AC final exam.pdf - current WEEK 11 Accounts Receivable...

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current WEEK 11 Accounts Receivable: Definition: Amounts customers owe on account. “On account” means purchased with a promise to pay in the future. Companies keep track of each individual customer’s account We will focus on aggregated amounts: all customers who owe Often abbreviated as A/R • A/R balance increases (debit) when: Additional sales are made on account • A/R balance decreases (credit): Cash is collected from customers who owe Customer accounts are written off as uncollectible Example: In June, SCE sells 800 bags of coffee to Pete’s Fresh Market at $7 / bag. Pete’s agrees to pay cash in July. When should SCE recognize revenue for this sale? GAAP: Revenue is recognized (recorded) when: 1. The service obligation has been performed (earned) . The seller has delivered the goods or performed the service. 2. Payment is reasonably assured (realizable). The seller is confident that payment will occur in the future. If someone doesnt pay that money , then it will still decrease A/R, even if the account is deemed uncollectable. -requires companies to estimate how much of the money wont be paid off by the customer. • Revenue is accrued: recognized before cash is received. • A/R is an asset representing the customer’s promise to pay.
Once paid, that account is “zeroed”out. Cash collection of A/R does not affect income. A company's balance of A/R on Sept. 1 is $35,000. During the month of September, sales on account are $157,000 while cash collections from customers total $148,000. What is the A/R balance on Sept. 30? End A/R = Beg A/R + sales on account - cash collections = 35,000 + 157,000 - 148,000 = 44,000 Bad Debt • In our example, we assumed Pete’s would pay and it did. In some cases, sales on account will not be collected in cash. Why would a company sell to customers it doesn’t expect to pay? The company doesn’t know which customers won’t pay, but expects (given economic factors) that some ultimately won’t be able to pay. Companies set credit policies to balance: Desire for greater revenues vs. Assurance of collectibility Bad debt expense is recorded to account for the expectation that not all credit sales will be collected. • Some proportion of A/R will not convert to cash Accounting for Bad Debt: Four steps: 1. Record sales on account (current period) 2. Record adjusting entry for bad debt expense (current period) 3. Record write-offs (future periods) 4. Record recoveries, if they occur (future periods) Accounting for Bad Debt: Step 1 • Revenue is earned now (coffee has been delivered). • Realization (cash collection) is expected in the future.
Accounting for Bad Debt: Step 2. Record adjusting entry for bad debt expense • SCE must assess the probability that some portion of the $5,600 credit sales will end up not being collected. • In the second step, we quantify this expectation and incorporate it into the financial statements .

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