current-assets-part-ii

12 credit cards banks and financial services

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Unformatted text preview: and financial services companies have developed credit cards that are widely accepted by many merchants, and eliminate the necessity of those merchants maintaining separate credit departments. Popular examples include MasterCard, Visa, and American Express. These credit card companies earn money off of these cards by charging merchant fees (usually a formula-based percentage of sales) and assess interest and other charges against the users. Nevertheless, merchants tend to welcome their use because collection is virtually assured and very timely (oftentimes same day funding of the transaction is made by the credit card company). In addition, the added transaction cost is offset by a reduction in the internal costs associated with maintaining a credit department. The accounting for credit card sales depends on the nature of the card. Some bank-card based transactions are essentially regarded as cash sales since funding is immediate. Assume that Bassam Abu Rayyan Company sold merchandise to a customer for $1,000. The customer paid with a bank card, and the bank charged a 2% fee. Bassam Abu Rayyan Company should record the following entry: 1-9-X3 Cash 980 Service Charge *** 20 Sales 1,000 Sold merchandise on “bank card;” same day funding, net of fee of 2% assessed by bank Download free ebooks at bookboon.com 8 The Costs and Benefits of Selling on Credit Current Assets: Part II Other card sales may involve delayed collection, and are initially recorded as credit sales: 1-9-X3 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on “nonbank card” **** 1-25-X3 Cash 980 Service Charge 20 Accounts Receivable 1,000 Collected amount due from credit card company; net of fee of 2% Notice that the entry to record the collection included a provision for the service charge. The estimated service charge could (or perhaps should) have been recorded at the time of the sale, but the exact amount might not have been known. Rather than recording an estimate, and adjusting it later, this illustration is based on the simpler approach of not recording the charge until collection occurs. This expedient approach is acceptable because the amounts involved are not very significant. Download free ebooks at bookboon.com 9 Accounting for Uncollectible Receivables Current Assets: Part II 2. Accounting for Uncollectible Receivables Unfortunately, some sales on account may not be collected. Customers go broke, become unhappy and refuse to pay, or may generally lack the ethics to complete their half of the bargain. Of course, a company does have legal recourse to try to collect such accounts, but those often fail. As a result, it becomes necessary to establish an accounting process for measuring and reporting these uncollectible items. Uncollectible accounts are frequently called “bad debts.” 2.1 Direct Write-off Method A simple method to account for uncollectible accounts is the direct write-off approach. Under this technique, a specific account receivable is removed from the accounting records at the time it is finally determined to be uncollectible. The appropriate entry for the direct wr...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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