Reporting and Interpreting Sales

Revenue, Receivables, and Cash

Chapter 6

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, Inc.

Accounting for Sales Revenue

The revenue principle requires that
revenues be recorded when earned:

Goods
Goods or
or services
services
have
have been
been delivered.
delivered.
Amount
Amount of
of customer
customer
payments
payments known.
known.
Collection
Collection is
is
reasonably
reasonably assured.
assured.
McGraw-Hill/Irwin

Slide 2

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

2/10, n/30
Discount
Percentage

# of Days in
Discount
Period

Otherwise, the
Full Amount Is
Due

Maximum Days
in Credit Period

Read as: Two ten, net thirty

McGraw-Hill/Irwin

Slide 3

To Take or Not Take the Discount

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 =

McGraw-Hill/Irwin

= 2.04%

365 Days 2.04% = 37.23%

20 Days
Slide 4

Sales Returns and Allowances

Debited for damaged
merchandise.
Debited for returned
merchandise.
Contra revenue
account.
McGraw-Hill/Irwin

Slide 5

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.

McGraw-Hill/Irwin

Slide 6

Measuring and Reporting Receivables

When
When companies
companies allow
allow customers
customers to
to purchase
purchase
merchandise
merchandise on
on an
an open
open account,
account, the
the customer
customer promises
promises
to
to pay
pay the
the company
company in
in the
the future
future for
for the
the purchase.
purchase.

Accounts Receivable

Trade receivables are

amounts owed to the
business for credit sales of
goods, or services.
McGraw-Hill/Irwin

Nontrade receivables are

amounts owed to the
business for other than
business transactions.
Slide 7

Accounting for Bad Debts

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

Bad Debt Expense

Matching Principle

Record in same
accounting period.
Sales Revenue

Most
Most businesses
businesses record
record an
an estimate
estimate of
of the
the bad
bad debt
debt
expense
expense
with
with an
an adjusting
adjusting entry
entry at
at the
the end
end of
of the
the
accounting period.

McGraw-Hill/Irwin

Slide 8

Allowance for Doubtful Accounts

Balance Sheet Disclosure
Accounts
Accounts receivable
receivable
Less:
Less: Allowance
Allowance for
for doubtful
doubtful accounts
accounts
Net
Netrealizable
realizablevalue
valueof
ofaccounts
accounts receivable
receivable

Amount the business

expects to collect.
McGraw-Hill/Irwin

Slide 9

Estimating Bad Debts Percentage of

Credit Sales
Bad debt percentage is based on
actual uncollectible accounts from
prior years credit sales.
Focus is on determining the amount to record
on the income statement as
Bad Debt Expense.

Net
Net credit
credit sales
sales
%
% Bad
Bad debt
debt loss
loss rate
rate
Amount
Amount of
of journal
journal entry
entry
McGraw-Hill/Irwin

Slide 10

Aging of Accounts Receivable

--

Accounts
Accounts Receivable
Receivable
%
% Estimated
Estimated Uncollectible
Uncollectible
Desired
Desired Balance
Balance in
in Allowance
Allowance Account
Account
Allowance
Allowance Account
Account Credit
Credit Balance
Balance
Amount
Amount of
of Journal
Journal Entry
Entry

Accounts
Accounts Receivable
Receivable
%
% Estimated
Estimated Uncollectible
Uncollectible
Desired
Desired Balance
Balance in
in Allowance
Allowance Account
Account
++ Allowance
Allowance Account
Account Debit
Debit Balance
Balance
Amount
Amount of
of Journal
Journal Entry
Entry
McGraw-Hill/Irwin

Slide 11

Focus on Cash Flows

Add Decrease
in Accounts
Receivable
Sales
Revenue
Subtract
Increase in
Accounts
Receivable

McGraw-Hill/Irwin

Cash Collected
from
Customers

Slide 12

Cash and Cash Equivalents

Checks

Money
Orders

Cash and
Cash
Equivalents
Certificates
of Deposit

Bank Drafts
T-Bills

McGraw-Hill/Irwin

Slide 13

Internal Control of Cash

Internal control refers to policies and procedures designed to:
Properly
account for
assets.

Safeguard
assets.

Ensure the
accuracy of
financial
records.

Cash
Cash is
is the
the asset
asset most
most susceptible
susceptible to
to theft
theft and
and fraud.
fraud.
Recording
Separation
of Duties

Custody
Authorization

McGraw-Hill/Irwin

Slide 14

Internal Control of Cash

Bank
Reconciliations
Daily
Deposits

Cash
Controls

Payment
Approval

Purchase
Approval

Check
Signatures
Prenumbered
Checks

McGraw-Hill/Irwin

Slide 15

Bank Reconciliation
Explains the difference between cash reported on bank
statement and cash balance on companys books and
provides information for reconciling journal entries.
Balance per Bank
+ Deposits in Transit
- Outstanding Checks
Bank Errors
= Correct Balance
McGraw-Hill/Irwin

Balance per Book

+ Deposits by Bank
(credit memos)
- Service Charge
- NSF Checks
Book Errors
= Correct Balance
Slide 16

End of Chapter 6

2008 The McGraw-Hill Companies, Inc.