Introtoacc Week 7 Lecture-2

Introtoacc Week 7 Lecture-2 - Introduction to Accounting...

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Introduction to Accounting Module 7 Receivables Inventories 1
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CHAPTER 18 Receivables Sections 18.1-18.4 of Hoggett text only
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Accounts Receivable Specifically relate to the sale of goods or provision of services Bills Receivable More formal arrangement than account receivable Mostly used for financing purposes Other Receivables Similar to accounts receivable but not related to goods or services 3 TYPES OF RECEIVABLES
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Also known as Trade Debtors Recognition Usually at time of sale Need to consider discounts and allowances Valuation Not all amounts owing will be collected Need to account for Impairment or Bad Debts 4 ACCOUNTS RECEIVABLE
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Affects valuation of our Accounts Receivable Risk of doing business on credit Minimised through credit checks Unpaid amounts are a business expense Written off periodically (reduce Accounts Receivable and incur as expense) Two methods to account for bad debts Allowance method Direct write-off method 5 BAD AND DOUBTFUL DEBTS
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Estimate of doubtful debts made at the end of the period Adjusting entry recognises expense and contra-asset 6 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS General Journal June 30 Bad Debts Expense 6 000 Allowance for Doubtful Debts 6 000 (Estimated bad debts expense)
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Records the expense in same period as the income to which it relates Creates an allowance that will be deducted from accounts receivable on the balance sheet Allowance also known as ‘provision’ AASB 137 Provisions, Contingent Liabilities and Contingent Assets 7 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS
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8 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS CC LTD Balance Sheet (partial) as at 30 June 2015 CURRENT ASSETS Cash at bank $ 58 500 Accounts Receivable $110 000 Less : Allowance for doubtful debts 6 000 104 000 Inventory 71 000 TOTAL CURRENT ASSETS $233 500
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Generally based on combination of Past experience Forecasts of future economic and business conditions Involves considerable degree of judgement Two common methods Percentage of net credit sales Ageing of accounts receivable 9 ESTIMATING DOUBTFUL DEBTS
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History of bad debts is analysed to establish relationship between credit sales and bad debts GST is excluded from calculation Year-end adjustment to recognise bad debts expense 10 PERCENTAGE OF NET CREDIT SALES METHOD General Journal June 30 Bad Debts Expense 8 470 Allowance for Doubtful Debts 8 470 (Bad debts expense for the year, 1% of Credit Sales (ex GST))
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Based on length of time overdue Older accounts more likely to be bad Past accounting records analysed Calculates the amount the allowance for doubtful debts should be, therefore what is recorded is an adjustment to the year end balance Approach consistent with the Conceptual Framework 11 AGEING OF ACCOUNTS RECEIVABLE METHOD
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12 EXAMPLE - AGEING OF ACCOUNTS RECEIVABLE METHOD
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Estimated bad debts amt Age Category Amount % Amount Not yet due $61 600 1 $ 616 1-30 days overdue 11 660 5
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