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Learning Outcomes
Once you have completed this lesson, you should be able
to:
1. Explain how companies measure and report sales
revenue.
2. Explain how companies measure, report and manage
receivables.
3. Apply internal control principles to cash and explain
reporting of cash.
Learning Objectives
1. Explain how companies measure and report sales
revenue.
2. Explain how companies measure and report
receivables and impairment of accounts receivable
expenses.
3. Explain how companies manage accounts receivables.
4. Explain and apply internal control principles to cash.
5. Prepare a bank reconciliation and explain its purpose.
6. Explain the reporting of cash.
Learning Objective 1
LO 1
Activity
Sales of
goods and
services to
customers
Income
Statement
Balance
Sheet
Cash
Sales revenue
Accounts
Receivable
Statement of
Cash Flows
Cash received
from customers
LO 1
Sales Revenue
LO 1
Sales Revenue
LO 1
LO 1
Sales Discounts
Credit Period
Full amount
less discount
Time
Due
Discount
Period
Purchase or Sale
Read as: Two ten, net thirty
Lau Yin Kheng
Discount
Percent
Otherwise, Net
(or All) is Due
2/10,n/30
Credit
Period
LO 1
Date
Description
Debit Credit
5,000
Jul
4,900
100
2 Cash (A+)
Sales Discount[5,000x2%] (R-)(OE-)
Accounts Receivable (A-)
5,000
5,000
LO 1
Customer Service
Reason for
the return?
LO 1
Date
Description
Debit Credit
196
4
200
Learning Objective 2
LO 2
Types of Receivables
Amounts due from individuals and other companies that
are expected to be collected in cash.
Accounts
Receivable
Notes
Receivable
Other
Receivables
Amounts owed to
the business for
credit sales of
goods, or services.
Amounts owed to
the business for
which formal
instruments of credit
are issued as proof
of debt.
Nontrade amounts
owed to the
business for other
than business
transactions.
LO 2
LO 2
We sell amounts
biscuits on
The estimated
of Why cant we just
Accounting
rules
credit.
It is known
likely aswrite off accounts
doubtful
accounts
are
require you
tosome
after they turn
that
impairments
of
accounts
estimate the
amountand
bad?
customers
may
receivable
expense
they
of doubtful
accounts
notwith
pay.revenues
should
be matched
forsame
each fiscal
fiscal period that
in the
period.
created
those accounts.
LO 2
Allowance Method
Direct Write-Off
Theoretically undesirable:
No matching.
Required by GAAP.
Not GAAP
LO 2
LO 2
Date
Description
Debit Credit
Selling expense
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1,500
1,500
Contra-asset account
LO 2
XXX
8,500
XX
XX
XXXX
XXX
XXX
1,500
XX
XX
LO 2
Writing Off an
Uncollectible Account Receivable
Barry Best Biscuit Company
JulyBalance
2015,Sheet
Barryat Best
Biscuit
30 June
(partial)Company
Assume in
learns
that
Chill Caf has gone out of business and that the $500
Current
Assets:
Cash
account receivable from this customer is now worthless. XXX
Accounts receivable
$ 10,000
When
an account
is determined
to be completely
impaired,
Less:
Allowance
for impairment
of accounts receivable
(1,500)
8,500
Inventory
XX
it no longer qualifies as an asset and should be written off.
Prepaid expense
XX
Total current assets
XXXX
Date
Description
Debit Credit
500
500
LO 2
Writing Off an
Uncollectible Account Receivable
Before write-Off
Accounts receivable
After Write-Off
10000
-500
9500
1500
-500
1000
8500
8500
LO 2
Recovery of Accounts
LO 2
Recovery of Accounts
Then the collection of the account is recorded in the usual
manner:
Date
Description
Debit
Credit
500
500
Estimating Impairment of
Accounts Receivable
LO 2
LO 2
Customer
Individually
significant
E
G
H
Sub-total
Age analysis
A
B
C
D
F
Sub-total
x % impairment
Est impairment
Total
Lau Yin Kheng
Sunny Company
Schedule of Accounts Receivable
at 31 December 2014
Total AR
Current
Days
Past Due
1-30
31-60
> 60
$130,000 $120,000
$10,000
150,000
145,000
$3,000
2,000
100,000
80,000 $10,000
5,000
5,000
380,000
345,000
10,000
8,000
17,000
4,000
12,000
5,000
20,000
35,000
76,000
456,000
3,500
10,000
5,000
8,000
30,000
56,500
1%
565
500
1,000
1,000
5,000
3,000
9,500
3%
285
4,000
1,500
6,500
5%
325
3,000
500
3,500
10%
350
Total
Estimated
Impairment
10,000
5,000
10,000
25,000
1,525
26,525
LO 2
Method 1
Sunny Company
Balance Sheet at 31 December 2014(partial)
Current Assets:
Cash
Accounts receivable
Less: Allowance for impairment of accounts receivable
Inventory
Prepaid expense
Total current assets
Method 2
$ 456,000
(26,525)
429,475
8,120
40
470,635
Sunny Company
Balance Sheet at 31 December 2014(partial)
Current Assets:
Cash
Accounts receivable, net of $26,525 allowance
Inventory
Prepaid expense
Total current assets
Lau Yin Kheng
$ 33,000
33,000
429,475
8,120
40
470,635
LO 2
Case 2:
LO 2
Allowance for
Impairment of AR
Case 2
2,000
10,000
Adjustment needed
16,525
28,525
Desired balance
26,525
26,525
Date
(Case 1) Description
Impairment of Accounts Receivable
Date
Dr
Cr
16,525
Dr
16,525
Cr
28,525
28,525
Learning Objective 3
LO 3
Factoring
Accounts
Receivable
Credit Card
Sales
LO 3
Net Sales
Average Net Acc. Receivable
LO 3
365 Days
Accounts Receivable Turnover
Average
Collection =
Period
365 Days
27.03 Times
= 13.50 days
Learning Objective 4
LO 4
LO 4
Financial Pressure
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Rationalization
LO 4
Safeguard assets.
LO 4
Establish Responsibility
Assign responsibility and identify specific individual for a
given task at a time.
Cash receipts: only cashiers are authorised to handle
cash receipts
Cash payments: only authorised persons can sign
cheques and authorise payments.
Segregation of Duties
Responsibility for record keeping, custody of assets and
authorization should be separate.
Related activities should be assigned to different
individual.
LO 4
Documentation Procedures
Use prenumbered documents to account for all
documents. Source documents should be promptly
given to accounting department for timely recording.
Physical Controls
Relate to safeguarding of assets and enhance the
accuracy and reliability of the accounting records.
Cash and cheques to be deposited in bank account on a
daily basis.
LO 4
LO 4
Human element.
Ineffective internal control could be caused by
employees indifference, fatigue or negligence.
Employees in collusion can override the best controls.
Size of the business.
Small companies find it difficult to segregate duties.
LO 4
Petty Cash
Funds
Has one
custodian.
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Replenished
periodically.
Learning Objective 5
PREPARE A BANK
RECONCILIATION AND EXPLAIN
ITS PURPOSE
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LO 5
Bank reconciliation.
LO 5
Bank Reconciliation
Explains the difference between cash reported on bank
statement and cash balance on companys books and provides
information for reconciling journal entries.
Balance per Bank
+ Deposits in Transit (late
deposits not yet reflected in
the bank statement)
Outstanding Cheques
(Issued but not yet
presented to the bank)
Bank Errors
= Adjusted Balance
= Adjusted Balance
LO 5
Bank Reconciliation
The bank statement for Simmons Company indicated a cash
balance of $9,610 on 31st July. On this date, the cash ledger account
shows a balance of $7,430. Using 4 reconciling steps, Simmons
determine the following reconciling items:
STEP 1: Deposits in transit: Deposit received by bank
on 1st August.
STEP 2: Outstanding cheques: Totaled
STEP 3: Bank memoranda:
Debit: A customers NSF cheque
Credit: Interest on bank balance for July
STEP 4: Errors: Cheque 781 for supplies cleared the bank
for $268 but was erroneously recorded as $240.
A $486 deposit by Acme Company was
erroneously credited to our account by the bank.
Lau Yin Kheng
$500
$2,417
$225
$30
$28
$486
LO 5
Bank Reconciliation
Balance per bank statement, 31st July
9,610
Additions:
Deposit in transit (Step 1)
500
Deductions:
Outstanding cheques (Step 2)
2,417
486
(2,903)
7,207
7,430
Additions:
Interest (Step 3)
30
Deductions:
NSF cheque (Step 3)
Recording error (Step 4)
Adjusted cash balance
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225
28
(253)
$
7,207
LO 5
Debit
Credit
30
30
28
225
253
Learning Objective 6
LO 6
Bank credit
card sales
Bank drafts
Coins and
paper money
Cheques
LO 6
Restricted Cash
Line of Credit
Including compensating
balance must be disclosed