Lecture 8 - 09.20.23 Bad Debts: -Methods for calculating B.D. oPercentage of receivables method: 1stget the new allowance for B.D: % (s) of the ending A/R balance Plural because there is another version of this method: Aging A/R oBased on how old they are o Then to get the B.D. Expense: New Allowance for B.D - Existing Allowance for B.D. oPercentage of credit sales: B.D Expense = % of Net Credit Sales Does not take into account to % of receivables. -Write-Offs: oWhen a specific customers account will not get paid for: Due to bankruptcy: Do not affect the NI or the Net Realizable Value Because an asset is being reduced, and a contra-asset is also being reduced. Dr. Allowance for B.D Cr. A/R -Recoveries: oWhen we have done a write-off and a customer is able to pay of its bad debt that we have already written off: Essentially the reverse of a write off + the addition of the receivable to cash: Dr. A/R Cr. Allowance for B.D Dr. Cash Cr. A/R Managing A/R -A/R Turnover Ratio: oRatio of net credit sales to average A/R Net Credit sales / Average A/R oThe average A/R is the: (A/R in the beginning of the year + at the ed of the year) / 2. oThe higher the ratio, the better. -Average Collection Ratio: o365 / A/R Turnover Ratio oWe want this ratio to be small. Because we are calculating how frequent we have a collection period
Notes Receivable: -Arise by typically selling items of high value: oWill always have interest associated with it. Factoring or Discounting Receivables: -Means selling receivables to a bank or someone else. -Example: X company sells a note of 1K to a bank with a service fee of 3%. oCr. A/R = $970 oCr. Service Fee Expense = $30 Dr. Cash = $1000 Contingent Liability from discount receivables: -These come from factoring or discount receivables with recourse. -See example in notes. -These are not reported as a liability of an balance sheet, but must be reported in the notes section.