ContraRevenue Accounts, Receivables, and Bad Debts

ContraRevenue Accounts, Receivables, and Bad Debts -...

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Contra-Revenue Accounts, Receivables, and Bad Debts 3 major types of businesses— 1) service (e.g. accounting. consulting or law firm), 2) manufacturing (e.g. auto manufacturer) & 3) merchandising (e.g. department or grocery store) Each type of business has some unique revenue recognition issues, but generally for manufacturing & merchandising, revenue is recognized when goods are shipped or title changes; for service businesses, when the project is completed. 3 Post-Sale Events that Would Reduce Revenue Already Recorded 1. Offer discount if pay early—do not know if customer will take advantage of discount until payment received. Need to relieve Accounts Receivable for original amount of sale recorded, but receive lesser amount of cash. Difference is recorded in Sales Discounts account— contra revenue account —will appear in income statement as a reduction of Sales Revenue. 2. Give price adjustment ( allowance) to dissatisfied customer. Need to relieve A/R for original amount of sale recorded, but receive a lesser amount of cash. Difference is recorded in account— contra revenue account —will appear in income statement as a reduction of Sales Revenue. 3. Goods are returned from customer ( sales returns) —Need to relieve A/R since will ; Also reverse cost of goods sold & restore inventory. --Use contra revenue accounts rather than reduce Sales Revenue directly to provide information regarding products, managers, policies, so can make better decisions in future. ACCOUNTS RECEIVABLE Current asset; amount that customer/client owes the company for goods or services provided; normally expected to be paid within 30 days.
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ContraRevenue Accounts, Receivables, and Bad Debts -...

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