Management 1A Lecture Notes (6)

Management 1A Lecture Notes (6) - Management 1A Lecture...

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Management 1A Lecture Notes Professor Gardner-Treloar Week 6
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Accounts Receivable Dr A/R, cr sales Methods for handling bad debts or uncollectible accounts Collectability is a major business problem associated with accounts receivable Every business with accounts receivable must estimate an Allowance for Uncollectible Accounts and record and a Bad Debt Expense Direct Write off Method (for the IRS) This is not proper GAAP but tax laws require it -it violates two important GAAP principles - matching – the costs incurred to generate revenues should be expenses in the same accounting period as the revenues -if the sale happened in 2009 but you didn’t decide that the account won’t be paid for until 2010, then you aren’t matching - conservatism – do no overstate assets and income Dr bad debt expense, cr A/R if people don’t pay the A/R Allowance Method (GAAP) Income Statement Approach (% of Credit Sales) -example Year #1 Credit Sales (on account) 1,000,000 X % Bad 2% Bad Debt 20,000 This percentage on previous year’s data for a new business look at other firms in the same industry for an estimate Preparing the journal entry to accrue for the allowance of Bad Debt: Dr bad debt expense Cr “allowance” Post the allowance in an allowance account Allowance is a contra-account for A/R Accounts Receivable Allowance 20,000 400,000 Determine the Net Realizable Value: A/R 400,000 Allowance (20,000 ) NRV 380,000 Bad debt expense is an expense account
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Allowance for bad debts is a contra-asset account -It is an anonymous allowance account -We don’t know which customers are going to pay and which aren’t Year #2 Credit Sales 1,500,000 X % Bad 2% Bad Debt 30,000 Prepare the journal entry to accrue for the allowance for Bad Debt Dr bad debt expense 30,000 Cr allowances 30,000 Post the Allowance in the Allowance account
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Management 1A Lecture Notes (6) - Management 1A Lecture...

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