Lecture 8 - 09.20.23

Georgia Institute Of Technology **We aren't endorsed by this school
ACCT 2101
Oct 17, 2023
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Lecture 8 - 09.20.23 Bad Debts: - Methods for calculating B.D. o Percentage of receivables method: 1 st get 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 o Based on how old they are o Then to get the B.D. Expense: New Allowance for B.D - Existing Allowance for B.D. o Percentage of credit sales: B.D Expense = % of Net Credit Sales Does not take into account to % of receivables. - Write-Offs: o When 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: o When 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: o Ratio of net credit sales to average A/R Net Credit sales / Average A/R o The average A/R is the: (A/R in the beginning of the year + at the ed of the year) / 2. o The higher the ratio, the better. - Average Collection Ratio: o 365 / A/R Turnover Ratio o We 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: o Will 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%. o Cr. A/R = $970 o Cr. 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.
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