Copy of Set the Stage for Chapter 5

Copy of Set the Stage for Chapter 5 - Set the Stage for...

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Set the Stage for Chapter 5 In Chapter 2 you learned that customers sometime pay for goods or services received ‘on account’- meaning they receive the goods or services immediately and promise to pay cash for those goods or services at some future point in time. However, you also learned that accrual accounting means you record revenue in the period in which it is earned, even if the cash comes at a later date. Since every transaction must impact at least 2 accounts in order for the accounting equation to stay in balance, you learned that Accounts Receivable is the asset created to establish those amounts that customers promise to pay in the future because goods and services have already been delivered. But what if customers don’t pay their bills? Does that ever happen? You bet! But you don’t know which customers won’t pay their bills at the time the sale is made and the revenue is recorded. If you did know exactly which customers won’t be able to pay, you wouldn’t allow them to purchase goods or services ‘on account’ in the first place! In order to maintain the matching concept, companies must estimate the amount of sales ‘on account’ that won’t be repaid and record that estimated amount as an expense at the same time the revenue from that sale is recognized. Whew! How is that done? A company can use prior experience or industry averages (if it’s a new company) to estimate how much customers typically don’t pay on their bills. In this chapter, you will learn about a new type of account called a contra account. A contra account is associated with an asset, liability, or equity account and it adjusts the balance of that associated account. In our case of Accounts Receivable, a contra asset account is established
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This note was uploaded on 02/05/2012 for the course ACCT 2100 taught by Professor Smith during the Spring '08 term at Kennesaw.

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Copy of Set the Stage for Chapter 5 - Set the Stage for...

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