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Chapter 6Reporting and Interpreting SalesRevenue, Receivables, and CashIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Accounting for Sales RevenueThe revenue principle requires thatrevenues be recorded when earned:AnAn exchangeexchange hashas takentakenplace.place.TheThe earningsearnings processprocess isisnearlynearly complete.complete.CollectionCollection isis probable.probable.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Reporting Net SalesCompaniesCompanies recordrecord salessales discounts,discounts, salessalesreturnsreturns andand allowances,allowances, andand creditcredit cardcarddiscountsdiscounts separatelyseparately toto allowallow managementmanagementmonitoringmonitoring ofof thesethese transactions.transactions.Sales revenueLess: Sales returns and allowancesSales discountsCredit card discountsNet salesIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Credit Card Sales to ConsumersCompanies accept creditcards for several reasons:To increase sales.To avoid providing creditdirectly to customers.To avoid losses due to badchecks.To receive payment quicker.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Credit Card Sales to ConsumersWhen credit card sales are made,the company must pay the creditcard company a fee for the service itprovides.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Credit Card Sales to ConsumersOn January 2, a Timberland factory store’scredit card sales were 3,000. The creditcard company charges a 3% service fee.Prepare the Timberland journal entry.GENERAL JOURNALDateDescriptionPage 34DebitCreditJan. 2Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Credit Card Sales to ConsumersOn January 2, a Timberland factory store’scredit card sales were 3,000. The creditcard company charges a 3% service fee.CreditCardDiscounts arereportedPreparetheTimberlandjournalentry.as a contra revenue account.GENERAL JOURNALDateDescriptionJan. 2 Accounts ReceivableCredit Card DiscountsSales RevenuePage 34DebitCredit2,910903,000 3,000 3% 90 Credit Card FeeIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountWhen companies allow customers topurchase merchandise on an openaccount, the customer promises topay the company in the future for thepurchase.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on Account2/10, n/30Read as: “Two ten, net thirty”When customers purchase on openaccount, they may be offered a salesdiscount to encourage early payment.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on Account2/10, n/30Percentageof DiscountIrwin/McGraw-Hill# of DaysDiscount IsAvailableOtherwise,the FullAmount IsDue# of Dayswhen FullAmount IsDue The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountOn January 6, Timberland sold 1,000of merchandise on credit with termsof 2/10, n/30.Prepare the Timberland journal entry.GENERAL JOURNALDateJan.DescriptionPage 34DebitCredit6Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountOn January 6, Timberland sold 1,000of merchandise on credit with termsof 2/10, n/30.Prepare the Timberland journal entry.GENERAL JOURNALDateJan.Description6 Accounts ReceivableSales RevenueIrwin/McGraw-HillPage 34DebitCredit1,0001,000 The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountOn January 14, Timberland receivesthe appropriate payment from thecustomer for the January 6 sale.Prepare the Timberland journal entry.GENERAL JOURNALDateDescriptionPage 34DebitCreditJan. 14Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountOn January 14, Timberland receivesthe appropriate payment from thecustomer for the January 6 sale.Prepare the Timberland journal entry.Date 1,000 2% 20 sales discountGENERAL JOURNAL 1,000 - Description 20 980 cash receiptDebitJan. 14 CashSales DiscountsAccounts ReceivableIrwin/McGraw-HillContra-revenue accountPage 34Credit980201,000 The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountIf the customer remits the appropriateamount on January 20 instead ofJanuary 14, what entry wouldTimberland make?GENERAL JOURNALDateDescriptionPage 34DebitCreditJan. 20Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales to Businesses on AccountIf the customer remits the appropriateamount on January 20 instead ofJanuary 14, what entry wouldTimberland make?Since the customer paid outside of the discountperiod,a sales JOURNALdiscount is not granted.Page 34GENERALDateDescriptionJan. 20 CashAccounts ReceivableIrwin/McGraw-HillDebitCredit1,0001,000 The McGraw-Hill Companies, Inc., 2001

Sales Returns and AllowancesDebited for damagedmerchandise.Debited for returnedmerchandise.Contra revenueaccount.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales Returns and AllowancesOn July 8, Fontana Shoes returns 500of hiking boots originally purchasedon account from Timberland.Prepare the Timberland journal entry.GENERAL JOURNALDateJulyDescriptionPage 40DebitCredit8Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Sales Returns and AllowancesOn July 8, Fontana Shoes returns 500of hiking boots originally purchasedon account from Timberland.Prepare the Timberland journal entry.GENERAL JOURNALDateJulyDescription8 Sales Returns and AllowancesAccounts ReceivableIrwin/McGraw-HillPage 40DebitCredit500500 The McGraw-Hill Companies, Inc., 2001

Gross Profit PercentageGross ProfitPercentage Gross ProfitNet ortedgrossgrossprofitprofitofof 342,839,000 342,839,000ononsalessalesofof 862,168,000. -Hill The McGraw-Hill Companies, Inc., 2001

Gross Profit PercentageGross ProfitPercentageGross ProfitPercentage Gross ProfitNet Sales 342,839,000 862,168,000 igherhighernetnetincome.income.1998 Gross Profit ComparisonsTimberlandSkechers U.S.A.Wolverine39.8%41.5%31.8%Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Measuring and ReportingReceivablesAccountsReceivableAmounts owed byother companiesor persons forcash, goods, orservices.Irwin/McGraw-HillOpen accountsowed to thebusiness by tradecustomers. The McGraw-Hill Companies, Inc., 2001

Measuring and ReportingReceivables 1,200TermSixty daysPrincipalthe orderofWheaton, Ohio Payee January 5, 2000after date I promise to pay toWheaton Mountain BankOne thousand two hundred --------------------------------- DollarsPayable atInterestMountainRateWheatonBankValue received with interest atNo. 10242 DueMarch 6, 200012%Makerper annumPatTimberland CompanyRogersDue DateIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Accounting for Bad DebtsBadBad debtsdebts resultresult fromfrom creditcredit customerscustomerswhowho willwill notnot paypay thethe businessbusiness thetheamountamount theythey owe,owe, regardlessregardless ofofcollectioncollection efforts.efforts.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Accounting for Bad DebtsBad DebtExpenseMatchingPrincipleRecord in sameaccountingperiod.SalesRevenueIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Accounting for Bad DebtsMostMost businessesbusinesses recordrecord anan estimateestimate ofof thethebadbad debtdebt expenseexpense byby anan adjustingadjusting entryentryatat thethe endend ofof thethe accountingaccounting period.period.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Recording Bad Debt ExpenseEstimatesTimberland estimated bad debtexpense for 1998 to be 2,383,000.Prepare the adjusting entry.GENERAL JOURNALDateDescriptionPage 78DebitCreditDec. 31Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Recording Bad Debt ExpenseEstimatesTimberland estimated bad debtexpense for 1998 to be 2,383,000.Prepare the adjusting entry.Bad DebtExpense isnormally classified as aPage 78GENERALJOURNALand is closed at year-end.Date selling expenseDescriptionDebitCreditDec. 31 Bad Debt ExpenseAllowance for Doubtful Accounts2,383,0002,383,000Contra asset accountIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Allowance for DoubtfulAccountsBalance Sheet DisclosureAccounts receivableLess: Allowance for doubtful accountsNe t re aliz able value o f ac c o unts re c e ivableAmount the businessexpects to collect.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Writing Off UncollectibleAccountsWhen it is clear that a specificcustomer’s account receivable will beuncollectible, the amount should beremoved from the AccountsReceivable account and charged to theAllowance for Doubtful Accounts.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Writing Off UncollectibleAccountsOn May 6, Timberland wrote off aspecific account receivable witha balance of 2,500.Prepare the Timberland journal entry.GENERAL JOURNALDateDescriptionPage 37DebitCreditMay 6Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Writing Off UncollectibleAccountsOn May 6, Timberland wrote off aspecific account receivable witha balance of 2,500.Prepare the Timberland journal entry.GENERAL JOURNALDateDescriptionMay 6 Allowance for Doubtful AccountsAccounts ReceivableIrwin/McGraw-HillPage 37DebitCredit2,5002,500 The McGraw-Hill Companies, Inc., 2001

Writing Off UncollectibleAccountsAssumeAssume thatthat beforebefore thethe write-offwrite-off entry,entry,Timberland’sTimberland’s AccountsAccounts ReceivableReceivablebalancebalance waswas 81,000,000 81,000,000 andand thetheAllowanceAllowance forfor DoubtfulDoubtful AccountsAccountsbalancebalance waswas 2,000,000. 2,000,000.Let’sLet’s seesee whatwhat effecteffect thethe write-offwrite-off hadhadonon thesethese accounts.accounts.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Writing Off UncollectibleAccountsBefore WriteOffAccounts receivable 81,000,000Less: Allow. for doubtful accts.2,000,000Net realizable value 79,000,000After WriteOff 80,997,5001,997,500 s.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Methods for Estimating BadDebtsPercentage of credit salesorAging of accounts receivable?Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Percentage of Credit SalesBad debt percentage is basedon actual uncollectible accountsfrom prior years’ credit sales.Focus is on determining the amount torecord on the income statement asBad Debt Expense.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Percentage of Credit SalesNetNet CreditCredit SalesSales %% EstimatedEstimated UncollectibleUncollectibleAmountAmount ofof JournalJournal EntryEntryIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Percentage of Credit SalesIn 2000, Kid’s Clothes had credit salesof 60,000. Past experienceindicates that bad debts are onepercent of sales.What is the estimate of bad debtsexpense for 2000?Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Percentage of Credit SalesIn 2000, Kid’s Clothes had credit salesof 60,000. Past experienceindicates that bad debts are onepercent of sales.What is the estimate of bad debtsexpense for 2000? 60,000 .01 600Now, prepare the adjusting entry.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Percentage of Credit SalesGENERAL JOURNALDatePage 76DescriptionDebit CreditDec. 31 Bad Debt Expense600Allowance for Doubtful AccountsIrwin/McGraw-Hill600 The McGraw-Hill Companies, Inc., 2001

Now let’s discussanother method that isused to account foruncollectible accounts.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001

Aging of Accounts ReceivableFocus is on determining the desiredbalance in the Allowance for DoubtfulAccounts on the balance sheet.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001