CHAPTER 6

REPORTING AND INTERPRETING SALES

REVENUE, RECEIVABLES, AND CASH
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All

ACCOUNTING FOR NET SALES

REVENUE
The revenue realization principle requires that
revenues be recorded when earned.
Goods
Goods have
have been
been delivered
delivered or
or services
services
have
have been
been rendered.
rendered.
There
There is
is persuasive
persuasive evidence
evidence of
of an
an
arrangement
arrangement for
for customer
customer payment.
payment.
Price
Price is
is fixed
fixed or
or
determinable.
determinable.
Collection
Collection is
is
reasonably
reasonably assured.
assured.
6-2

CREDIT CARD SALES TO

CONSUMERS
Companies
Companies accept
accept credit
credit cards
cards for
for several
several reasons:
reasons:
1.
1. To
To increase
increase sales.
sales.
2.
2. To
To avoid
avoid costs
costs of
of providing
providing credit
credit directly
directly to
to customers.
customers.
3.
3. To
To avoid
avoid losses
losses due
due to
to bad
bad checks.
checks.
4.
4. To
To avoid
avoid losses
losses due
due to
to fraudulent
fraudulent credit
credit card
card sales.
sales.
5.
5. To
To receive
receive payment
payment quicker.
quicker.
When credit card sales are made, the company must pay the
credit card company a fee for the service it provides.

6-3

SALES DISCOUNTS TO BUSINESSES

When customers purchase on open account, they may be
offered a sales discount to encourage early payment.

Read as: Two ten, net thirty

6-4

TO TAKE OR NOT TO TAKE THE

DISCOUNT, THAT IS THE QUESTION
With
With discount
discount terms
terms of
of 2/10,n/30,
2/10,n/30, aa customer
customer
saves
saves $2
$2 on
on aa $100
$100 purchase
purchase by
by paying
paying
on
on the
the 10
10thth day
day instead
instead of
of the
the 30
30thth day.
day.
Interest Rate for 20 Days =

Amount Saved
Amount Paid

Interest Rate for 20 Days =

$2
$98

Annual Interest Rate =

365 Days
20 Days

= 2.04%

2.04% = 37.23%
6-5

SALES RETURNS AND ALLOWANCES

Customers have a right to return unsatisfactory or
damaged merchandise and receive a refund or an
adjustment to their bill. Such returns are often
accumulated in a separate account called Sales
Returns and Allowances.

Damaged
Merchandise
Returned
Merchandise
6-6

REPORTING NET SALES

Companies
Companies record
record credit
credit card
card discounts,
discounts,
sales
sales discounts,
discounts, and
and sales
sales returns
returns and
and allowances
allowances
separately
separately to
to allow
allow management
management
to
to monitor
monitor these
these transactions.
transactions.

6-7

MEASURING AND REPORTING

RECEIVABLES
Accounts receivable are
created when companies
have sales to customers
on open accounts.

Notes receivable are

written promises from
another party to pay with
specified terms.

Trade receivables are

amounts owed to the
business for credit sales of
goods or services.

Nontrade receivables are

amounts owed to the
business for other than
business transactions.

Balance Sheet Classifications

Current (short term)
Noncurrent (long term)
6-8

ACCOUNTING FOR BAD DEBTS

Bad debts result from credit customers who will not pay the
amount they owe, regardless of collection efforts.
Bad Debt Expense
Matching Principle

Record in same
accounting period.
Sales Revenue

Allowance
Method

Most businesses record an estimate

of the bad debt expense with an
adjusting entry at the end of the
accounting period.
6-9

RECORDING BAD DEBT EXPENSE

ESTIMATES
Deckers estimated bad debt expense for 2011 to
be $75,995. Prepare the adjusting entry.

Contra-asset account

Bad debt expense is normally classified as a selling

expense and is closed at year-end.

6-10

WRITING OFF SPECIFIC

UNCOLLECTIBLE ACCOUNTS
When
When itit is
is clear
clear that
that aa specific
specific customers
customers account
account
receivable
receivable will
will be
be uncollectible,
uncollectible, the
the amount
amount should
should be
be
removed
removed from
from the
the Accounts
Accounts Receivable
Receivable account
account and
and
charged
charged to
to the
the Allowance
Allowance for
for Doubtful
Doubtful Accounts.
Accounts.
Deckers
Deckers total
total write-offs
write-offs for
for 2011
2011 were
were $68,075.
$68,075.
Prepare
Prepare aa summary
summary journal
journal entry
entry for
for these
these write-offs.
write-offs.

6-11

SUMMARY OF THE ACCOUNTING

PROCESS
Accounting for bad debts is a two step process.

6-12

REPORTING ACCOUNTS RECEIVABLE

AND BAD DEBTS

6-13

ESTIMATING BAD DEBTS

PERCENTAGE OF CREDIT SALES METHOD
Bad debt percentage is based
on historical percentage of
credit sales that result in bad
debts.

6-14

ESTIMATING BAD DEBTS

PERCENTAGE OF CREDIT SALES METHOD
The focus of the percentage of credit
sales method is on determining the
amount to record on the income
statement as Bad Debt Expense.

6-15

ESTIMATING BAD DEBTS

AGING OF ACCOUNTS RECEIVABLE
The focus of the aging of
accounts receivable method is
on determining the desired
balance in the Allowance for
Doubtful Accounts on the
balance sheet.

6-16

ESTIMATING BAD DEBTS

AGING OF ACCOUNTS RECEIVABLE

6-17

CONTROL OVER ACCOUNTS

RECEIVABLE
Practices That Can Help Minimize Bad Debts
Require approval of
customers credit by a
person independent of
the sales and
collections functions.

Age accounts
receivable periodically
and contact customers
with overdue payments.

Reward both sales and

collections personnel
for speedy collections.
6-18

RECEIVABLES TURNOVER
This receivables turnover ratio measures how many times
average receivables are recorded and collected for the year.

Deckers 2011

6-19

FOCUS ON CASH FLOWS

Sales
Revenue

Add Decrease
in Accounts
Receivable
Subtract
Increase in
Accounts
Receivable

Cash Collected
from Customers

Excerpt from Cash Flow Statement

6-20

CASH AND CASH EQUIVALENTS

Money

Cash

Checks

Money
Orders
Bank Drafts

Cash
Equivalents

Certificates
of Deposit
T-Bills
6-21

CASH MANAGEMENT
Cash Management Procedures
Accurate accounting so
that reports of cash
flows and balances may
be prepared.

Controls to ensure
that enough cash is
available to meet
current operating needs,
maturing liabilities, and
unexpected
emergencies.

Prevention of the
accumulation of excess
amounts of idle cash.
6-22

INTERNAL CONTROL OF CASH

Internal control refers to policies and procedures designed to:
Safeguard
assets.

Provide
reasonable
assurance on
the reliability of
financial
records.

Provide
reasonable
assurance on
the
effectiveness
and efficiency
of operations.

Provide
reasonable
assurance on
the compliance
with laws and
regulations.

Cash
Cash is
is the
the asset
asset most
most vulnerable
vulnerable to
to theft
theft and
and fraud.
fraud.
6-23

INTERNAL CONTROL OF CASH

Separate jobs of receiving cash and disbursing
cash.

Separation
of Duties

Separate procedures of accounting for cash

receipts and cash disbursements.
Separate the physical handling of cash and all
phases of the accounting function.
Require that all cash receipts be deposited in a
bank daily.

Policies and
Procedures

Require separate approval of the purchases and

the actual cash payments.
Assign responsibilities for cash payment approval
and check-signing to different individuals.
Require monthly reconciliation of bank accounts
with the cash accounts on the companys books.
6-24

CONTENT OF A BANK STATEMENT

Interest Earned
(INT)

Electronic Funds
Transfer (EFT)
Not Sufficient
Funds (NSF)
Service Charge
(SC)
6-25

NEED FOR RECONCILIATION

Explains the difference between cash reported on bank
statement and cash balance on companys books.
Reasons:
1. Timing Differences
a) Transactions recorded in the books but not shown
on the bank statement.
b) Transactions shown on the bank statement but not
recorded in the books.
2. Errors in Recording Transactions
Outstanding
Checks
Deposits in
Transit

Interest
Earned

Bank Service
Charges
NSF
Checks

Errors
6-26

BANK RECONCILIATION
ILLUSTRATED
General Format of Bank Reconciliation

6-27

BANK RECONCILIATION
ILLUSTRATED
Example of a Bank Reconciliation

6-28

BANK RECONCILIATION
ILLUSTRATED
The bank reconciliation identifies previously unrecorded transactions or
changes that are necessary to cause the companys Cash account(s) to
show the correct cash balance. Any transactions or changes on the
companys books side of the bank reconciliation need journal entries.

6-29

CHAPTER SUPPLEMENT:
RECORDING DISCOUNTS AND
RETURNS
Assume
Assume aa credit
credit card
card company
company is
is charging
charging aa 33 percent
percent fee
fee for
for
its
its service
service and
and Deckers'
Deckers' Internet
Internet credit
credit card
card sales
sales are
are $3,000
$3,000
for
for January
January 2.
2.
Prepare
Prepare the
the journal
journal entry.
entry.

6-30

CHAPTER SUPPLEMENT:
RECORDING DISCOUNTS AND
RETURNS
Similarly,
Similarly, assume
assume that
that credit
credit sales
sales of
of $1,000
$1,000 are
are
recorded
recorded with
with terms
terms 2/10,
2/10, n/30,
n/30, and
and payment
payment is
is made
made
within
within the
the discount
discount period.
period.
Prepare
Prepare the
the journal
journal entries.
entries.

6-31

CHAPTER SUPPLEMENT:
RECORDING DISCOUNTS AND
RETURNS
Sales
Sales returns
returns and
and allowances
allowances should
should always
always be
be treated
treated as
as aa
contra-revenue.
contra-revenue.
Assume
Assume that
that Fontana
Fontana Shoes
Shoes of
of Ithaca,
Ithaca, New
New York,
York, buys
buys 40
40
pairs
pairs of
of sandals
sandals from
from Deckers
Deckers for
for $2,000
$2,000 on
on account.
account. Before
Before
paying
paying for
for the
the sandals,
sandals, however,
however, Fontana
Fontana discovers
discovers that
that 10
10
pairs
pairs of
of sandals
sandals are
are not
not the
the color
color ordered
ordered and
and returns
returns them
them
to
to Deckers.
Deckers.
Prepare
Prepare the
the journal
journal entries.
entries.

6-32

END OF CHAPTER 6

6-33