Accounting Fundamentals
Dr. Yan Xiong
Department of Accountancy
CSU Sacramento
The lecture notes are primarily based on Reimers
(2003).
7/11/03
Chapter 7: Sales and Collection Cycle
Agenda
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Control Procedures for Cash
Bank Reconciliations
Accounts Receivables and Bad Debts
Other Accounting Issues
Agenda

Control Procedures for Cash
Controlling CASH
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Cash has universal appeal
and ownership is difficult to
prove.
Both cash receipts and
cash payments should be
recorded immediately when
received and made.
Checks should be
prenumbered and kept
secure.
Safeguarding Cash

Separation of duties
Different people receive and disburse
the cash.
Procedures for the record keeping of
cash receipts and disbursements are
separate.
Handling the cash and record keeping
are completely separate.
Procedures To Have In Place
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Both cash receipts and cash payments
should be recorded immediately when
received and made.
Keep cash under strict physical control,
and deposit cash receipts daily.
Have separate approvals for purchases
and the payment for those purchases.
Procedures
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Use pre-numbered checks, and keep a log
of electronic transfers.
Payment approval, check signing, and
electronic funds transfer should be
assigned to different individuals.
Bank accounts and cash balances should
be reconciled monthly.
Accounting For Cash:
Reconciling The Bank Statement
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An important part of internal
control
Need for calculating a true cash
balance
Two “sides” to be reconciled
 balance per bank
 balance per books
If there are any mistakes or
transactions that have not been
recorded in the company’s books,
the company’s records should be
updated.
Agenda

Bank Reconciliations
Terminology
Bank statement
Monthly report prepared by bank that
contains details of a company’s
deposits, disbursements, and bank
charges.
Bank reconciliation
Report prepared by the company after
receiving the bank statement that
compares the bank statement with the
company’s records to verify the
accuracy of both.
More Terminology
Outstanding check
A check written by the company that
has been recorded on the company’s
records but has not yet cleared the
bank
Deposit in transit
A deposit that the company has made
and recorded, but it has not reached
the bank’s record keeping system yet.
More Terminology
NSF check
A “bad” check written by a customer that
must be deducted from the company’s
records. The company recorded the check
as a cash receipt (and then deposited it),
but the check writer didn’t have the money
in his or her account to cover it. The bank
will have already deducted it from the
company’s balance (in the bank’s records),
but the company will have to make an
adjustment to their records.
More Terminology
Credit memo
An addition to the company’s balance in
the bank’s records for a reason such as
the bank having collected a note for the
company (from a third party who owed
the company).
Debit memo
A deduction from the company’s balance
in the bank’s records for a reason such as
a bank service charge.
An Example Of A Reconciliation
Given the following information:
Balance per bank at 4/30
Balance per books at 4/30
Outstanding checks at 4/30
Bank service charge for April
Deposit in transit at 4/30
Customer’s NSF check
(returned with bank statement)
Bank collected note receivable
company
$8,750
6,900
1,380
30
400
100
1,000 for
Balance Per Bank Section
Of The Reconciliation
Balance per bank
Plus: Deposit in transit
Less: Outstanding checks
Cash Balance at 4/30
$8,750
400
(1,380)
$7,770
Balance Per Books Section Of The
Reconciliation
Balance per books
$6,900
Plus: Note collected by bank 1,000
Less: NSF check returned
(100)
Service charge
( 30)
Cash balance at 4/30
$7,770

Bank Reconciliation: Necessary Entries to
Correct Account Balances
How would the collection of the note
receivable be recorded in the journal?
Date
Transaction
Apr 30 Cash
Note receivable
Debit Credit
1,000
1,000

Bank Reconciliation: Necessary Entries to
Correct Account Balances
How would the NSF check and the bank
service charge be recorded in the journal?
Date
Transaction
Apr 30 Accounts receivable
Operating expenses
Cash
Debit Credit
100
30
130
There Is One True
Cash Balance
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Bank balance per
statement is
reconciled to the
TRUE cash balance
Book balance
(company’s records)
is reconciled to the
TRUE cash balance
Cash (Bank) Reconciliation Has
Two “Independent” Parts
Balance per bank
++ deposits in transit
++
-- outstanding
checks
-True cash balance
Balance per books
++ collections for us
made by the bank
++
-- NSF checks (from
customers)
-- Service charges
True cash balance
Agenda

Accounts Receivables and Bad Debts
Accounts And Notes Receivable
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A/R are the expected future cash
receipts of a company. They are
typically small and are expected to
be received within 30 days.
N/R are used when longer credit
terms are necessary. The note
specifies the maturity date, the rate
of interest, and other credit terms.
Value Of Receivables
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Receivables are reported at
their face value less an
allowance for accounts which
are likely to be uncollectible.
The amount which is actually
expected to be collected is
called the net realizable value
(NRV).
GAAP requires that A/R be reported
at NRV.
Two Methods
GAAP
Not GAAP
Allowance Method
Direct Write-Off
Method
A/R
Method
Sales
Method
Used only when bad debts
are a very small item or
when credit sales are
insignificant.
The Most Common Method
Allowance method
Estimate the bad debt expense as an
adjustment when it is time to prepare the
financial statements.
Record the amount as a reduction in
ACCOUNTS RECEIVABLE, even though
you don’t know whose accounts will be
“bad.”
Allowance Method, continued
We
will base the estimate on:
Sales, or
Accounts Receivable
This method attempts to match the
expense (bad debt) with the revenue
(sale) by recording the expense in the
same period as the sale even though
the company has not specifically
identified which accounts will go
unpaid.
The Other Method
Direct Write-Off
No estimates of bad debts are made.
Only when a specific account is known to be
uncollectible (customer files bankruptcy, for
example) is bad debt expense recorded.
This doesn’t do a very good job of matching
the revenue (sale) with the expense (bad debt),
because a company often discovers an
account is uncollectible in a period
subsequent to the one in which the sale was
made.
How Do We Report A/R On The
Balance Sheet?
Net Realizable Value of AR = what we expect to collect
On the balance sheet:
Accounts Receivable
less allowance for
uncollectible accounts
$3,000
Net AR
$2,800
(200)
1. On April 1, provided $5,000 Services
On Account.

How would providing services on account
be recorded in the journal?
Date
Transaction
Apr 1 Accounts receivable
Service revenue
Debit Credit
5,000
5,000
2. On April 15, Collected $4,000 Cash
From Accounts Receivable.
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How would the collection on account be
recorded in the journal?
Date
Transaction
Apr 15 Cash
Accounts receivable
Debit Credit
4,000
4,000
3. Adjusting Entry Booked To Reflect The
Estimate Of 5% Of Ending A/R To Be
Uncollectible.
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How would the adjusting entry be recorded
in the journal?
Date
Transaction
Debit Credit
Dec 31 Bad debt expense
50
Allowance for uncollect. accts.
50
Financial Statements
At The End Of Year 19X4:
Income Statement
For the year 19X4
Sales
Bad debt expense
Net Income
$5,000
50
Statement of Cash Flows
For the year 19X4
Cash from operations $4,000
Cash from investing
-0Cash from financing
-0-
$4,950
Total change in cash
$4,000
Balance Sheet
At 12/31/X4
Assets:
Cash
AR 1,000
Allowance
Net A/R
Total Assets
Liab. + Equity:
$4000
(50)
950
$4,950
RE
$4,950
$4,950
1-b. On Feb 5, wrote Off A $40 A/R That
Was Determined To Be Uncollectible.
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How would the actual write-off of accounts
receivable be recorded in the journal?
Date
Transaction
Debit Credit
Feb 5 Allowance for uncollect. accts. 40
Accounts receivable
40
1. On March 8, Provided $6,000 Services
On Account.
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How would providing services on account
be recorded in the journal?
Date
Transaction
Mar 8 Accounts receivable
Service revenue
Debit Credit
6,000
6,000
2. On March 23, Collected $4,500 Cash
From Accounts Receivable.
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How would the collection on account be
recorded in the journal?
Date
Transaction
Mar 23 Cash
Accounts receivable
Debit Credit
4,500
4,500
Where Do We Stand?
We overestimated bad debts by $10--we estimated $50
but we only wrote off $40 in the subsequent year.
This year our estimate is 5% of $2460 (BB 1,000 + 6,000
credit sales - $4,500 collections -$40 accounts written off)=
$123. But since we overestimated last year, we only need
to record $113 this year.
3. Adjusting Entry Booked To Reflect The
Estimate Of 5% Of Ending A/R To Be
Uncollectible.

How would the adjusting entry be recorded
in the journal?
Date
Transaction
Debit Credit
Dec 31 Bad debt expense
113
Allowance for uncollect. accts.
113
To summarize:
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Two methods:
 the allowance
method
 the direct writeoff method
Which one
involves
estimating future
uncollectibles?
Summary Of The Allowance
Method Continued
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One way to estimate bad debt expense
is to use a percentage of ending A/R
(or an aging schedule)
When an actual account is written off
as uncollectible, it is credited out of
A/R and debited out of the Allowance.
THERE IS NO NET EFFECT ON
ASSETS and NO EXPENSE at the time
of the write-off.
Agenda
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Other Accounting Issues
Other Accounting Issues Related
to Sales: Warranty Costs
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Why give warranties?
When should expense be recognized?
We will
repair or
replace this
item...
Warranty
Warranties
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How is the warranty
obligation met and
subsequently removed from
the balance sheet?
How do all of the above affect
financial statements?
What other issues are similar
to warranties?
Transaction Analysis
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Assume the following selected events
occurred at Cell-It. For each event:
Determine how the accounting
equation was affected.
Determine the effect on the financial
statements.
Record the event in t-accounts.
1. On Jan 1, Sold Merchandise For $5,000 Cash
That Had Originally Cost $4,000. These Goods
Were Sold With A Two-year Warranty.
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How would the sale of merchandise be recorded
in the journal?
Date
Transaction
Jan 1 Cash
Sales revenue
Cost of goods sold
Inventory
Debit Credit
5,000
5,000
4,000
4,000
2. Estimated That $100 Of Warranty Cost Will Be
Incurred Over The Next Two Years On The Goods
Sold In Transaction 1.

How would the adjusting entry be recorded
in the journal?
Date
Transaction
Debit Credit
Dec 31 Warranty expense
100
Estimated warranty liability
100
3. On February 7, A Customer Returned Goods
Under Warranty For Repair. The Cost Of The
Repair Was $30 Cash.
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How would the cost of the repair be
recorded in the journal?
Date
Transaction
Feb 7 Estimated warranty liability
Cash
Debit Credit
30
30