Financial Managment CH8

- - - - - - - - - - - ch8 subsidiary ledger a ledger that is used to manage detailed information that would be difficult ti track in a general ledger account subsidiary accounts are controlled by a single general ledger account known as the control account accounts receivable subsidiary ledgers include t accounts that record transaction from different customers. Interest revenue interest charge occur when customer does not pay in full within the credit term. for example : SYCH Ltd. has a 3000 outstanding balance, and the interest charge is 28 % eg. 3000*28%*1/12 =70 debit accounts receivable 70 credit interest revenue 70 Bad debts Debit Bad Debts Expense Credit Allowance for Doubtful Accounts (this is a contra asset) allowance method- management estimates the uncollectible accounts at the end of each period. percentage of receivable outstanding: management estimates what percentages of receivable is likely to be uncollectible - based on past experience, with current economic climate factored aging of accounts receivable method - stratifying receivables classifies them by the length of time they have been outstanding. - the longer the receivable is outstanding the higher the estimated percentage of uncollectible debts carrying amount of accounts receivable- is the amount at which receivable are presented in the statement of financial position and reflected management's estimated of the receivable that will ultimately be received. Allowance for Doubtful accounts is normally a credit account Bad debt expense - calculating the difference between the required balance and the existing unadjusted balance in the allowance account
- - - - - - - - - - - - - - - If there is an opening debit balance - the account is added to the required amount Bad debts expense is reported in the income statement as an operating expense. the balance in allowance for doubtful accounts is deducted from accounts receivable in the current assets section of the statement of financial statement. Write offs uncollectible accounts debit allowance for doubtful accounts credit accounts receivable under allowance method, every write off of accounts receivable is debited to the allowance for doubtful accounts not to bad debit expense Bad Debt Recovery reverse the write-off entry to reinstate the customer account debit accounts receivable credit allowance for doubtful accounts record cash collection Debit Cash Credit Accounts receivable Account for notes receivable promissory notes may be used when when individuals and companies lend or borrow money when the amount of the transaction and the length of the credit period exceeds normal limits settle an account receivable where payment cannot be made within the established credit period. recording notes receivable (when accounts receivable is settled as promissory note) debit notes receivable credit accounts receivable record interest from notes receivable debit interest receivable credit interest revenue honoured notes receivable
- - - - - - - - - - - - - - - - debit cash credit notes receivable credit interest receivable Dishonoured notes receivable notes receivable is transferred into an accounts receivable by due date debit accounts receivable credit notes receivable credit interest receivable if no hope of collection principal and accused interest will be written off. because no allowance has been established bad debts is recorded when written off Debit Bad Debts Expense Credit Notes receivable Credit Interest receivable Bad debts expense is recorded as an operating expense interest revenue is recorded separately in non-operating section extending credit risky customers might be needed to provide letters of credit or bank guarantee companies should ask new customers seeking for credit for reference from banks and supplier of payment history establishing payment period when extending credit credit period should be similar to competitors monitoring collection an accounts receivable aging schedule should be prepared and reviewed at least monthly. receivable turnover ratio- the mount of times on average that receivable are collected through the years (higher the better = net credit sales/ average gross accounts receivable gross accounts receivables is the amount reported in the accounts receivable before deducting allowance for doubtful account average gross accounts receivable = beginning accounts receivable + ending accounts receivable /2 net sales = net credit sale
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