Lecture_3_FA_3_Spring_2011_2slide

Lecture_3_FA_3_Spring_2011_2slide - ACCT 615 Lecture 3...

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NJIT_ACCT615_WX_LECTURE 3 1 1 NJIT_ACCT615_WX Lecture 3 Fundamentals of Financial Accounting (3) ACCT 615 NJIT_ACCT615_WX 2 - Selective Accounting Issues - 1. Accounting for Receivables & Bad Debts 2. Accounting for Inventory & COGS (Cost of Goods Sold) 3. Accounting for PPE & Depreciation 4. Debt Financing vs. Equity Financing a) Accounting for Bonds - Debt Financing b) Accounting for Stocks - Equity Financing c) Accounting for Dividends Learning Points
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NJIT_ACCT615_WX_LECTURE 3 2 3 NJIT_ACCT615_WX Point (1) Accounting for A/R & Bad Debts - Allowance Method - NJIT_ACCT615_WX 4 Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable Notes Receivable Receivables Written promises to pay a sum of money on specified future date If from sales - “Trade Receivables”
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NJIT_ACCT615_WX_LECTURE 3 3 NJIT_ACCT615_WX 5 Dr. Accounts Receivable – customer xxx Cr. Sales (or Service) Revenue Dr. Cash Cr. Accounts Receivable – customer xxx A/R is increased (debited) when “work is done” on account ; Revenues are recognized at the same time. General Accounting for A/R A/R is decreased (credited) when cash is collected from customers or when A/R is sold to “factors”. NJIT_ACCT615_WX 6 Uncollectible accounts occur when customers do not pay for items or services they purchased on credit. When A/R became uncollectible, selling company incurred LOSS - bad debt expense (classified as Selling Expense ) is recognized. Major method used to account for A/R and bad debt losses: Uncollectible Accounts Allowance Method
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NJIT_ACCT615_WX_LECTURE 3 4 NJIT_ACCT615_WX 7 Step 1 :AtFYE , record estimated loss from uncollectible accounts (e.g. based on history/experience, bad debt loss is estimated to be $200 as of 12/31/2010 ) Dr. Bad Debt Expense ( estimated loss )2 0 0 Cr. Allowance for Doubtful Accounts (contra- acct) 200 Step 2 : Write off A/R whenever it’s determined to be uncollectible, Dr. Allowance for Doubtful Accounts xxx Cr. Accounts Receivable – xxx customer xxx WHY estimate ? ______________________________________ Journal Entries – Allowance method NJIT_ACCT615_WX 8 Partial Balance Sheet ( as of 12/31/10) ASSETS Cash Accounts Receivable 2,000 Less: Allowance for Doubtful Accounts ( contra-asset acct. ) 200 Net Accounts Receivable 1,800 …… Cash (Net) Realizable Value On Balance Sheet Stat. Presentation – Allowance method Partial Income Statement (for YR 2010) Sales Revenues (earned in year 2010 ) Cost of Goods Sold Gross Profit Bad Debt Expenses ( estimated loss; est. on 12/31/10) 200 On Income Statement
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NJIT_ACCT615_WX_LECTURE 3 5 NJIT_ACCT615_WX 9 Estimation Methods: (1). Inc. Stat. Approach (% of credit sales) (2). Bal. Sheet Approach (% of A/R) a). Composite % of A/R (single %) b). Use “ Aging Schedule (multiple %) When allowance method is used, management need to estimate bad debt amount at the end of each & every fiscal year Bad Debts Estimation A /R NJIT_ACCT615_WX 10 Aging Schedule Method: A more accurate way to estimate uncollectible A/R ; It requires a company to arrange it’s A/R based on their ages ( i.e. how long they’ve been outstanding ) z Current z 1-30 days past due z
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Lecture_3_FA_3_Spring_2011_2slide - ACCT 615 Lecture 3...

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