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Chapter 09 - ACCOUNTING FOR RECEIVABLES Chapter 9 ACCOUNTS...

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ACCOUNTING FOR RECEIVABLES Chapter 9
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McGraw-Hill/Irwin Slide 2 ACCOUNTS RECEIVABLE Amounts due from customers for credit sales. Credit sales require: Maintaining a separate account receivable for each customer. Accounting for bad debts that result from credit sales.
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McGraw-Hill/Irwin Slide 3 SALES ON CREDIT Date PR Debit Credit Balance Jun 30 1,000 1,000 Jul 1 720 280 CompStore Date PR Debit Credit Balance Jun 30 2,000 2,000 Jul 1 950 2,950 Accounts Receivable Ledger RDA Electronics RDA Electronics 280 $ CompStore 2,950 Total 3,230 $ Schedule of Accounts Receivable Date PR Debit Credit Balance Jul 1 3,230 3,230 General Ledger Accounts Receivable
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McGraw-Hill/Irwin Slide 4 Some customers may not pay Some customers may not pay their account. Uncollectible their account. Uncollectible amounts are referred to as bad amounts are referred to as bad debts. There are two methods of debts. There are two methods of accounting for bad debts: accounting for bad debts: Direct Write-Off Method Direct Write-Off Method Allowance Method Allowance Method VALUING ACCOUNTS RECEIVABLE
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McGraw-Hill/Irwin Slide 5 On January 23 rd , TechCom determined that it can not collect $520 owed by its customer, J. Kent. DIRECT WRITE-OFF METHOD DR CR Jan 23 Bad Debts Expense 520 Accounts Receivable - J. Kent 520 To write-off uncollectible account
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McGraw-Hill/Irwin Slide 6 RECOVERING A BAD DEBT Although uncommon, sometimes an account written off is later collected. How should we prepare the journal entries? On March 11 th , J. Kent was able to make full payment to TechCom for the amount previously written-off.
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McGraw-Hill/Irwin Slide 7 DIRECT WRITE-OFF METHOD DR CR Mar 11 Accounts Receivable - J. Kent 520 Bad Debts Expense 520 To reinstate account previously written-off Mar 11 Cash 520 Accounts Receivable - J. Kent 520 To record payment on account
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McGraw-Hill/Irwin Slide 8 DIRECT WRITE-OFF METHOD What accounting principle would be violated with the direct write-off method? How can the matching principle be complied with under the circumstances? The Allowance Method uses estimation of uncollectible A/R to reflect Bad Debts Expense in the proper period and is required under GAAP
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McGraw-Hill/Irwin Slide 9 MATCHING VS. MATERIALITY Matching requires expenses to be reported in the same accounting period as the sales they help produce. Matching requires expenses to be reported in the same accounting period as the sales they help produce. Materiality states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions. Materiality states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions.
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McGraw-Hill/Irwin Slide 10 ALLOWANCE METHOD At the end of each period, record an estimate of the uncollectible accounts.
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