Week 4 Class Notes (Cash AR and Sales)

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School
University of Illinois, Chicago **We aren't endorsed by this school
Course
ACTG 522
Subject
Accounting
Date
Oct 26, 2023
Pages
10
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WEEK 4 CLASS NOTES CASH, ACCOUNTS RECEIVABLE & SALES— CHAPTER 6 CASH & CASH EQUIVALENTS Cash is money or any instrument that banks will accept for deposit and immediately credit your account (e.g. money orders, checks). Cash equivalents are investments with a maturity of three months or less that are readily convertible to cash and whose value is unlikely to change (e.g. short- term CD's or treasury bills). Effective Cash Management Make sure you have enough cash to meet obligations. Prevent excess amounts of idle cash from accumulating. Have adequate internal controls so that cash is safeguarded from theft, fraud, etc. ACCOUNTS RECEIVABLE Accounts receivable are amounts that customers owe to the company due to prior sales of goods or services. Accounts Receivable Example—Hornet Tax Services: Assume that Hornet Tax Services has $125,000 in gross Accounts Receivable and $15,000 in its Allowance for Doubtful Accounts at the beginning of the year. During the year, Hornet completes 230 tax returns and bills its clients $5,000 per tax return (i.e., Hornet bills a total of $1,150,000). Hornet collects $1,125,000 from clients during the year. What journal entries does Hornet make when they bill clients and collect cash from clients during the year? What is Hornet's Accounts Receivable balance at the end of the year, after accounting for these transactions? Assume that of Hornet's year-end Accounts Receivable balance, only $100,000 is current (i.e., not past due). Does Hornet need to make any further journal entries
related to its Accounts Receivable before preparing its year-end financial statements? Week 4 Class Notes, Page 2 of 8
JOURNAL ENTRIES RELATED TO UNCOLLECTIBLE ACCOUNTS RECEIVABLE ESTIMATING FUTURE BAD DEBTS To avoid overstated assets and net income, the company must make a journal entry in the period of sale to account for future bad debts. However, the company does not yet know exactly which (or how many) of its accounts receivable will not be collected. Therefore, the company will use the allowance method, which makes an estimate of how many accounts will be uncollectible in the future. The company then makes an adjusting journal entry to record this estimate of future bad debts as follows: Journal Entry to Record ESTIMATED BAD DEBTS Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts (also called Bad Debt Reserve) What kind of account is Bad Debt Expense? Is it a temporary or permanent account? What kind of account is Allowance for Doubtful Accounts? Is it a temporary or permanent account? WRITING OFF ACTUAL BAD DEBTS Once the company knows that a particular receivable is uncollectible, they will remove that account receivable from the books. This is called a write-off . Journal Entry to WRITE OFF an ACTUAL BAD DEBT Dr. Allowance for Doubtful Accounts (decreases/uses up the Allowance) Cr. Accounts Receivable (takes the Accounts Receivable off the books) RECOVERING A PREVIOUSLY WRITTEN OFF ACCOUNT RECEIVABLE If the company collects an account receivable that was previously written off, they first make an entry to reverse the write-off entry and then make an entry for a normal cash collection of a receivable. This is called a recovery . Journal Entries to Record a RECOVERY Reverse write-off entry Dr. Accounts Receivable Cr. Allowance for Doubtful Accounts Record cash receipt Dr. Cash Cr. Accounts Receivable Week 4 Class Notes, Page 3 of 8
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