ACCT2020 Introduction to Accounting for Non-Business Majors Chapter 6

Reporting and Interpreting Sales Reporting and Interpreting Sales Revenue, Receivables, and CashRevenue, Receivables, and Cash

Chapter 6

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin

Accounting for Sales Revenue

The revenue principle requires thatrevenues be recorded when earned:

Goods or services have been delivered.Goods or services

have been delivered.

Collection isreasonably assured.

Collection isreasonably assured.

Amount of customer payments known.

Amount of customer payments known.

McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin

2/10, n/302/10, n/30

Sales Discounts

When customers purchase on open account, they may be offered a sales discount to encourage early payment.

Read as: “Two ten, net thirty”

DiscountPercentage

# of Days in Discount

Period

Otherwise, the Full Amount Is

Due

Maximum Days in Credit Period

McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin

To Take or Not Take the Discount

With discount terms of 2/10,n/30, a customersaves $2 on a $100 purchase by payingon the 10th day instead of the 30th day.

With discount terms of 2/10,n/30, a customersaves $2 on a $100 purchase by payingon the 10th day instead of the 30th day.

Annual Interest Rate =Annual Interest Rate = 365 Days20 Days

365 Days20 Days

× 2.04% = 37.23% × 2.04% = 37.23%

$2$98

= 2.04%Interest Rate for 20 Days =

Interest Rate for 20 Days =Amount SavedAmount Paid

McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin

Sales Returns and Allowances

Debited for damaged merchandise.

Debited for returned merchandise.

Contra revenue account.

McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin

Reporting Net Sales

Companies record credit card discounts,sales discounts, and sales returns and allowances

separately to allow managementto monitor these transactions.

Companies record credit card discounts,sales discounts, and sales returns and allowances

separately to allow managementto monitor these transactions.

McGraw-Hill/Irwin Slide 7

When companies allow customers to purchase merchandise on an open account, the customer promises

to pay the company in the future for the purchase.

When companies allow customers to purchase merchandise on an open account, the customer promises

to pay the company in the future for the purchase.

Measuring and Reporting Receivables

Accounts Receivable

Trade receivables are amounts owed to the

business for credit sales of goods, or services.

Nontrade receivables are amounts owed to the

business for other than business transactions.

McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin

Accounting for Bad Debts

Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts.

Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts.

Matching Principle

Bad Debt Expense

Sales Revenue

Record in same accounting period.

Most businesses record an estimate of the bad debt expensewith an adjusting entry at the end of the accounting period.

Most businesses record an estimate of the bad debt expensewith an adjusting entry at the end of the accounting period.

McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin

Allowance for Doubtful Accounts

Accounts receivableLess: Allowance for doubtful accountsNet realizable value of accounts receivable

Accounts receivableLess: Allowance for doubtful accountsNet realizable value of accounts receivable

Amount the businessexpects to collect.

Balance Sheet Disclosure

McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin

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.

Net credit sales% Bad debt loss rate

Amount of journal entry

Net credit sales% Bad debt loss rate

Amount of journal entry

Estimating Bad Debts ─ Percentage of Credit Sales

McGraw-Hill/Irwin Slide 11

Accounts Receivable % Estimated Uncollectible

Desired Balance in Allowance Account- Allowance Account Credit Balance

Amount of Journal Entry

Accounts Receivable % Estimated Uncollectible

Desired Balance in Allowance Account- Allowance Account Credit Balance

Amount of Journal Entry

Accounts Receivable % Estimated Uncollectible

Desired Balance in Allowance Account+ Allowance Account Debit Balance

Amount of Journal Entry

Accounts Receivable % Estimated Uncollectible

Desired Balance in Allowance Account+ Allowance Account Debit Balance

Amount of Journal Entry

Aging of Accounts Receivable

McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin

Focus on Cash Flows

Sales Revenue

Add Decrease in Accounts Receivable

Subtract Increase in Accounts

Receivable

Cash Collected from

Customers

McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin

Cash and Cash Equivalents

Cash and Cash

Equivalents

Checks Money Orders

Bank DraftsCertificates of Deposit

T-Bills

McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin

Internal Control of Cash

Cash is the asset most susceptible to theft and fraud.Cash is the asset most susceptible to theft and fraud.

Properly account for

assets.

Ensure the accuracy of

financial records.

Safeguard assets.

Internal control refers to policies and procedures designed to:

Separationof Duties

Authorization

Recording

Custody

McGraw-Hill/Irwin Slide 15

Daily Deposits

Purchase Approval

Prenumbered Checks

Payment Approval

Cash Controls

Check Signatures

Bank Reconciliations

Internal Control of Cash

McGraw-Hill/Irwin Slide 16

Balance per Bank

+ Deposits in Transit

- Outstanding Checks

± Bank Errors

= Correct Balance

Balance per Book

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Errors

= Correct Balance

Bank ReconciliationExplains the difference between cash reported on bank statement and cash balance on company’s books and

provides information for reconciling journal entries.

© 2008 The McGraw-Hill Companies, Inc.

End of Chapter 6