48
Avg Days Sales
Outstanding
= 38.5 days
Revelon:
365/7.57 =
Mary-Kay: 365/6.51 =
48.2 days
56.1 days
Focus on Cash Flows
Add Decrease
in Accounts
Receivable
Sales
Revenue
Subtract
Increase in
Accounts
Receivable
Cash Collected
from
Customers
In class exercise
Recording, Reporting, and Evaluating a Bad Debt Estimate
During 2013, Dorothy's Ceramics Shop had sales revenue of $70,000, of which $25,000 was on credit. At the
start of 2013, Accounts Receivable showed a $4,000 debit balance, and the Allowance for Doubtful Accounts
showed a $300 credit balance. Collections of accounts receivable during 2013 amounted to $19,000.
Data during 2013 follows:
a. On December 31, 2013, an Account Receivable (Toby's Gift Shop) of $700 from a prior year was determined
to be uncollectible; therefore, it was written off immediately as a bad debt.
b. On December 31, 2013, on the basis of experience, a decision was made to continue the accounting policy
of basing estimated bad debt losses on 2.5 percent of credit sales for the year.
Required:
1. Give the required journal entries for the two items on December 31, 2013 (end of the accounting period).
2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the
income statement and balance sheet for 2013. Disregard income tax considerations.
3. On the basis of the data available, does the 2.5 percent rate appear to be reasonable? Explain.
Learning Objectives
Report, control, and safeguard cash.
Cash and Cash Equivalents
Checks
Money
Orders
Cash and
Cash
Equivalents
Certificates
of Deposit
Bank Drafts
T-Bills
Internal Control of Cash
Internal control refers to policies and
procedures that are designed to:
Properly
account
for assets.
Safeguard
assets.
Ensure the
accuracy of
financial
records.
Cash is the asset most susceptible to theft and fraud.
Internal Control of Cash
Custody
Separation
of Duties
Recording
Authorization
Internal Control of Cash
Bank
Reconciliations
Daily
Deposits
Cash
Controls
Payment
Approval
Purchase
Approval
Check
Signatures
Prenumbered
Checks
Bank Reconciliation
Explains the difference between cash
reported on bank statement and cash
balance on company’s books.
Provides information for
reconciling journal entries.
Bank Reconciliation
Balance per Bank
Balance per Book
+ Deposits in Transit
+ Deposits by Bank
(credit memos)
- Outstanding Checks
- Service Charge
- NSF Checks
± Bank Errors
± Book Errors
= Correct Balance
= Correct Balance
Bank Reconciliation
All
Balance per Bank
reconciling
items
on
the
+ Deposits in Transit
book side
require an
- Outstanding Checks
adjusting
entry
to
the
± Bank Errors
cash account.
= Adjusted Balance
Balance per Book
+ Deposits by Bank
(credit memos)
- Service Charge
- NSF Checks
± Book Errors
= Correct Balance
Bank Reconciliation
Example:
July 31 bank reconciliation statement and the
resulting journal entries for the Simmons
Company.
• The July 31 bank statement indicated a cash
balance of $9,610
• Cash ledger account on that date shows a balance
of $7,430.
Bank Reconciliation
• Outstanding checks totaled $2,417.
• A $500 check mailed to the bank for deposit had not
reached the bank at the statement date.
• The bank returned a customer’s NSF check for $225 received
as payment of an account receivable.
• The bank statement showed $30 interest earned on the
bank balance for the month of July.
• Check 781 for supplies cleared the bank for $268 but was
erroneously recorded in our books as $240.
• A $486 deposit by Acme Company was erroneously credited
to our account by the bank.
Bank Reconciliation
A
$486 deposit
by Acme
Ending
bank balance,
July 31Company was
$ 9,610
erroneously credited to our account by the
Additions:
Outstanding checks totaled $2,417.
bank.
Deposit in transit
500
Deductions:
Bank error
$ 486
A $500 check mailed to the bank for deposit
Outstanding
checks
2,417
2,903
had not
reached
the bank at the
statement
Correct cash balance
$ 7,207
date.
Bank Reconciliation
Ending bank balance, July 31
$ 9,610
Additions:
Deposit in transit
500
The bank statement showed $30 interest
Deductions:
earnedBank
on the
for the
errorbank balance $
486 month of
July. Outstanding checks
2,417
2,903
Check 781 for supplies cleared the bank
Correct cash balance
$ 7,207
for $268 but was erroneously recorded in
ourEnding
books
asbalance,
$240.aJuly
($268-$240=$28)
The
bankbook
returned
customer’s
NSF $ 7,430
31
check
for $225 received as payment of an
Additions:
account
receivable.
Interest
30
Deductions:
Recording error
NSF check
Correct cash balance
$
28
225
253
$ 7,207
Bank Reconciliation
GENERAL JOURNAL
Date
Description
Jul 31 Cash
Post.
Ref.
Debit
30
Interest Revenue
31 Supplies Inventory
Accounts Receivable
Cash
Credit
30
28
225
253
Recording Discounts and Returns
Credit Card Sales
On January 2, a Gaiam Retail Store credit card
sales were $3,000. The credit card company
charges a 3% service fee.
Prepare the Gaiam’s journal entry.
Credit Card Sales
On January 2, a Gaiam’s Retail store credit card
sales were $3,000. The credit card company
charges a 3% service fee.
Prepare the Gaiam’s journal entry.
Credit Card Discounts are reported
as a contra-revenue account.
Sales Discounts
On January 6, Gaiam sold $1,000 of merchandise
on credit with terms of 2/10, n/30.
Prepare the Gaiam’s journal entry.
GENERAL JOURNAL
Date
Jan.
6
Description
Debit
Credit
Sales Discounts
On January 6, Gaiam’s sold $1,000 of merchandise
on credit with terms of 2/10, n/30.
Prepare the Gaiam’s journal entry.
GENERAL JOURNAL
Date
Jan.
Description
6 Accounts Receivable
Sales Revenue
Debit
Credit
1,000
1,000
Sales Discounts
On January 14, Gaiam receives the
appropriate payment from the customer for
the January 6 sale.
Prepare the Gaiam’s journal entry.
GENERAL JOURNAL
Date
Jan. 14
Description
Debit
Credit
Sales Discounts
On January 14, Gaiam receives the
appropriate payment from the customer for
the January 6 sale.
Prepare the Gaiam’s journal entry.
$1,000 × 2% = $20 sales discount
$1,000 - $20 = $980 cash receipt
GENERAL JOURNAL
Date
Description
Jan. 14 Cash
Sales Discounts
Accounts Receivable
Contra-revenue account
Debit
Credit
980
20
1,000
Sales Discounts
If the customer remits the appropriate
amount on January 20 instead of
January 14, what entry would Gaiam
make?
Sales Discounts
If the customer remits the appropriate
amount on January 20 instead of
January 14, what entry would Gaiam
make?
GENERAL
Since the customer
paidJOURNAL
outside of the discount
Date
Description
period, a sales
discount is not Debit
granted. Credit
Jan. 20 Cash
Accounts Receivable
1,000
1,000
Sales Returns and Allowances
On July 8, before paying, a customer returns $500 of
sandals originally purchased on account from
Gaiam. The sandals originally cost Gaiam $300.
Prepare the Gaiam journal entry.
Sales Returns and Allowances
On July 8, before paying, a customer returns $500 of
sandals originally purchased on account from
Gaiam. The sandals originally cost Gaiam $300.
Prepare the Gaiam’s journal entry.
GENERAL JOURNAL
Date
July
Description
8 Sales Returns and Allowances
Debit
500
Accounts Receivable
July
8 Merchandise Inventory
Cost of Goods Sold
Credit
500
300
300
Applying the Revenue Principle in
Special Circumstances
Delayed Revenue Recognition: Installment
Method
Generally, revenue is recognized when:
 An exchange has taken place.
 The earnings process is nearly complete.
 Collection is probable.
Uncertain collectibles result in delaying
revenue recognition until cash is collected.
Installment method: revenue is recognized as cash
is collected, often over several accounting periods.
Revenue Recognition Before the Earnings
Process
is Complete: Long-Term Construction Contracts
Completed Contract
Method
Percentage-ofCompletion Method
 Revenue and expenses
are recognized in the year
the contract is completed.
 Construction-in progress
years show no revenue
or expenses.
 Revenue and expenses
recognized each year as
work is accomplished.
 Revenues each year are
based on the ratio of costs
incurred to total costs.
Revenue Recognition Before the Earnings Process
is Complete: Long-Term Construction Contracts
•An example of the percentage-of-completion method.
Acme Construction is constructing a building for Jones Foods
over a three-year period for a total price of $50,000,000.
Acme reported the following progress in year one:
Estimated total cost
Cost incurred in year one
Year 1
40,000,000
10,000,000
How much revenue and expense
should be recognized on the
project in year one using the
percentage of completion method?
Year 2
Year 3
Revenue Recognition Before the Earnings Process is
Complete: Long-Term Construction Contracts
Acme Construction is constructing a building for Jones Foods
over a three-year period for a total price of $50,000,000.
Acme reported the following progress in year one:
Estimated total cost
Cost incurred in year one
Year 1
40,000,000
10,000,000
Year 2
Year 3
Percent complete =
Total costs incurred to date
Estimate of total project cost
Percent complete =
$10,000,000
= 25%
$40,000,000
Revenue Recognition Before the Earnings Process is
Complete: Long-Term Construction Contracts
Acme Construction is constructing a building for Jones Foods
over a three-year period for a total price of $50,000,000.
Acme reported the following progress in year one:
Estimated total cost
Cost incurred in year one
Year 1
40,000,000
10,000,000
Year 2
Year 3
$10,000,000
Percent complete =
= 25%
$40,000,000
Construction revenue (25% of $50,000,000)
Construction expense
Construction income
$
$
12,500,000
10,000,000
2,500,000
Assignments:
See web: http//cabrillo.blacboard.com
This will be updated weekly as required
•Update your weekly journal for the Final Journal
•Work weekly on your final project, do the analysis
with information learned during the week