Chapter 6 – Reporting

Revenues, Receivables and

Cash
Outline
I) Revenue Recognition – Rules for recording a sale
II) Discounts and Returns reporting issues
III) Not everyone pays – Bad Debt Expense and Allowance for Bad Debt
IV) Writing off accounts
V) How to determine the Amount of Bad Debt
A. Percentage of Sales
B. Aging of Accounts Receivable
VI) Bank Reconciliations
I) Revenue Recognition – Rules for recording a sale

• Remember our 4 rules for recognizing revenue (all must be met)

1. Goods have been _________ or ___________ have been rendered.
a. Careful of shipping terms
i. FOB Shipping Point
ii. FOB Destination
2. There is persuasive evidence of an arrangement for customer ________.
a. E.g. Customer ______ within 30 days of receipt of invoice date
3. Price is ________ or ___________.
a. Price is _______ or easily ___________based on contract.
4. Collection is ____________ assured.
a. Nothing is guaranteed but we believe we can collect.
I) Sales & Sales Returns and Discounts
Sales Example
• North Face sells a $20,000 worth of winter coats to Dick’s Sporting Goods
on account. The coats cost North Face $5,000 to make.
• What Entry would North Face Record?

• When a sale is made, a company needs to record the sales price and
expense associated with the revenue (matching principle)
II) Sales & Sales Returns and Discounts
Return Example
E.g. Turns out that the supply of coats was the wrong color and Dick’s returns all of the
coats How would North Face record the return.

Customers have a right to return unsatisfactory or damaged merchandise and

receive a refund or an adjustment to their bill. Such returns are often accumulated
in a separate account called Sales Returns and Allowances.

Why would a company keep a separate returns account? Why not just debit the
revenue?
II) Always Be Closing – Incentivize Sales
• To incentivize people to buy items, companies will often accept credit
cards and/or provide a discount.
• Credit Cards – Card companies pay ~97-99% of the owed to the business
immediately.
• E.g. If I buy my $10 Latte from Starbucks and swipe my Mastercard, Mastercard pays
Starbucks ~$9.80 the next day. (Yes, I owe $10 to Mastercard)
• How much should Starbucks record in revenue? Why would Starbucks accept this deal?

• Recording Revenue
• Starbucks would want to track the discount.
Dr.
Dr.
Cr.
II) Why accept credit cards?
Companies accept credit cards for several reasons:
1. To increase __________.
2. To avoid costs of providing __________directly to customers.
3. To avoid _________due to bad checks.
4. To avoid losses due to _____________ credit card sales.
5. To receive _________ quicker.
 II) Sales Discounts to Businesses
• When customers purchase on open account, they may be offered a
__________________to encourage early payment.

Read as: “Two ten, net thirty”

This means that there is a 2% discount is the bill is paid in 10 days. If not paid within 10 days, the full amount is due in
30 days.
II) Should customers take the discount?
• With discount terms of 2/10,n/30, a customer saves $2 on a $100
purchase by paying on the 10th day instead of the 30th day.
Amount Saved
Interest Rate for 20 Days = =
Amount Paid

Annual Interest Rate = 365 Days × =

20 Days

Assuming the full amount of the invoice was paid in 30 days from the date of the purchase, the cost to “borrow”
the $.2 would be 37.23% on an annual basis. In other words, take the discount.
II) Reporting Net Sales
• Companies record credit card discounts, sales discounts, and sales
returns and allowances separately to allow management
to monitor these transactions.
III – Not everyone pays

• http://siccness.net/wp/wp-content/uploads/2014/02/chalee.jpg
III – Not everyone pays -> Accounting for Bad Debts
• ___________result from credit customers who will not pay the
amount they owe, regardless of collection efforts.
Bad Debt Expense
Record in same accounting
Matching Principle
period.
Sales Revenue

Most businesses record an estimate of the

bad debt expense with an adjusting
Allowance Method
entry at the end of the accounting
period.
III – Not Everyone Pays- Bad Debt Expense
• When Stewie sells $1,000 worth of his laser pistol and mind control services
on account, he should record

Based on past experience, Stewie knows that someone isn’t going to pay $125 ->he
just doesn’t know who. As a result, Stewie should

Note: Allowance for Bad Debt is the same account as Allowance for Doubtful Accounts.
Allowance for Bad Debt is a _________________Account that reduces the A/R balance.

If you prefer a real company, please read this article about City Sports going bankrupt
III) Not everyone pays – Write offs
• When it is clear that a ________ customer’s account receivable will
be uncollectible, the amount should be _________ from the Accounts
Receivable account and charged to the Allowance for Doubtful
Accounts,
• E.g. When Brian can’t pay Stewie, Stewie should record the following:

Note: The income statement is not impacted because the bad debt expense had
previously been reported.
Also, note that the __________did not change
Summary of the Accounting Process
Accounting for bad debts is a two step process.

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IV – How to determine the Bad Debt Expense
• IV a) Estimating Bad Debt based on
The Percentage of Credit Sales Method

Bad debt percentage is based on historical percentage of credit sales

that result in bad debts.
E.G. Based on historical amounts, Stewie predicts 1.25% of credit sales
is uncollectible. Assuming he should made $10,000 of credit sales
during the period, he would calculate:

The focus of the percentage of credit sales method is on determining the amount to record on the income
statement as Bad Debt Expense.
IV – How to determine the Bad Debt Expense
• IV B) AGING OF ACCOUNTS RECEIVABLE
• The focus of the aging of accounts receivable method is on determining the desired
balance in the ______________________on the balance sheet.
• Steps
1) You divide you’re A/R into “tranches” or “buckets.”
2) Based on historical data, you determine the % of uncollectible amounts in each
“bucket”
3) Multiply the amount in each bucket by the % to determine the total estimated
amount of uncollectible accounts.
4) Add the results.
THIS IS THE TOTAL OF _______________________________
5) Record the adjustment to bad debt expense
IV) ESTIMATING BAD DEBTS ─ AGING OF ACCOUNTS
RECEIVABLE

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CONTROL OVER ACCOUNTS RECEIVABLE
Practices That Can Help Minimize Bad Debts

Require approval of
customers’ credit by a
person independent of
Age accounts receivable
the sales and collections
periodically and contact
functions.
customers with overdue
payments.

Reward both sales and

collections personnel for
speedy collections.
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Receivables Turnover
This receivables turnover ratio measures how many times average
_______________ are recorded and collected for the year.

Deckers

6-20
VI – Cash and Bank Reconciliations
• Cash Management Procedures
• Accurate accounting so that reports of ______________and balances may be
prepared
• Controls to ensure that enough cash is available to meet current operating needs, maturing
liabilities, and unexpected emergencies
• Prevention of the accumulation of excess amounts of idle cash.
• Companies can get loose with the purse strings
• Investors push to have a return on investment
• Special dividends – e.g. Microsoft
• Cash is particularly important to monitor as it is easily stolen without proper internal controls
VI – Cash ->Internal Control of Cash
Separate jobs of receiving cash and disbursing cash.

Separate procedures of accounting for cash receipts

and cash disbursements.
Separate the physical handling of cash and all phases
of the accounting function.

Require that all cash receipts be deposited in a bank

daily.
Require separate approval of the purchases and the
Policies and actual cash payments.
Procedures Assign responsibilities for cash payment approval and
check-signing to different individuals.
Require monthly reconciliation of bank accounts with
the cash accounts on the company’s books.
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VI-Cash and Bank Reconciliations
• Timing differences between the bank statement and a companies books.
• Sometimes errors are made
• Need to ______________ the statements
• Goals: A bank reconciliation accomplishes two major objectives:
1.It checks the accuracy of the bank balance and the company cash records,
which involves developing the correct cash balance. The correct cash balance
(plus cash on hand, if any) is the amount of cash that is reported on the
balance sheet.

2.It identifies any previously unrecorded transactions or changes that are

necessary to cause the company’s Cash account(s) to show the correct cash
balance. Any transactions or changes on the company’s books side of the bank
reconciliation need journal entries.
Bank Reconciliation illustrated

General Format of Bank Reconciliation

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Bank Reconciliation - Example / Do Now

The February 28, Year 1, bank statement for Bennett Company and the February ledger accounts
for cash are summarized here:

BANK STATEMENT
  Checks Deposits Balance
Balance, February 1, Year 1     $ 7,800
Deposits recorded during February   $32,280 40,080
Checks cleared during February $32,880   7,200
NSF checks—Patty Prichard 204   6,996
Bank service charges 72   6,924
Balance, February 28, Year 1     6,924

Cash (A)

Feb. 1 Balance 7,800 Feb. Checks written 34,680

Feb. Deposits 33,720      

No outstanding checks and no deposits in transit were carried over from January;
however, there are deposits in transit and checks outstanding at the end of February.
Do Now:

Required:
1. Reconcile the bank account.
2. Give any journal entries that should be made as the result of the bank reconciliation.
3. What should the balance in the Cash account be after the reconciliation entries?
4. What total amount of cash should the company report on the February 28 balance sheet?
Requirement 1

BENNETT COMPANY
Bank Reconciliation
For the Month Ending February 28, Year 1
Company's Books Bank Statement

Ending balance per Cash Ending balance per bank

account * statement
Additions: Additions:
None Deposits in transit **

Deductions: Deductions:
Bank service charges
NSF check –Patty Prichard Outstanding checks

Ending correct cash balance Ending correct cash balance

Cash (A)

Feb. 1 Balance 7,800 Feb. Checks written 34,680

Feb. Deposits 33,720      
 Requirement 2
Debit Credit

1.

2.

Requirement 3

Requirement 4

Balance Sheet (February 28, Year 1)

Current Assets:
Cash…………………………………………………………….….
Questions?