AFM 101 Chapter 7 notes - AFM 101 Chapter 7 notes...

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AFM 101 Chapter 7 notes Accounting for Revenue Revenue recognition principle requires three criteria to be met 1. Entity has transferred risk and rewards of the good to the buyer 2. Entity does not retain control or ownership of good 3. Amount of revenue can be measured reliably 4. Probably that the economic benefit will flow into the business 5. Cost incurred can be measured reliably Free On Board (FOB) shipping point – ownership of the good changes hand once the good is shipped off. Buyer pays for the shipping. - This means revenues are usually recognized at the time they are shipped out FOB destination - ownership changes after receiver gets the good. Seller pays for shipping - Revenues are usually recognized after the customer has received them Sales to customers Sales to customers can be paid by cash or credit. The reasons why sellers allow customers to use creit cards are because; 1. Increases customer traffic at stores 2. Avoid the cost of providing credit directly to customers as it is hard to keep track of and the chances of bad debts are high 3. Lower losses due to bad cheques 4. Avoiding losses from fraudulent credit card sales (the credit card company absorbs losses) 5. Faster receipt of money (usually the credit card company directly deposits money into the firm’s bank account once the transaction has gone through. It then collect the money from customers later Credit card discount: a fee that is charged by the credit card company for their services (a contra revenue account) - Companies don’t received the full amount of sales because some is given to the credit card company Sales discounts to a business When there is a sale or purchase on credit, there is usually something like 2/10, n/30 This means 2% off if you pay within 10 days and you must pay the net in 30 days Sales/ cash discount is a cash discount used to encourage customers to pay back their amount owing to the company faster. - Quicker cash reduces the need to borrow money to fund operating activities - Also when customers are given an incentive to pay faster, it reduces the chance of bad debs because they don’t have to pay as much and they pay faster (lower interest) One the income statement: Sales discounts is a contra revenue account, and it is put right after sales as Less: cash discounts Journal entry: To record credit sales with cash discounts there are two methods Gross method and Net method Gross method requires you to debit trades receivable and credit revenue for the full amount at first (like how you would record any credit sale) - Then if they pay back within the discount period, you must receive less cash due to the discount. Then to make it balance, you debit cash discounts
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- If they don’t pay within the discount period then just record like any other receivable payoff Net method is not used very often - When sale happens, you assume that they will pay within the discount period. So you will debit cash and credit sales by the amount after discount -
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