Management

PROBLEM VARIATIONS

The Foster Generators problem illustrates use of the

basic transportation model. Variations of the basic

Science
transportation model may involve one or more of the
following situations:

1. Total supply not equal to total demand

Chapter 6: Distribution and Network Models 2. Maximization objective function
3. Route capacities or route minimums
The models discussed in this chapter belong to a 4. Unacceptable routes
special class of linear programming problems called
network flow problems. Supply chain, transportation TOTALSUPPLY NOTEQUALTO TOTAL DEMAND,
problem assignment problem. Often the total supply is not equal to the total demand.

Transshipment problem In general, the network model DUMMYORIGIN, added to a transportation problem
for these problems consists of nodes representing to make the total supply equal to total demand. The
origins, destinations, and, if necessary, transshipment supply assigned to the dummy origin is the difference
points in the network system. between the total demand and the total supply.

Arcs are used to represent the routes for shipment, MAXIMIZATION OBJECTIVEFUNCTION In some
travel, or flow between various nodes. transportation problems, the objective is to find a
solution that maximizes profit or revenue.

Transportation ROUTE CAPACITIESOR ROUTE MINIMUMS, the

Supply chain
problem linear programming formulation of the transportation
problem also can accommodate capacities or
minimum quantities for one or more of the routes.
Transshipment Assignment
problem Problem UNACCEPTABLE ROUTES, Finally, establishing a
route from every origin to every destination may not
be possible. To handle this situation, we simply drop
SUPPLYCHAIN, the set of all interconnected
the corresponding arc from the network or remove the
resources involved in producing and distributing a
corresponding variable from the linear programming
product.
formulation.
TRANSPORTATION PROBLEM, a network flow
CAPACITATED TRANSPORTATION PROBLEM, a
problem that often involves minimizing the cost of
variation of basic transportation problem in which
shipping goods from a set origin to a set of
some or all the arcs are subject to capacity
destinations.
restrictions.
In general, the decision variables for transportation
TRANSSHIPMENTPROBLEM, an extension of the
problems having m origins and n destinations.
transportation problem to distribution problems
NETWORK, A graphical representation of a problem involving transfer points of possible shipments
consisting of numbered circles (nodes) interconnected between any pair of nodes.
by a series of lines (arcs); arrowheads on the arcs
CAPACITATED TRANSSHIPMENTPROBLEM, a
show the direction of flow. Transportation,
variation of the transshipment problem in which some
assignment, and transshipment problems are network
of all of the arcs are subject to capacity restrictions.
flow problems.
ASSIGNMENTPROBLEMS a network flow problem
NODES, The intersection or junction points of a
that often involves the assignment of agents to tasks;
network.
it can be formulated as a linear program and is a
ARCS, the lines connecting the nodes in a network. special case of transportation problem.

From/ Dc Dc Dc Suppl Demand

Nodes
to 1 2 3 y Shipping Cost (Arks)
Boston 5 6 4 300
Toront 6 3 7 500
o
Min 5xb1 + 6xb2 + 4xb3 + 6xt1 +3xt2 + 7xt3

Xb1 + xb2 + xb3 = 300 CAPITAL BUDGETING, A 0-1 integer programming

problem that involves choosing which projects or
Xt1 + xt2 +xt3 = 500 activities provide the best investment return.

In many applications, the cost of production has two

Xb1 + xt1 = 200 dc1 components: a setup cost, which is a fixed cost, and a
variable cost, which is directly related to the
Xb2 + xt2 = 300 dc2 Demand production quantity. The use of 0-1 variables makes
including the setup cost possible in a model for a
Xb3 + xt3 = 250 dc3 production application.
(Add dummy) Multiple choice constraint, A constraint requiring that
Dummy origin no value “balance” the sum od 2 or more 0-1 variables are equal. Thus,
any feasible solution makes a choice of which
From/to Dc Dc Dc Supply variable to set equal to 1.
1 2 3
Chapter 7: Mutually exclusive constraint, A constraint requiring
Boston 5 6 4 300
the sum of 2 or more 0-1 variables be less than or
Toronto 6 3 7 500 Integer equal to one.
D.O 50 linear
Conditional constraints, involving 0-1 variables does
Deman 30 30 25 800/85
not allow certain variables.
d 0 0 0 0
Programming Corequisite constraints, requiring two 0-1 variables be
equal.
In this chapter all variables are required to be integer,
we have an all-integer linear program. The following is (-3,-2, -1) negative (0,1,2,3)Positive
a two-variable, all-integer linear programming model:
Per row, find the least.
The linear program that results from dropping the
1 2 3 4
integer requirements is called the LP Relaxation of
the integer linear program. A 10 12 19 11

If some, but not necessarily all, variables are required B 5 10 7 8

to be integer, we have a mixed integer linear program. C 12 13 14 11

APPLICATIONS INVOLVING 0-1 VARIABLES D 8 12 11 9

Much of the modeling flexibility provided by integer

linear programming is due to the use of 0-1 variables. Subtract (ex: 10 -12 = 2)
In many applications, 0-1 variables provide selections
or choices with the value of the variable equal to 1 if a 1 2 3 4
corresponding activity is undertaken and equal to 0 if A 0 2 9 1
the corresponding activity is not undertaken. The
B 0 5 2 3
capital budgeting, fixed cost, distribution system
design, bank location, and product design/market C 1 3 2 0
share applications presented in this section make use D 0 4 3 1
of 0-1 variables.

Person Job Total 1 2 3 4

A 2 12
A 0 0 7 1
B 3 7
C 4 11 B 0 3 0 3
d 1 8 C 1 1 0 0
Total Optimal Cost 38 D 0 2 1 1
 PROJECT SCHEDULING BASED ON EXPECTED
ACTIVITY TIMES

Unbalanced

A B C D

1 15 21 25 29

2 5 10 14 16

3 7 12 16 19

0 0 0 0

- is the listing of activities, deliverables, and

0 6 10 14 0 1 5 9 milestones within a project. A schedule also usually
0 0 4 6 includes a planned start and finish date, duration, and
0 5 9 11
resources assigned to each activity.
0 5 9 12 0 0 4 7

0 0 0 0 0 0 0 0

2=4 not optimal 3 = 4 not optimal The Concept of a Critical Path

- is the longest path (in time) from Start to Finish; it

indicates the minimum time necessary to complete
the entire project.

Determining the Critical Path

- determined by identifying the longest stretch of

dependent activities and measuring the time required
to complete them from start to finish.

   
AC E D 50
0 1 1 5 4 = 4 Optimal
E 20
T F
0 0 0 2 Optical Assignment: Optimal S
0 0 0 3
Cost 50 30 80
L L
0 0 0 0 1-A D
=15+10+16
S F

2-B =41
Early start time (ES)
3-C
- Early start time denotes the earliest possible point at
Chapter 8: Non-Linear Optimization which an activity may be commenced.
Model -The ES for the first task(s) in a project is set to zero.
A nonlinear optimization problem is any optimization
To calculate the ES for all other tasks, just copy the
problem in which at least one term in the objective
EF (Early finish time) of the preceding dependent
function or a constraint is nonlinear.
task. If a task is dependent on two or more previous
CHAPTER 9: PROJECT SCHEDULING activities, refer to the activity with the longer ES.

Early finish time (EF)

PERT/CPM
-Early finish time denotes the earliest moment at
which it is possible to finish a task.
-To calculate the early finish time for a task, you take
its ES and add the task duration
(Dur): EF = ES + Dur
Since the first activity in a project generally has an ES
of 0, the EF will be identical to the duration of the first
activity. All dependent tasks that stem immediately
after it will take the first task’s EF as their ES, and add
their duration to it to calculate their EF.
Late finish time (LF)
-Late finish time denotes the latest point at which you
can complete an activity without it prolonging the
overall project timeline.
Tasks that are on the Critical Path have identical LF
and EF values.
To calculate the LF of tasks that aren’t on the Critical
Path, you have to start with the project completion
node and work your way backwards. The LF of a
node is equal to the LS (Late start time) of its
subsequent dependent node.
Late start time (LS)
-Late start time denotes the latest point at which you
can start work on an activity without having it prolong
the overall project timeline.
To calculate the LS of an activity, use the following
formula: LS = LF – Dur
Total float/slack (TF)
-Total float and total slack denote the amount of
wiggle room you have before you must start working
on tasks that are not on the Critical Path.
If you’re being pedantic, you could say that float and
slack aren’t identical and that the difference between
the two lies in your attitude — float is how much extra
time you can dedicate to tasks whereas slack is how
long you can procrastinate.
For all intents and purposes, float and slack are
identical, as they share the same values and are
calculated using the same formula.
-To calculate total float/slack, use either of the
following formulae: TF = LF – EF and TF = LS – ES
Free float (FF)
-Free float denotes the time you can delay an activity
without delaying the early start of subsequent
activities that are dependent on it.
By definition, free float cannot be larger than total
float. This means that activities on the Critical Path
have no free float.
However, when there’s a chain of activities that aren’t
on the Critical Path, the earlier activities in that chain
will have shorter free float than total float.
-To calculate free float, use the following formula: FF
= subsequent activity ES – ES – Dur
How to find the Critical Path?
 Step 1 — Create a Work Breakdown Structure
 Step 2 — Do a forward pass
 Step 3 — Do a backward pass
Critical Path Method vs PERT
-PERT (Program Evaluation Review Technique) and
CPM share a lot in common. Not only are they both
scheduling tools, but
they were also developed around the same time.
Back when CPM was being developed at DuPont, the
US Navy’s Polaris
Project was also behind schedule. PERT was the
solution they developed to combat this issue.
Needless to say, it operated a bit differently.
While the starting point of PERT still includes
breaking the project down into bite-sized tasks and
mapping out the
necessary sequence of tasks based on their
dependencies, it’s stricter about calculating the
duration of each task.
This was done by assigning each task three potential
duration estimates:
1. The most optimistic (O) time needed to complete
each task,
2. The most probable (M) time needed to complete
each task, and
3. The most pessimistic (P) time needed to complete
each task.
Once you have this data, you can calculate the PERT
estimate (E) using the following equation: E = (O +
4M + P) / 6

In addition to this, charting out the timeline using

PERT means starting from the deadline and working
your way backwards.
 Cost
1. Physical control or safeguarding materials
2. Control of the investment in material

Physical Control of material

Accounting Every business requires system of internal control

that includes procedures for the safeguarding of
assets. In general, effective control of materials
involves:
Chapter 6: Accounting for materials
1. Limited access
Systems of Accounting for materials issued to
2. Segregation of duties
production and ending material inventory, Either the
3. Accuracy in recording
periodic inventory system maybe be used to account
for materials issued to production and ending Limited access. Only authorized personnel should
materials inventory. have access to material storage area.

Accounting by the periodic inventory system, under Segregation of duties. – purchasing, receiving,
periodic inventory system the purchase of direct and storage, use, recording.
indirect materials is recorded in an account entitled
“Purchases”. If a beginning material inventory exist it Accuracy in recording. Inventory records shout permit
is recorded in a separate account entitled “materials determination of inventory quantities on hand upon
inventory – Beginning”. Purchases added to the request.
materials inventory. Ending material inventory is
determined by a physical count of the materials on
hand at the end of the period. Controlling the investment in materials

COMMONLY USED CONTROL PROCEDURES (1) when orders should be placed

(2) how many units should be ordered
1. Order cycling
2. Min-max method Order point. A subsidiary leader must be kept for each
3. Two-bin method individual item of raw material used in the
4. Automatic order system manufacturing process.
5. ABC plan
Assume that the expected daily usage of an item
material is 100 units. The anticipated lead time is 4
days, estimated stocks of 800 units is needed. The
Order cycling- method where materials on hand are
following calculations shows that the order point is
reviewed on a regular or periodic cycle, every 30
1,200 units.
days.
100 units x 4 days 400 units
Min-max method- this method is based on the
assumption that materials inventory has minimum and Safety stocks 800 units
maximum levels.
Order point 1,200 units
Two-bin method- this method is used for materials
that are considered inexpensive and nonessential. Economic Order quantity. The purchase order which
results to the minimum total inventory costs.
Automatic order system- this method is used by most
companies that are computerized. Formula method

ABC plan- method used by companies with large EOQ = √2CN

numbers of materials, each one having a different
K
value.
ASSIGNMENT:
Material Control

There are two basic aspects of materials control

 1. first-in, first-out

balance
received issued

1,600 x 6.00
9,600`

5 400 x 1,600 x 6.00

7.00 2,800 9,600

400 x 7.00
2,800
a) EOQ = √ 2 (number of units required annually)
(cost of order) / carrying cost per unit 9 400 x 1,600 x 6.00
8.00 3,200 9,600
√ 2 x 13,000 x 200 / 5.20
400 x 7.00
√ 5,200,000 / 5.20 2,800

= 1,000 units 400 x 8.00

3,200
b) Number of orders in a year
16 800 x 800 x 6.00
= 13,000 / 1,000 6.00 4,800
= 13 orders 4,800
400 x 7.00
2,800

400 x 8.00
3,200

24 600 x 800 x 6.00

9.00 5,400 4,800

400 x 7.00
2,800

400 x 8.00
3,200

600 x 9.00
5,400
Average inventory based on EOQ
27 800 x 200 x 7.00
=1,000/2 6.00 1.400
4,800
= 500 400 x 8.00
200 x 3,200
d)Total carrying cost
7.00
1,400 600 x 9.00
Average inventory x Carrying cost/unit
5,400
=500 x 5.20

=P 2,600

Total ordering cost

cost of materials issued
No. of orders x ordering cost
= 4,800 + 4,800 + 1,400 = 11,000
=13 x 200
cost of ending inventory
=P 2,600
= 1,400 + 3,200 + 5,400 = 10,000
2, AVERAGE 4.Absolute maximum inventory

3,500 + 500 units = 4,000 units

Received Issued Balance

1 1,600 x 6.00
9,600

5 400 x 7.00 2,000 x 6.20

2,800 12.400

9 400 x 8.00 2,400 x 6.50

3,200 15,600

16 800 x 6.50 1,600 x 6.50

5,200 10,400

24 600 x 9.00 2,200 x 7.18

5,400 15,800

27 1,000 x 7.18 1,200 x 7.18

7,180 8,620

Cost of materials issued

= 5,200 + 7,180 = 12,380

Cost of ending inventory 8,620

1.Safety stock

(5 days x 100 units) = 500 units

2.Reorder point

(5 days x 600 units) = 3,000 units

3. Normal maximum inventory

(3,500/2) + 500 units = 2,250 units

 INTERMEDIAT
E
ACCOUNTING
CHAPTER 3: PROOF OF CASH
Two date bank reconciliation is so called “two-date”
because it literally involves two date.

Among others, the omitted information may be any

one or a combination of the following:

a. Book balance- beginning and ending

b. Bank balance- beginning and ending
c. Deposits in transits- beginning and ending
d. Outstanding checks- beginning and ending

If the ending balance are not given, the following

formulas may help.

If beginning balance are omitted, the formulas should

simply be reversed or just work back.

Computation of book balance

Balance per book – beg of month xx

Add: Book debits during the month xx

Total xx

Less: Book credits during the month xx

Balance per book – end of month xx

Book debits refers to cash receipts or all items

debited to the cash in bank account.

Book credits refer to cash disbursement or all items

credited to the cash in bank account.

In a T-account form, the cash in the bank may

appears as follows:

Cash in bank

balance – beg xx book credits xx

book debits xx balance ending xx
 Outstanding checks – end of month xx

Computation of bank balance Proof of cash

Balance per bank – beg of month xx A proof of cash is an expanded reconciliation in that it
includes proof of receipts and disbursements.
Add: Bank debits during the month xx

Total xx Three forms of proof of cash, namely:

Less: Bank credits during the month xx a. Adjusted balance method

b. Book to bank method
Balance per bank – end of month xx c. Bank to book method

Bank credits refers to all items credited to the account SUMMARY

of the depositor which include deposits
acknowledgment by bank and credit memos. Jan 31 Feb 28

Bank debits refers to all items debited to the account Balance per book 50,000 70,000
of the depositor which include check paid by bank and
Balance per bank 84,000 124,000
debit memos.
Book debits 200,000
In T account form, the depositor account, Company X
will appear as follows: Book credits 180,000
Company X Bank debits 130,000

Bank credits 170,000

Bank debits xx balance ending xx
Balance – ending xx Bank credits xx Deposit in transit 40,000 75,000

Outstanding checks 65,000 119,000

Computation of deposits in transit
NSF check 5,000 10,000
Deposits in transits – beg of the month xx
Service charge 1,000 -
Add: Cash receipts deposited during the month xx
Note collected by bank 15,00 20,000
Total deposits to be acknowledged by bank xx

Less: deposits acknowledged by bank during month

The book debits and credits and the bank debits and
xx credits for January are not listed anymore because
they are not necessary.
Deposits in transits – end of month xx
The proof of cash pertains to the receipts and
Computation of outstanding checks
disbursements for the current month of February.
Outstanding checks – beg of month xx
ADJUSTED BALANCE METHOD
Add: checks drawn by depositor during the month
Company X
xx
Proof of cash
Total checks to be paid by bank xx
For the month of February
Less: checks to be paid by bank during month
Jan31 Receipts D Feb
xx
Balance per book 50,000 200,000 180,000 Thus, the January note collectable amounting 15,000
70,000 is deducted from the February book receipts.

Note collected 2.Credit memos of the current month already

increased the bank receipts for the current month but
January 15,000 (15,000) 20,000
have no effect on the book receipt.
February 20,000 20,000
Thus, February note collected amounting to 20,000 is
NSF check: added to the February book receipts.
January (5,000) (5,000) 3.Debit memos of the previous month do not affect
February 10,000 (10,000)
the bank disbursement for the current month.

Service charge: Thus, the January NSF of 5,000 and January service
charge of 1,000 are deducted from the February book
January (1,000) (1,000) disbursement.
Adjusted book 59,000 205,000 184,000 80,000 4.Debit memos for the current month already
Balance
increased bank disbursement for the current month
Balance per bank but have no effect on the book of disbursement.
Deposits in transits: 84,000 170,000 130,000 124,000
Thus, February NSF of 10,000 is added to the
January 40,000 (40,000) February book disbursement.
February 75,000 (75,000)
COMMENTS ON BANK ITEMS
Outstanding checks:
January (65,000) (65,000) 1. Deposit in transit of the previous month do not
February 119,000 (119,000) affect the bank receipts for the current month.
Adjusted bank 59,000 205,000 184,000 80,000
Thus, January deposit in transit of 40,000 is deducted
balance from the February bank receipts.

2. Deposit in transit of the current month already

GENERAL COMMENTS
increased the bank receipts for the current month but
-The January 31 and February 28 columns require no have no effect on the book receipt
further explanation. They represent the usual
Thus, the February deposit of transit of 75,000 is
reconciliations discussed earlier. added to the February bank receipts.
-The receipts and disbursements columns pertain to
3. Outstanding checks of the previous month do not
the current month of February, Actually the proof of affect the bank disbursement for the current month.
cash is a reconciliation of the receipts and
Thus, the January outstanding checks of 65,000 is
disbursements for the current period.
deducted from the February bank disbursements.
- Adjusted balance method, Book to bank method,
Bank to book method are adjusted to equal the 4. Outstanding checks for the current month already
correct receipts and disbursements for the current increased bank disbursement for the current month
month. but have no effect on the book of disbursement.

Thus, the February outstanding checks of 119,000 is

added to the February bank disbursements.
COMMENTS ON THE BOOK ITEMS

1.Credit memos of the previous month do not affect BOOK TO BANK METHOD
the bank receipts for the current month but increased Company X
the book receipts for the current month because the Proof of cash
credit memos for the previous month are recorded For the month of February
only by the depositor during the current month. Jan31 Receipts D Feb
Balance per book 50,000 200,000 180,000 Service charge:
70,000 January (1,000) (1,000)
Note collected Balance per book 50,000 200,000 180,000 70,000
January 15,000 (15,000) 20,000
February 20,000 20,000
NSF check: COMMENTS
January (5,000) (5,000)
February 10,000 (10,000) 1.The bank reconciling items- deposit in transit and
Service charge: outstanding check are treated in the same manner
January (1,000) (1,000) following adjusted balance method.
Deposits in transits: 84,000 170,000 130,000 124,000
January 40,000 (40,000) 2. the book reconciling items-note collected, NSF and
service are treated in the reversed.
February 75,000 (75,000)
Outstanding checks:
Chapter 4: Accounts Receivable
January (65,000) (65,000)
February 119,000 (119,000) TRADE AND NONTRADE RECEIVABLES
Balance per bank 84,000 170,000 130,000 124,000 Trade receivables refer to claims arising from sale of
merchandise or service in the ordinary course of
COMMENTS business.
1.The book reconciling items- note collected, NSF
Trade receivables include accounts receivable and
and service charge are treated in the same manner
notes receivable.
following the adjusted balance method.
Accounts receivable are open accounts arising from
2.The bank reconciling items- deposit in transit and the sale of goods and services in the ordinary course
outstanding check are treated in the reverse. of the business and not supported by promissory
notes.
3.The book to bank proof of cash means that the book
receipts and disbursement are adjusted to equal the -Customers’ accounts
bank receipts and disbursements.
-Trade debtors
4.Deposits in transit of previous month do not affect -Trade accounts receivable
the book receipts for the current month but increased
the bank receipts for the current month. Note receivable are those supported by formal
promises to pay in the form of notes.
BANKS TO BOOK METHOD
Nontrade receivables represent claims arising from
sources other than the sale of merchandise or
Company X service.
Proof of cash
For the month of February Trade receivables normal operating cycle or one year
Jan31 Receipts D Feb and Non trade receivables within one year CURRENT
Balance per bank 84,000 170,000 130,000 124,000 ASSETS.
Deposits in transits
Collectable beyond one year is classified
January 40,000 (40,000)
NONCURRENT ASSETS
February 75,000 (75,000)
Outstanding checks: PRESENTATION
January (65,000) (65,000) Accounts receivable xx
February 119,000 (119,000)
Allowance for doubtful accounts xx
Note collected
January 15,000 (15,000) 20,000 Notes receivable xx
February 20,000 20,000
NSF check: Accrued interest on note receivable xx
January (5,000) (5,000)
February 10,000 (10,000) Advances to officers and employees xx
Dividends receivables xx -Freight prepaid means that freight charge on the
goods shipped is already paid by the seller.
Total trade and other receivables 6,300,000
ACCOUNTING FOR FREIGHT CHARGE
Trade receivables and nontrade which are currently Example:
collectible shall be presented on the face of the
statement of financial position as one line item called An entity has a 100,000-account receivable ate the
trade and other receivables. end of accounting period. The terms 2/10, n/30, FOB
destination and freight collect. The customer paid
freight charge of 5,000.
EXAMPLES OF NONTRADE RECEIVABLES 1.To record the sale:
a.Advances to or receivables from shareholders, Accounts receivable 100,000
directors, officer or employees. If collectible in one
year such advances or receivables should be Freight out 5,000
classified as current assets.
Sales 100,000
b.Advances to affiliate are noncurrent assets
investments. Allowance for freight charge 5,000

c.Advances to supplier are current assets.

d.Subscriptions receivable should be shown 2.To record the collection within the discount period:
preferably as a deduction from share capital unless Cash 93,000
collectible currently.
Sales discount 2,000
e.Creditors’ accounts with debit balances are
classified current assets. Allowance for freight charge 5,000

f.Special deposits classified as noncurrent assets. Accounts receivable 100,000

g.Dividend receivable classified as current assets.

h.claims receivable classified as current assets. ALLOWANCE FOR SALES RETURN

The fair value of a financial assets is usually the Example:

transaction price, for short term receivables the fair
value is equal to the face amount or original invoice Amount of 50,000 of the total accounts receivable ate
amount. year end represents selling prices of goods that will
probably returned. JOURNAL ENTRY.
Cash flow relating to short term receivables are not
discounted. Sales return 50,000

The amortized cost is actually the net realizable value
of accounts receivable, more relevance in long term
note receivable.
TERMS RELATED TO FREIGHT CHARGE
-FOB destination means that ownership of the goods
purchased is vested in the buyer upon receipt thereof.
-FOB shipping point means that ownership of the
goods purchased is vested in the buyer upon
shipment thereof.
-Freight collect means that freight charge on the
goods shipped is not yet paid.
Allowance for sales return 50,000
SALES DISCOUNT
A cash discount also known as sales discount on the
part of the seller and a purchase discount in the part
of the buyer.
METHOS OF RECORDING CREDIT SALES
a. Gross method- the account receivable and sales
are recorded at gross amount of invoice. Common
and widely used method simple to apply.
b. Net method- the account receivable and sales are ILLUSTRATION – ALLOWANCE METHOD
recorded at net amount of the invoice. Price minus the
cash discount whether taken or not taken. 1.Accounts of 30,000 are considered doubtful of
collection.

Doubtful accounts 30,000

ILLUSTRATION – GROSS METHOD
Allowance for doubtful acc 30,000
1.Sale of merchandise for 100,000, terms 5/10, n/30.
2.Accounts are subsequently discovered to be
Accounts receivable 100,000 worthless or uncollectible.

Sales 100,000 Allowance for doubtful accounts 30,000

2.Assume collection is made within the discount Accounts receivable 30,000

period.
3.The same accounts that are previously written off
Cash 95,000 are unexpectedly recovered or collected.

Sales discount 5,000 Accounts receivables 30,000

Accounts receivable 100,000 Allowance for doubtful accounts 30,000

3.Assume collection is made beyond the discount Cash 30,000

period.
Accounts receivable 30,000
Cash 100,000
ILLUSTRATION – DIRECT WRITE OFF METHOD
Accounts receivable 100,000
1.Accounts of 30,000 are considered doubtful of
ILLUSTRATION – NET METHOD collection.

1.Sale of merchandise for 100,000, terms 5/10, n/30. No entry is necessary.

Accounts receivable 95,000

Sales 95,000 2.The accounts proved to be worthless.

2.Assume collection is made within the discount Bad debts 30,000

period.
Accounts receivable 30,000
Cash 95,000
3.The same accounts that are previously written off as
Accounts receivable 95,000 worthless are recovered or collected.

3.Assume collection is made beyond the discount Accounts receivable 30,000

period.
Bad debts 30,000
Cash 100,000
Cash 30,000
Accounts receivable 95,000
Accounts receivable 30,000
Sales discount forfeited 5,000

(Sales discount forfeited is classified as other

income.) DOUBTFUL ACCOUNTS IN THE INCOME
STATEMENT
ACCOUNTING FOR BAD DEPTS
1.Distribution cost
1.Allowance method – doubtful of collection
The granting of credit and collection of accounts are
2.Direct write-off method – worthless or uncollectible. under the charge of the sales manager, doubtful
accounts shall be considered as distribution cost.
2.Administrative expense

Granting of credit and collection of account are under

the charge of an offer other than sales manager,
doubtful accounts shall be considered as
administrative expense.

In the absence of any contrary statement, doubtful

accounts shall be classified as administrative
expense.