Selling Goods and Services May 2010©Kimberly Lyons 1.
Post on 28-Mar-2015
224 Views
Preview:
Transcript
REVENUE RECOGNITION PRINCIPLE
Revenue should be recognized (recorded) when earned, and realized or realizable (collectible)
Revenue is earned when an exchange has taken place, and the company has provided goods or services that entitle them to collect
May 2010©Kimberly Lyons
2
CASH COLLECTION OF RECEIVABLES
Usually, a company will collect its receivables and convert them to cash
Issues that result in reduced cash collections include: Sales Discounts Sales Returns and Allowances Uncollectible Accounts (bad debts)
May 2010©Kimberly Lyons
3
SALES DISCOUNTS
Discounts are offered to customers to encourage timely payment
Example: Simco Inc. sells goods to Balto for $1,000 on September 27th, with credit terms 2/10, net/30
The credit terms allow Balto a 2% discount on payments made within 10 days, the remainder (net) is due within 30 days
Simco records the initial sale:9/27 Accounts Receivable1,000
Sales Revenue 1,000
May 2010©Kimberly Lyons
4
SALES DISCOUNTSCONTINUED
Balto pays the bill on October 5th and Simco records the following10/5 Cash 980
Sales Discounts 20Accounts Receivable 1,000
Sales Discounts is a “contra revenue” account Contra = opposite This account has a debit balance and will
reduce sales revenue indirectly in the income statement
May 2010©Kimberly Lyons
5
SALES RETURNS AND ALLOWANCES
Occasionally customers return goods or are allowed a reduced price allowance for defective products
Example: Simco Inc. sells goods to Patton Inc. for $1,000 on September 25th with credit terms 2/10, net/30. Patton returns half of the goods on September 30th and pays for the remainder on October 15th (outside of the discount period)
Simco records the following:9/25 Accounts Receivable 1,000
Sales Revenue 1,000
9/30 Sales Returns & Allow. 500Accounts Receivable 500
10/15 Cash 500Accounts Receivable 500
May 2010©Kimberly Lyons
6
SALES RETURNS AND ALLOWANCESCONTINUED
Sales returns and allowances are also a contra revenue account
They have a debit balance and reduce sales revenue indirectly in the income statement
When both of Simco’s transactions are complete, accounts receivable is zero, and total cash collected of $1,480 equals net sales which is the net “inflow” from the transaction
Sales Revenue $2,000
Sales discounts (20)
Sales returns (500)
Net sales $1,480
©Kimberly Lyons
7
May 2010
UNCOLLECTIBLE ACCOUNTS AND BAD DEBT EXPENSE
There are two methods of accounting for uncollectible accounts Direct write-off method Allowance method
Direct write-off method: when accounts are known to be uncollectible they are written off immediately
Bad Debt Expense XXXAccounts Receivable
XXX
May 2010©Kimberly Lyons
8
DIRECT WRITE-OFF METHOD CONTINUED
The direct write-off method often results in the recording of sales revenue in one period and bad debt expense in another
No matching of related revenues and expenses
Not GAAP Used for tax purposes instead
May 2010©Kimberly Lyons
9
ALLOWANCE METHOD
Achieves matching by recording bad debt expense in the same period related sales revenue is recorded (GAAP)
Estimates are used to record uncollectibles before they happen
An allowance account is credited instead of accounts receivable, since specific uncollectible receivables are not yet known
When actual write-offs occur at a later date, they are debited against the existing credit in the allowance account
May 2010©Kimberly Lyons
10
ALLOWANCE METHOD CONTINUED
Example: Piper Inc. estimates uncollectible accounts receivable of $1,300. This estimate is recorded at December 31st as part of the year-end adjustment process:
12/31 Bad Debt Expense 1,300Allowance for Uncollectibles
1,300
When actual bad debts become known (in a later period) piper writes them off with:
5/13 Allowance for Uncollectibles 1,250Accounts Receivable 1,250
May 2010©Kimberly Lyons
11
ALLOWANCE FOR UNCOLLECTIBLES
Allowance for uncollectibles is a contra accounts receivable account
It has a credit balance that will net against and reduce receivables in the balance sheet
Net receivables is also referred to as net realizable value of receivables
A more conservative value of assets
May 2010©Kimberly Lyons
12
MAKING ESTIMATES% OF CREDIT SALES
Example: Piper Inc. estimates uncollectibles of 1% of credit sales. Credit sales for the period are $150,000:
150,000 x .01 = $1,500
12/31 Bad Debt Expense 1,500Allowance for Uncollectibles
1,500
May 2010©Kimberly Lyons
13
MAKING ESTIMATES% OF CREDIT SALESCONTINUED
When estimates are made as a % of credit sales, the adjustment will be recorded without considering any existing balance in the allowance account
Allowance Write-offs 1,250 1,300 Beginning
1,500Adjustment
1,550End
May 2010©Kimberly Lyons
14
MAKING ESTIMATES% OF ACCOUNTS RECEIVABLE
Example: Piper Inc. estimates uncollectibles of 5% of outstanding accounts receivable. Accounts receivable at 12/31 are $28,400. Piper started the year with a credit balance in the allowance account of $1,300, against which $1,250 was written off. The balance in the allowance account before adjustment is $50 (credit). Estimate of uncollectibles = (28,400 x .05) = $1,420 year-end adjustment = $1,420 – 50 = $1,370
12/31 Bad Debt Expense 1,370Allowance for Uncollectibles 1,370
May 2010©Kimberly Lyons
15
MAKING ESTIMATES% OF ACCOUNTS RECEIVABLECONTINUED
When estimates are made as a % of accounts receivable, the adjustment must take the existing allowance balance into consideration
The estimate will become the new balance in the allowance account and will go to the balance sheet to net with accounts receivable
Allowance
Write-offs 1,250 1,300Beginning 1,370 Adjustment
1,420 Estimate
May 2010©Kimberly Lyons
16
BALANCE SHEET PRESENTATION
Assets:
Accounts Receivable
$28,400
Less: Allowance (1,420)
Net Realizable Value
$26,980
©Kimberly Lyons
17
May 2010
MAKING ESTIMATES REVIEW
When making estimates of uncollectibles as a % of sales, ignore the existing balance in the allowance account and record the estimate as bad debt expense
When making estimates of uncollectibles as a % of accounts receivable, adjust the allowance account so that the estimate will become its ending balance
May 2010©Kimberly Lyons
18
PRODUCT WARRANTIES
Selling products with attached warranties gives rise to related expenses
These expenses should be matched with related revenues at the time of sale
Use of estimates allows recoding warranty expense with the related liability without having to wait for future returns
May 2010©Kimberly Lyons
19
WARRANTY EXAMPLE
Tilton Inc. Sells goods that are under warranty The company sells 2,000 units for $25 each and expects 2%
to be returned for replacement at a cost of $17 each At the time of sale Tilton must record the warranty expense:
(DR) Accts rec. 50,000(CR) Sales revenue 50,000
(DR) Cost of goods sold 34,000(CR) Inventory 34,000
(DR)Warranty expense 680(CR) Warranty liability 680
(2,000 x .02 x $17 = $680)
May 2010©Kimberly Lyons
20
WARRANTY EXAMPLE
Suppose 10 units are returned in the future and Tilton replaces the units at cost:
(DR) Warranty liability 170(CR) Inventory 170(10 units x $17 = $170)
May 2010©Kimberly Lyons
21
PRODUCT WARRANTIES
The recorded warranty expense is matched with the related revenue at the time of sale
The warranty liability remains in the balance sheet (carries over to the next period or later) until it is honored
May 2010©Kimberly Lyons
22
REVIEW FOR EXAM
State the revenue recognition principle Calculate and record sales discounts and
sales returns and allowances Calculate net sales Record bad debts with the direct write-off
method of accounting for uncollectibles Calculate and record bad debt expense using
the allowance method and a % of credit sales Calculate and record bad debt expense using
the allowance method and a % of accounts receivable
May 2010©Kimberly Lyons
23
top related