Sales and Accounts Recievable

Sales and Accounts Recievable - SALES AND ACCOUNTS...

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SALES AND ACCOUNTS RECEIVABLE Lessons Six and Seven
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LESSION SIX Sales and The Allowance Method
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SALES ACTIVITIES – THE SALE z Your store makes a sale of $10,000 on account, 2/10, n/30.
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SALES ACTIVITIES – THE SALE Accounts Receivable 10,000 Sales 10,000
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SALES ACTIVITIES – THE RETURN z The customer then returns 1,000 of the merchandise.
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SALES ACTIVITIES – THE RETURN Sales Returns and Allowances 1000 Accounts Receivable 1000 Sales Returns and Allowances account is a contra –revenue.
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SALES ACTIVITIES – RECEIPT OF THE PAYMENT z At this point, the customer owes you $9,000 and was offered a discount of 2% if he or she paid you within 10 days
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SALES ACTIVITIES – RECEIPT OF THE PAYMENT The discount is based on the actual receivable not on the original sale. Sale 10,000 Sales Returns and Allow. 1,000 Current Receivable 9,000
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SALES ACTIVITIES – RECEIPT OF THE PAYMENT Current A/R 9,000 x .02 Sales Discount 180 Net received in cash 8,820
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SALES ACTIVITIES – RECEIPT OF THE PAYMENT Cash 8820 Sales Discount 180 Accounts Receivable 9000 The Sales Discount account is a contra- revenue.
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SALES ACTIVITIES – RECEIPT OF THE PAYMENT To record the receipt of the payment if the customer misses the discount date: Cash 9000 Accounts Receivable 9000
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SALES ACTIVITIES – CONTRA- ACCOUNTS z Sales returns and Allowances and Sales Discounts are contra-revenue accounts and used to reduce Sales on the Income Statement.
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SALES ACTIVITIES – THE INCOME STATEMENT z The income statement for a merchant would begin with: Sales - Sales Discounts - Sales Returns and Allowances Net Sales
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THE ALLOWANCE METHOD
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ACCOUNTS RECEIVABLE – BAD DEBTS z Even if we use good credit policies, some of our customers will not pay us. z The Matching Principle requires that businesses who normally have such accounts use the Allowance Method.
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THE ALLOWANCE METHOD Assume the following year–end balances: Accounts Receivable Dr | Cr Allowance for Bad Debts 90000 | Dr | Cr | 10,000
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THE ALLOWANCE METHOD z The Allowance for Bad Debts is a contra – asset. z A contra-asset is an account that is an asset that has a credit balance. z The balance of the Allowance for Bad Debts is our estimate of what we expect to lose from our receivables.
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THE ALLOWANCE METHOD z On the balance sheet, we would see: Accounts Receivable 90,000 - Allowance for Bad Debts 10,000 80,000 The $80,000 is the net realizable value or what we expect to receive from our receivables.
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THE ALLOWANCE METHOD – THE ADJUSTING ENTRY z It is only an estimate a) Bad Debt Expense 1000 Allowance for Bad Debts 1000
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