chap7mod3 - Introduction to Financial Accounting Chapter 7,...

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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 1 Chapter 7, Module 3 Chapter 7, Module 3 Slide 1 AMIS 211 Introduction to Financial Accounting Professor Marc Smith Chapter 7 Module 3 Chapter 7 Module 3 Hi everyone. Welcome back. Let’s go ahead and continue our discussion of Accounts Receivable. And, remember where we left off: We left off saying: “Hey look! When you sell goods on account, not everybody pays.” It is a fact of doing business. So, we have to record what is called: bad debt expense. So, let’s just pick up right there. And, let’s move to the next slide.
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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 2 Chapter 7, Module 3 Slide 2 Chapter 7 Module 3: Bad Debts Remember – we estimate the amount of bad debt expense in order to adhere to the Matching Concept The issue here is that the company does NOT know when the estimate is made which customers will not pay – they only know that some will not pay QUESTION: What happens when the company determines a specific customer will not pay? And, let’s remember that bad debt expense is an estimate. It must be estimated. We need to record it immediately when the sales happen in that same year in order to conform to the Matching Concept—in order to conform to Generally Accepted Accounting Principles (GAAP). So, bad debt expense is an estimate. Now, the issue here is: we don’t know which customers won’t pay us. We don’t know which specific individual customers won’t pay. We only know that there is some percentage of those folks that will not pay their bill. That is why we make an estimate of bad debt expense every year. So, the question, then, becomes: What do you do when you finally decide that a customer won’t pay you? Remember in the previous Module my example about: you make a credit sale to me; I don’t pay; so then you go through all of this process of trying to collect; and after you exhaust all of these different ways of trying to collect,
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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 3 Chapter 7, Module 3 you finally say: “It is just not worth my time anymore. We need to eliminate that customer from our Balance Sheet.” And, we said, “Well, look! That is not when the bad debt expense is recorded.” It is recorded in the year of the credit sale to conform to Matching. So, what do you do when you finally decide this specific individual customer is not going to pay their bill? Move to the next slide. Slide 3 Chapter 7 Module 3: Write-Offs ANSWER: They must write-off the customer’s account receivable Date Account Titles Debit Credit General Journal Any Allowance for Doubtful Accounts X Accounts Receivable X Note: A write-off can occur at any point during the year.
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chap7mod3 - Introduction to Financial Accounting Chapter 7,...

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