Lectures ACCT1501 self-notes W8-12.docx

Lectures ACCT1501 self-notes W8-12.docx - Week 8 Accounts...

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Week 8: Accounts receivable and further record-keeping 8.1. Receivables - Receivables are an asset that occurs when a service has been provided but cash will not be received until the following period. - Common examples; accounts receivable, interest receivable on loans, commission earned and unbilled revenues. - At time of sales: Dr Account receivable, Cr Sales - When cash is received: Dr Cash. Cr Account receivable - Sales on credit: Benefits: Earn more revenue if willing to sell to customers who wish to buy on credit Costs: Risk of not being paid o Bad Debts – part of customers’ debts to the company not collected i.e., An Expense to the company (Bad Debts Expense) o Matching principle = Recognising bad debts expense at the same time as sales revenue o Current asset should NOT be recorded at greater than the net realisable value (NRV) i.e., lower of cost or net realizable value (NRZ) 8.2. Control accounts and contra accounts Control accounts : every balance sheet account that is made up for many items. - Example; account receivable, account payable, inventory Contra accounts : balances that are in the opposite direction to those of the control accounts with which they are associated. - Allows us to recognize expense and related value changes to assets w/o changing the control account. - Account receivable – Allowance for doubtful debts (AFDD) - Property, plant and equipment – Accumulated depreciation (NCA) - Intangibles – Accumulated amortization - Inventory – Provision for obsolescence 8.3. Accounts receivable and contra accounts i. Valuation of accounts receivable - Net realizable value (NRZ) = the amount expected to be collected - The estimated collectable amount is gross accounts receivable minus the AFDD. Therefore, the allowance function to adjust the net values own to the lower of cost (original value) and the current estimated collectable amount. - On the BS, acc. Receivable are valued at this net amount. ii. Other Receivables - Two main kinds of receivables; trade debtors and other debtors - First kind is notes receivable which is supported by a signed contract between buyer and seller that specifies a payment schedule, an interest rate and other legal details. Such notes are often used for large and/or long-term receivables (e.g., sales of motor vehicles, houses, loans by banks) - Second kind is loans to employees, officers and shareholders, loans to associated companies, tax refunds the company is waiting for and other receivables not arising from revenue transactions. Included under the heading ‘Other debtors’
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iii. Allowance for doubtful debts. - Bad debts expense = a portion of the sales on account will be doubtful, and that portion should be deducted from revenue in determining profit for the period. For 1 st method: Direct write off method Dr Bad debts expense Cr Acc. Receivable For 2 nd method: Allowance method Create an ‘AFDD’ Dr Bad debts expense Cr AFDD Writing off debts Dr AFFD Cr Acc. Receivable AFDD a contra asset account Estimate accounts receivable that are ‘doubtful’
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