Reporting and Interpreting Sales Revenue, Receivables, and Cash Irwin/McGraw-Hill
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1 Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash
2 Accounting for Sales Revenue The revenue principle requires that revenues be recorded when earned: An exchange has taken place. The earnings process is nearly complete. Collection is probable.
3 Reporting Net Sales Companies record sales discounts, sales returns and allowances, and credit card discounts separately to allow management monitoring of these transactions. Sales revenue Less: Sales returns and allowances Sales discounts Credit card discounts Net sales
4 Credit Card Sales to Consumers Companies accept credit cards for several reasons: To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad checks. To receive payment quicker.
5 Credit Card Sales to Consumers When credit card sales are made, the company must pay the credit card company a fee for the service it provides.
6 Credit Card Sales to Consumers On January 2, a Timberland factory store s credit card sales were $3,000. The credit card company charges a 3% service fee. Prepare the Timberland journal entry. GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 2
7 Credit Card Sales to Consumers On January 2, a Timberland factory store s credit card sales were $3,000. The credit card company charges a 3% service fee. Prepare Credit the Card Timberland Discounts are journal reportedentry. as a contra revenue account. GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 2 Accounts Receivable 2,910 Credit Card Discounts 90 Sales Revenue 3,000 $3,000 3% = $90 Credit Card Fee
8 Sales to Businesses on Account When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase.
9 Sales to Businesses on Account 2/10, n/30 Read as: Two ten, net thirty When customers purchase on open account, they may be offered a sales discount to encourage early payment.
10 Sales to Businesses on Account 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due
11 Sales to Businesses on Account On January 6, Timberland sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the Timberland journal entry. GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 6
12 Sales to Businesses on Account On January 6, Timberland sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the Timberland journal entry. GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 6 Accounts Receivable 1,000 Sales Revenue 1,000
13 Sales to Businesses on Account On January 14, Timberland receives the appropriate payment from the customer for the January 6 sale. Prepare the Timberland journal entry. GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 14
14 Sales to Businesses on Account On January 14, Timberland receives the appropriate payment from the customer for the January 6 sale. Prepare the Timberland journal entry. $1,000 2% = $20 sales discount GENERAL JOURNAL Page 34 $1,000 - $20 = $980 cash receipt Date Description Debit Credit Jan. 14 Cash 980 Sales Discounts 20 Accounts Receivable 1,000 Contra-revenue account
15 Sales to Businesses on Account If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Timberland make? GENERAL JOURNAL Page 34 Date Description Debit Credit Jan. 20
16 Sales to Businesses on Account If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Timberland make? Since the customer paid outside of the discount period, GENERAL a sales JOURNAL discount is not granted. Page 34 Date Description Debit Credit Jan. 20 Cash 1,000 Accounts Receivable 1,000
17 Sales Returns and Allowances Debited for damaged merchandise. Debited for returned merchandise. Contra revenue account.
18 Sales Returns and Allowances On July 8, Fontana Shoes returns $500 of hiking boots originally purchased on account from Timberland. Prepare the Timberland journal entry. GENERAL JOURNAL Page 40 Date Description Debit Credit July 8
19 Sales Returns and Allowances On July 8, Fontana Shoes returns $500 of hiking boots originally purchased on account from Timberland. Prepare the Timberland journal entry. GENERAL JOURNAL Page 40 Date Description Debit Credit July 8 Sales Returns and Allowances 500 Accounts Receivable 500
20 Gross Profit Percentage Gross Profit Percentage = Gross Profit Net Sales In In 1998, Timberland reported gross profit of of $342,839,000 on on sales of of $862,168,000. All other things equal, a higher gross profit results in in higher net income.
21 Gross Profit Percentage Gross Profit Percentage = Gross Profit Net Sales Gross Profit Percentage $342,839,000 = = 39.8% $862,168,000 All other things equal, a higher gross profit results in in higher net income Gross Profit Comparisons Timberland Skechers U.S.A. Wolverine 39.8% 41.5% 31.8%
22 Measuring and Reporting Receivables Accounts Receivable Amounts owed by other companies or persons for cash, goods, or services. Open accounts owed to the business by trade customers.
23 Term $1,200 Wheaton, Ohio Payee January 5, 2000 Sixty days the order of Measuring and Reporting Receivables Principal after date I promise to pay to Wheaton Mountain Bank One thousand two hundred Dollars Payable at Wheaton Interest Mountain Rate Bank Maker Value received with interest at 12% per annum No Due March 6, 2000 Due Date Pat Timberland Company Rogers
24 Accounting for Bad Debts Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts.
25 Accounting for Bad Debts Matching Principle Bad Debt Expense Record in same accounting period. Sales Revenue
26 Accounting for Bad Debts Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.
27 Recording Bad Debt Expense Estimates Timberland estimated bad debt expense for 1998 to be $2,383,000. Prepare the adjusting entry. GENERAL JOURNAL Page 78 Date Description Debit Credit Dec. 31
28 Recording Bad Debt Expense Estimates Timberland estimated bad debt expense for 1998 to be $2,383,000. Prepare the adjusting entry. Bad Debt GENERAL Expense is JOURNAL normally classified as a Page 78 selling expense and is closed at year-end. Date Description Debit Credit Dec. 31 Bad Debt Expense 2,383,000 Allowance for Doubtful Accounts 2,383,000 Contra asset account
29 Allowance for Doubtful Accounts Balance Sheet Disclosure Accounts receivable Less: Allowance for doubtful accounts Net realizable value of accounts receivable Amount the business expects to collect.
30 Writing Off Uncollectible Accounts When it is clear that a specific customer s account receivable will be uncollectible, the amount should be removed from the Accounts Receivable account and charged to the Allowance for Doubtful Accounts.
31 Writing Off Uncollectible Accounts On May 6, Timberland wrote off a specific account receivable with a balance of $2,500. Prepare the Timberland journal entry. GENERAL JOURNAL Page 37 Date Description Debit Credit May 6
32 Writing Off Uncollectible Accounts On May 6, Timberland wrote off a specific account receivable with a balance of $2,500. Prepare the Timberland journal entry. GENERAL JOURNAL Page 37 Date Description Debit Credit May 6 Allowance for Doubtful Accounts 2,500 Accounts Receivable 2,500
33 Writing Off Uncollectible Accounts Assume that before the write-off entry, Timberland s Accounts Receivable balance was $81,000,000 and the Allowance for Doubtful Accounts balance was $2,000,000. Let s see what effect the write-off had on these accounts.
34 Writing Off Uncollectible Accounts Before Write- Off After Write- Off Accounts receivable $ 81,000,000 $ 80,997,500 Less: Allow. for doubtful accts. 2,000,000 1,997,500 Net realizable value $ 79,000,000 $ 79,000,000 Notice that the write-off did not change the net realizable value nor did it it affect any income statement accounts.
35 Methods for Estimating Bad Debts Percentage of credit sales or Aging of accounts receivable????
36 Percentage of Credit Sales Bad debt percentage is based on actual uncollectible accounts from prior years credit sales. Focus is on determining the amount to record on the income statement as Bad Debt Expense.
37 Percentage of Credit Sales Net Credit Sales % Estimated Uncollectible Amount of Journal Entry
38 Percentage of Credit Sales In 2000, Kid s Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2000?
39 Percentage of Credit Sales In 2000, Kid s Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2000? $60, = $600 Now, prepare the adjusting entry.
40 Percentage of Credit Sales GENERAL JOURNAL Page 76 Date Description Debit Credit Dec. 31 Bad Debt Expense 600 Allowance for Doubtful Accounts 600
41 Now let s discuss another method that is used to account for uncollectible accounts.
42 Aging of Accounts Receivable Focus is on determining the desired balance in the Allowance for Doubtful Accounts on the balance sheet.
43 Aging of Accounts Receivable Accounts Receivable % Estimated Uncollectible Desired Balance in in Allowance Account - Allowance Account Credit Balance Amount of Journal Entry Accounts Receivable % Estimated Uncollectible Desired Balance in in Allowance Account + Allowance Account Debit Balance Amount of Journal Entry
44 Aging Schedule Each customer s account is aged by breaking down the balance by showing the age (in number of days) of each part of the balance. An aging of accounts receivable for Kid s Clothes in 2000 might look like this...
45 Aging Schedule Days Past Due Total Customer Not Yet Due Over 90 A/R Balance Aaron, R. $ 235 $ 235 Baxter, T. $ 1, ,500 Clark, J. $ 50 $ 200 $ Zak, R Total $ 3,500 $ 2,550 $ 1,830 $ 1,540 $ 1,240 $ 10,660 Based on past experience, the business estimates the percentage of uncollectible accounts in each time category.
46 Aging Schedule Days Past Due Total Customer Not Yet Due Over 90 A/R Balance Aaron, R. $ 235 $ 235 Baxter, T. $ 1, ,500 Clark, J. $ 50 $ 200 $ Zak, R Total $ 3,500 $ 2,550 $ 1,830 $ 1,540 $ 1,240 $ 10,660 % Uncollectible These percentages are then multiplied by the appropriate column totals.
47 Aging Schedule Days Past Due Total The column Not Yet totals are then added to A/R Customer arrive Due at 1-30 the total estimate Over of 90 Balance Aaron, R. uncollectible $ 235 accounts of $1,201. $ 235 Baxter, T. $ 1, ,500 Clark, J. $ 50 $ 200 $ Zak, R Total $ 3,500 $ 2,550 $ 1,830 $ 1,540 $ 1,240 $ 10,660 % Uncollectible Estima ted Uncoll. Amount $ 35 $ 102 $ 183 $ 385 $ 496 $ 1,201
48 Aging of Accounts Receivable Days Past Due Total Record Not Yet the Dec. 31, 2000 adjusting A/R Customer entry Due assuming 1-30 that 31-60the Allowance Over 90 Balance Aaron, R. $ 235 $ 235 for Doubtful Accounts currently has Baxter, T. $ 1, ,500 Clark, J. a $50 credit $ balance. 50 $ 200 $ Zak, R Total $ 3,500 $ 2,550 $ 1,830 $ 1,540 $ 1,240 $ 10,660 % Uncollectible Estima ted Uncoll. Amount $ 35 $ 102 $ 183 $ 385 $ 496 $ 1,201
49 Aging of Accounts Receivable Date GENERAL JOURNAL Page 76 Description Post. Ref. Debit Credit Dec. 31 Bad Debt Expense 1,151 Allow ance for Doubtful Accounts 1,151 1,201 Desired Balance - 50 Credit Balance $ 1,151 Adjusting Entry After posting, the Allowance account would look like this...
50 Aging of Accounts Receivable Allowance for Doubtful Accounts Notice that the balance after adjustment is equal to the estimate of $1,201 based on the aging analysis performed earlier. 50 Balance at 12/31/2000 before adj. 1, adjustment 1,201 Balance at 12/31/2000 after adj.
51 Now let s start our discussion of cash.
52 Cash and Cash Equivalents Checks Money Orders Certificates of Deposit Cash and Cash Equivalents T-Bills Bank Drafts
53 Internal Control of Cash Internal control refers to policies and procedures that are designed to: Properly account for assets. Safeguard assets. Ensure the accuracy of financial records. Cash is is the asset most susceptible to to theft and fraud.
54 Internal Control of Cash Custody Separation of Duties Recording Authorization
55 Internal Control of Cash Bank Reconciliations Daily Deposits Payment Approval Cash Controls Purchase Approval Prenumbered Checks Check Signatures
56 Bank Reconciliation Explains the difference between cash reported on bank statement and cash balance on company s books. Provides information for reconciling journal entries.
57 Bank Reconciliation Balance per Bank Balance per Book + Deposits in Transit + Deposits by Bank (credit memos) - Outstanding Checks - Service Charge - NSF Checks ± Bank Errors ± Book Errors = Adjusted Balance = Adjusted Balance
58 Bank Reconciliation Balance All per Bank reconciling items on the book side require an adjusting entry to the cash account. + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance Balance per Book + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance
59 Bank Reconciliation Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is is shown on the next page.
60 Bank Reconciliation Outstanding checks totaled $2,417. A $500 check mailed to to the bank for deposit had not reached the bank at at the statement date. The bank returned a customer s NSF check for $225 received as as payment of of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in in our books as as $240. A $486 deposit by Acme Company was erroneously credited to to our account by the bank.
61 Bank Reconciliation Ending bank balance, July 31 $ 9,610 Additions: Deposit in transit 500 Deductions: Bank error $ 486 Outstanding checks 2,417 2,903 Correct cash balance $ 7,207
62 Bank Reconciliation Ending bank balance, July 31 $ 9,610 Additions: Deposit in transit 500 Deductions: Bank error $ 486 Outstanding checks 2,417 2,903 Correct cash balance $ 7,207 Ending book balance, July 31 $ 7,430 Additions: Interest 30 Deductions: Recording error $ 28 NSF check Correct cash balance $ 7,207
63 Bank Reconciliation Date GENERAL JOURNAL Page 56 Description Post. Ref. Debit Credit Jul 31 Cash 30 Interest Revenue Supplies Inventory 28 Accounts Receivable 225 Cash 253
64 End of Chapter 6
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