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 Lecture & Exercises

Current Assets:
Cash and Cash Equivalents –ch8
Trade & Other Receivables –ch9
 Byextending credit to your customers,
you give them the option to purchase
products or services today and pay for
them at a later date
 Credit cards
 Generates more sales
 You don’t receive payment right away –
so you can’t use the cash for your
 You might not get paid at all, depending
on the person
Service Revenue (for services)

Sales Revenue (for goods sold)
 30, 60, or 90 days
 Net 30 days (net of any returns you make)
 Ex. You sold goods for P1,000. Your
customer returned defective goods worth
P200. Customer pays you P800 (original
amount net of any returns) within 30 days

 May also be written as n/30

 n/10EOM
 Means: 10 days after the End of the Month
 2/10, n/30
 Readas: Two-ten, net thirty
 Means:
• if your customer pays within 10 days, you will
give him a 2% discount.
• If he pays beyond 10 days, there is no more
• But he must pay within 30 days
 1/10 EOM
 Means: 1% discount if the invoice is paid
within the first 10 days of the next month
 July 10 - Sold goods to customer.
• Terms are 60 days
• Terms are n/30
• Terms are 2/10, n/30
• Terms are 1/10 EOM

• Until when can customer pay?

• Until when is discount period?
Credit Terms Brief Description Amount To Be Received
The net amount is due within 10 days
Net 10 days $900
of the invoice date.
The net amount is due within 30 days
Net 30 days $900
of the invoice date.
The net amount is due within 60 days
Net 60 days $900
of the invoice date.
If paid within 10 days of the invoice
2/10, n/30 date, the buyer may deduct 2% from $882
the net amount. ($900 minus $18)
If paid in 30 days of the invoice date,
2/10, n/30 $900
the net amount is due.
If paid within 10 days of the invoice
1/10, n/60 date, the buyer may deduct 1% from $891
the net amount. ($900 minus $9)
If paid in 60 days of the invoice date,
1/10, n/60 $900
the net amount is due.
The net amount is due within 10 days
after the end of the month (EOM). In
Net EOM 10 $900
other words, payment for any sale
made in June is due by July 10.
 SalesReturns ex. Defective goods
• Also known as B.O. or Bad Orders!
 Sales Allowances ex. Defective goods,
and you reduce your customer’s total bill
 Sales Discounts ex. Paid early and you
give customer 2% discount
Sales Revenue xx
A/R xx

“Sales Returns and Allowances”
“Sales Discounts”

These are contra-accounts to “sales

 Sold
goods worth $1,000 to customers.
Customer returned $200 worth of
defective goods.

A/R 1000
Sales Revenue 1000

Sales Returns 200

A/R 200
 Terms2/10, n/30. Sold goods worth
$1,000. Customer paid within discount

A/R 1000
Sales Revenue 1000

Cash 980
Sales Discount 20
A/R 1000
 P. 182 – credit terms
 P. 183 – sales invoice
 P. 185-186 – sales returns, allowances,
 Self-Test2
 Brief Exercise 2
 You sell laptops online. Each laptop is
sold at P10,000. When first-time
customers buy laptops from you, you
don’t extend credit. They must pay cash
in full before you ship them your laptop.
 Aftertheir 3rd purchase with no problems,
you start extending them credit. You allow
50% downpayment, and the balance after
they receive the laptop.
 Customer from Sultan Kudarat. She
bought a laptop from you 3x. So far so
good. On the 4th purchase, you decide to
extend credit. So she pays you 50% first,
or P5,000. The other P5,000 is due after
she receives the laptop.
 You
wait and wait. No payment arrives.
Months later, still no payment.
 Normal and necessary risk of doing
business on a credit basis
 Part of operating expenses

Bad Debt Expense

 Also called Uncollectible Accounts

 Shortcut: BDE
The following year, you receive a text:

“Sorry, nagkasakit tatay ko, kelangan

bayaran yung mga gastos sa ospital.”
Bad Debt Expense 5,000
A/R 5,000
Bad Debt Expense 5,000
A/R 5,000
Bad Debt Expense 5,000
A/R 5,000

Not accepted by accounting rules. Why?

 Underthe direct write-off method,
companies end up recording bad debts
expense in a period different from the
period in which they recorded revenue.
Year 1 Year 2 Year 3 Year 4
Sales made 100M 70M 150M 70M
Record BDE 50M 35M 75M

Net Income 20M 115M (5M)

• From experience, every year, 50% of your

sales are uncollectible
• It takes you one year to determine that they
are uncollectible
 Match the bad debt expense with the
sales revenue. Record them in the same
 Howto do that? Estimate the bad debt
 Records bad debts expense even before
you determine that an account is
 Use estimates!
 Estimates based on what? (to be
discussed later)
 Company X made sales of 1M last year.
At year-end, the credit department
estimates bad debts to be 200,000 for last
year. What is the journal entry to record
bad debts expense?
 Because we estimate, we do not touch the
A/R account. We use a different account
called “Allowance for Doubtful Accounts”
Bad Debts Expense
Allowance for Doubtful Accounts

 Shortcut: ADA
A contra-account to Accounts Receivable
Presentation on the B/S:

A/R 1,000,000
Less: ADA 200,000
Net realizable value (NRV) 800,000
or Cash realizable value
1. Bad debts expense is a normal part of
2. We do not wait until the account becomes
uncollectible to record BDE (direct write-
off method). Matching principle is violated
3. We use estimates to record BDE.
4. We use an Allowance account to reduce
Accounts Receivable
5. Accounts Receivable are recorded on the
Balance Sheet at their net realizable value
Direct Write-off Method Allowance Method
BDE xx BDE xx
A/R xx ADA xx
Records BDE only when the account Records BDE in the same year which
becomes uncollectible the sale occurred, using estimates.

Ex. Customer informs you he is Records BDE even when there is no

bankrupt. You record BDE ACTUAL loss. BDE is estimated.
Not acceptable under GAAP Acceptable under GAAP
Directly reduces A/R Indirectly reduces A/R through the
use of an ADA account
Writes off A/R Does not yet write off A/R
 Brief Exercise 3
Methods of
Accounting for

Direct Write-off
Method (uses

Aging of
Percentage-of- Accounts or
Sales Percentage of
 Usually based on a % of total credit sales
or net credit sales
 Example: The company estimates bad
debts at 2% of total credit sales. How
much is BDE for the year? What if
estimate is based on net credit sales?
Sales 2,500,000
Sales Discounts 20,000
Sales Returns 30,000
Bad Debts Expense 49T
Allowance for Doubtful Accounts 49T
Also called the income-statement
approach, because the estimate is based
on sales for the year
 customer balances are classified by the
length of time they have been unpaid.
 Depending on company policy
 What is more accurate based on
company’s historical experience
Example: BDE for the year was determined
to be 10,000 from both methods.

(board illustration)
 Problems 4&5 (a & b only)
 Self-Test 3-6
 Example:

After repeated attempts to collect, Hardware’s

credit department determines that it cannot
collect a total of $1,200 from JV, a customer.

Allowance for Doubtful Accounts 1,200

Accounts Receivable 1,200
 T-account effect and B/S effect – see board

 The business has decided it will never collect

from JV. Therefore, eliminate the JV’s accounts
from the receivable records. This alerts the
credit department not to waste time pursuing
 When an A/R is written off, the receivable
does not die: JV still owes money.
However, the company stops pursuing
 Sometimes customers do end up paying
after awhile. Or a company may sue the
customer and recover some money.
 This is called: Recovery of a Bad Account
A/R 1,200
ADA 1,200
To reverse write-off

Cash 1,200
A/R 1,200
To record collection of A/R
 Self-Test7-8
 Question 7
 Brief Exercises 4-7
 Exercises 3-6
 Problems 1-5
 Tuesday – writeoffs, recoveries, difficult
A/R exercises not found in book
 Thursday – finish chapter 9
 The following Tuesday – compre quiz
 Read Chapter 9, accounts receivable
(half of the chapter)
 Answer problems for topics already