chap7m5 - Introduction to Financial Accounting Chapter 7,...

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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 1 Chapter 7, Module 5 Chapter 7, Module 5 Slide 1 AMIS 211 Introduction to Financial Accounting Professor Marc Smith Chapter 7 Module Chapter 7 Module 5 Hi everyone. Welcome back. Just as a refresher before we jump into the key point of this Module. Because I know that this is tough—this is not an easy topic. This tends to be one of the more challenging topics that we cover. You really want to keep in mind that your Allowance for Doubtful Accounts is keeping track of two (2) specific items: 1) On the increase—or credit side—it is keeping track of your bad debt expense estimates that you have made. 2) On the decrease—or debit side—it is keeping track of the actual write-offs that you have had. So, at any point in time, you can look at that account. If the balance is on the credit side, we have written off less than we had thought. If the balance is on the debit side, we have written off more than we had estimated that we would write-off.
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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 2 Chapter 7, Module 5 So, that is very crucial. If you need to go back and review those last couple of slides and that little bit of discussion in the previous Module, but you will want to make sure that you are comfortable with that. That said; let’s move to the next slide and let’s begin what we need to deal with in this Module. Slide 2 Chapter 7 Module 5: Bad Debt Expense Remember – we estimate the amount of bad debt expense in order to adhere to the matching concept Companies use one of two methods in estimating bad debt expense: 1 Percentage of sales (Net credit sales method) 2 Percentage of receivables (Aging method) Both bases are GAAP; the choice is a management decision. Reminder: Bad debt expense is an estimate. We must estimate the amount of the expense in order to conform to Matching. So, the last crucial question that we have to answer is: How do they do it? How do companies come up with the estimate of bad debt expense?
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Introduction to Financial Accounting AMIS 211 – Professor Marc Smith 3 Chapter 7, Module 5 And, there are actually two (2) different methods that they can use to estimate the bad debt expense. They can use the 1) Percentage of Sales Method—typically referred to as the Net Credit Sales Method—or they can use the 2) Percentage of Receivables Method—what we call the Aging Method. Note: Both of these methods are acceptable. Both methods are fine under GAAP. The choice of methods is simply a management issue. “Which method do we want to use for our company to estimate bad debt expense?” Now, let’s move to the next slide.
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This note was uploaded on 04/21/2008 for the course ACCT 211m taught by Professor Zeigler/smith during the Winter '07 term at Ohio State.

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chap7m5 - Introduction to Financial Accounting Chapter 7,...

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