Professional Documents
Culture Documents
Financial Accounting
Concepts
Fourth Edition
by
Edmonds, McNair, Milam, Olds
PowerPoint® presentation by
J. Lawrence Bergin
7- 2
Chapter 7
Value of Receivables
Transaction Analysis:
Transaction Analysis:
as uncollectible.
Balance Sheet Inc. Statement Cashflow
Assets = Liab.+ Stk. Equity
Cash+ A/Rec .- Allow. = A/P + C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4
5A
5B
Bal.
as uncollectible.
Balance Sheet Inc. Statement Cashflow
Assets = Liab.+ Stk. Equity
Cash+ A/Rec .- Allow. = A/P + C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A
5B
Bal.
Note: This is NOT the Direct Write-off method. Rather, it is a
write-off under the ALLOWANCE Method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
7- 19
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Receivable
5A 50 50
5B
Bal.
5A 50 50
5B 50 (50) 50
OA
Bal.
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.
MATCHING PRINCIPLE
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
7- 29
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Summary:
Accounting for Bad Debts
■ Allowance method
❐ GAAP
❐ Required if company has a
significant amount of bad
debts.
❐ Matches bad debt expense
(on the income statement) with
the sale.
❐ Requires an adjusting journal
entry before closing the books.
Summary:
Accounting for Bad Debts
■ Direct Write-off method
❐ Violates GAAP (Matching)
❐ No estimates of bad debts are made,
so no allowance account is used.
❐ Used by small businesses with few
account receivables or large
business with few collection problems.
❐ No entry until time specific account is
deemed “bad” (uncollectible).
We will
repair or
replace this
item...
Warranty
Warranties…When to “expense”?
General Principle
■ According to GAAP, the entire
estimated warranty expense must
be recorded in the period the sale
is made, NOT in the period when
the actual warranty cost is paid.
(Matching principle is being followed.)
■ A warranty liability is recorded along with the
expense. This liability is REDUCED whenever cash is
paid to service a product still under warranty.
Transaction Analysis
Transaction Analysis
SUMMARY QUESTIONS
SUMMARY QUESTIONS
SUMMARY QUESTIONS
SUMMARY QUESTIONS
SUMMARY QUESTIONS
SUMMARY QUESTIONS
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.
4 (160) (160) 160 (160) n.a.
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.
4 (160) (160) 160 (160) n.a.
5a 480 (480) 480 (480) n.a
b (8640) (640) (8000) (8000) FA
(640)
OA
6a (480) (480) 480 (480) n.a.
b (8000) (8000) (7360) FA
(640) OA
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
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2005 2005
Sept. 30 Interest Expense 480 Sept. 30 Interest Expense 480
Interest Payable 480 Discont on Note Payable 480
Accrued 9 mo. interest (8000x.08x9/12) Amortized 9 mo. interest from Discount to Int. Exp.
Chapter 7
The End
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003