Chapter 6

Reporting and Interpreting

Sales Revenue,
Receivables, and Cash

6-2

Accounting for Sales Revenue

The revenue principle requires that
revenues be recorded when earned:

An
An exchange
exchange has
has
taken
taken place.
place.
The
The earnings
earnings process
process
is
is nearly
nearly complete.
complete.
Collection
Collection is
is
probable.
probable.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-3

Reporting Net Sales

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

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-4

Credit Card Sales to Consumers

Companies accept credit cards for
several reasons:
1. To increase sales.
2. To avoid providing credit directly

to customers.

3. To avoid losses due to bad

checks.

4. To receive payment quicker.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-5

Credit Card Sales to Consumers

When credit card sales are made, the
company must pay the credit card
company a fee for the service it provides.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-6

Credit Card Sales to Consumers

On January 2, a Timberland factory stores credit
card sales were $3,000. The credit card
company charges a 3% service fee.
Prepare the Timberland journal entry.
GENERAL JOURNAL
Date

Description

Page 34
Debit

Credit

Jan. 2

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-7

Credit Card Sales to Consumers

On January 2, a Timberland factory stores credit
card sales were $3,000. The credit card
company charges a 3% service fee.
Prepare
the Timberland
journal
entry.
Credit Card
Discounts are
reported
as a contra revenue account.

GENERAL JOURNAL
Date

Description

Jan. 2 Accounts Receivable

Credit Card Discounts
Sales Revenue

Page 34
Debit

Credit

2,910
90
3,000

$3,000 3% = $90 Credit Card Fee

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-8

Sales to Businesses on Account

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

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-9

Sales Discounts to Businesses

2/10, n/30
Read as: Two ten, net thirty
When customers purchase on open
account, they may be offered a sales
discount to encourage early payment.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-10

Sales Discounts to Businesses

2/10, n/30
Discount
Percentage

McGraw-Hill/Irwin

# of Days in
Discount
Period

Otherwise,
the Full
Amount Is
Due

Maximum
Days in
Credit
Period

2004 The McGraw-Hill Companie

6-11

Sales Discounts to Businesses

On January 6, Timberland sold $1,000 of
merchandise on credit with terms of 2/10, n/30.
Prepare the Timberland journal entry.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-12

Sales Discounts to Businesses

On January 6, Timberland sold $1,000 of
merchandise on credit with terms of 2/10, n/30.
Prepare the Timberland journal entry.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-13

Sales Discounts to Businesses

On January 14, Timberland receives the
appropriate payment from the customer for
the January 6 sale.
Prepare the Timberland journal entry.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-14

Sales Discounts to Businesses

On January 14, Timberland receives the
appropriate payment from the customer for
the January 6 sale.
Prepare the Timberland journal entry.
$1,000 2% = $20 sales discount
$1,000 - $20 = $980 cash receipt

Contra-revenue account

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-15

Sales Discounts to Businesses

If the customer remits the appropriate
amount on January 20 instead of January
14, what entry would Timberland make?

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-16

Sales Discounts to Businesses

If the customer remits the appropriate
amount on January 20 instead of January
14, what entry would Timberland make?
Since the customer paid outside of the discount
period, a sales discount is not granted.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-17

Sales Returns and Allowances

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

2004 The McGraw-Hill Companie

6-18

Sales Returns and Allowances

On July 8, Fontana Shoes returns $500 of
hiking boots originally purchased on
account from Timberland.
Prepare the Timberland journal entry.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-19

Sales Returns and Allowances

On July 8, Fontana Shoes returns $500 of
hiking boots originally purchased on
account from Timberland.
Prepare the Timberland journal entry.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-20

Gross Profit Percentage

Gross Profit
Percentage

Gross Profit
Net Sales

In
In2000,
2000,Timberland
Timberland reported
reportedgross
grossprofit
profit of
of
$508,512,000
$508,512,000on
on sales
salesof
of $1,091,478,000.
$1,091,478,000.
All
Allother
otherthings
thingsequal,
equal,aa higher
higher gross
gross
profit
profitresults
resultsin
inhigher
highernet
net income.
income.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-21

Gross Profit Percentage

Gross Profit
Percentage
Gross Profit
Percentage

Gross Profit
Net Sales

$508,512,000
$1,091,478,000

46.6%

All
Allother
otherthings
thingsequal,
equal,aa higher
higher gross
gross
profit
profitresults
resultsin
inhigher
highernet
net income.
income.

2000 Gross Profit Comparisons

Timberland
Skechers U.S.A.
Wolverine
46.6%
42.1%
31.9%
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-22

Measuring and Reporting

Receivables

Accounts
Receivable

Amounts owed by
other companies
or persons for
cash, goods, or
services.
McGraw-Hill/Irwin

Open accounts
owed to the
business by trade
customers.

2004 The McGraw-Hill Companie

6-23

Measuring and Reporting

Receivables Notes Receivable
$1,200

Term

Sixty days

Wheaton, Ohio

January 5, 2003
Payee

after date I promise to pay t

Principal
Wheaton Mountain Bank
the order
of
One thousand two hundred --------------------------------- Dollars
Interest Rate
Payable
Wheaton
Mountain Bank
Maker
at
Value received with interest12%
at
per
Pat Rogers
annum
No.10242
Due
March 6, 2003
Timberland
Company
Due Date
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-24

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.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-25

Accounting for Bad Debts

Bad Debt
Expense
Matching
Principle

Record in same
accounting
period.

Sales
Revenue
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-26

Accounting for Bad Debts

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

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-27

Recording Bad Debt Expense

Estimates

Timberland estimated bad debt expense for

2000 to be $2,395,000.
Prepare the adjusting entry.
GENERAL JOURNAL

Date

Description

Page 78
Debit

Credit

Dec. 31

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-28

Recording Bad Debt Expense

Estimates

Timberland estimated bad debt expense for

2000 to be $2,395,000.
Prepare the adjusting entry.

Bad Debt
Expense is
normally classified as a Page 78
GENERAL
JOURNAL
and is closed at year-end.
Date selling expense
Description
Debit
Credit
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts

2,395,000
2,395,000

Contra asset account

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-29

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
accountsreceivable
receivable

Amount the business

expects to collect.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-30

Writing Off Uncollectible

Accounts

When it is clear that a specific customers

account receivable will be uncollectible, the
amount should be removed from the
Accounts Receivable account and charged
to the Allowance for Doubtful Accounts.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-31

Writing Off Uncollectible

Accounts

Timberlands total write-offs for

2000 were $1,480,000.
Prepare a summary journal
entry for these write-offs.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-32

Writing Off Uncollectible

Accounts

Timberlands total write-offs for

2000 were $1,480,000.
Prepare a summary journal
entry for these write-offs.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-33

Writing Off Uncollectible

Accounts

Assume
Assume that
that before
before the
the write-off,
write-off,
Timberlands
Timberlands Accounts
Accounts Receivable
Receivable balance
balance
was
was $81,000,000
$81,000,000 and
and the
the Allowance
Allowance for
for
Doubtful
Doubtful Accounts
Accounts
balance
balance was
was $2,000,000.
$2,000,000.
Lets
Lets see
see what
what effect
effect the
the total
total write-offs
write-offs of
of
$1,480,000
$1,480,000 had
had on
on these
these accounts.
accounts.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-34

Writing Off Uncollectible

Accounts
Before WriteOff
Accounts receivable
$ 81,000,000
Less: Allow. for doubtful accts.
2,000,000
Net realizable value
$ 79,000,000

After WriteOff
$ 79,520,000
520,000
$ 79,000,000

Notice
Noticethat
thatthe
thetotal
totalwrite-offs
write-offsof
of$1,480,000
$1,480,000 did
did not
not
change
changethe
thenet
netrealizable
realizablevalue
valuenor
nor did
didititaffect
affect any
any
income
incomestatement
statementaccounts.
accounts.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-35

Methods for Estimating Bad

Debts
Percentage of credit sales
or
Aging of accounts receivable
????

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-36

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.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-37

Percentage of Credit Sales

Net
Net Credit
Credit Sales
Sales
%
% Estimated
Estimated Uncollectible
Uncollectible
Amount
Amount of
of Journal
Journal Entry
Entry

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-38

Percentage of Credit Sales

In 2003, Kids Clothes had credit sales of
$60,000. Past experience indicates that
bad debts are one percent of sales.
What is the estimate of bad debts expense
for 2003?

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-39

Percentage of Credit Sales

In 2003, Kids Clothes had credit sales of
$60,000. Past experience indicates that
bad debts are one percent of sales.
What is the estimate of bad debts expense
for 2003?
$60,000 .01 = $600
Now, prepare the adjusting entry.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-40

Percentage of Credit Sales

GENERAL JOURNAL
Date

Page 76

Description

Debit Credit

Dec. 31 Bad Debt Expense

600

Allowance for Doubtful Accounts

McGraw-Hill/Irwin

600

2004 The McGraw-Hill Companie

Now lets discuss

another method that is
used to account for
uncollectible accounts.

McGraw-Hill/Irwin

6-41

2004 The McGraw-Hill Companie

6-42

Aging of Accounts Receivable

Focus is on determining the desired
balance in the Allowance for Doubtful
Accounts on the balance sheet.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-43

Aging Schedule
Each
Each customers
customers account
account is
is aged
aged by
by
breaking
breaking down
down the
the balance
balance by
by showing
showing
the
the age
age (in
(in number
number of
of days)
days) of
of each
each
part
part of
of the
the balance.
balance.
An
An aging
aging of
of accounts
accounts receivable
receivable for
for Kids
Kids
Clothes
Clothes in
in 2003
2003 might
might look
look like
like this
this .. .. ..
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-44

Aging Schedule
Days Past Due

Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total

Not Yet
Due
$ 1,200

1-30
$ 235
300

50

Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750

325
$ 1,830

325
$10,660

31-60

$
$ 3,500

$ 2,550

$ 1,540

$ 1,240

Based on past experience, the business

estimates the percentage of uncollectible
accounts in each time category.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-45

Aging Schedule
Days Past Due
Not Yet
Due

Customer
Aaron, R.
Baxter, T.
Clark, J.

$ 1,200

1-30
$ 235
300

31-60

Zak, R.
Total
% Uncollectible

$ 3,500
0.01

$ 2,550
0.04

50

325
$ 1,830
0.10

Total
A/R
61-90 Over 90 Balance
$ 235
1,500
$ 200 $ 500
750
$ 1,540
0.25

$ 1,240
0.40

325
$10,660

These percentages are then multiplied

by the appropriate column totals.
McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-46

Aging Schedule
Days Past Due
Total
The column
Not Yet totals are then added to
A/R
Customer
Due at 1-30
31-60
61-90 Over
arrive
the total
estimate
of 90 Balance
Aaron, R.
$ 235
uncollectible
accounts of $1,201. $ 235
Baxter, T.
$ 1,200
300
1,500
Clark, J.
$
50 $ 200 $ 500
750
Zak, R.
Total
% Uncollectible
Estimated
Uncoll. Amount

McGraw-Hill/Irwin

$ 3,500
0.01

$ 2,550
0.04

325
$ 1,830
0.10

35

102

183

$ 1,540
0.25

$ 1,240
0.40

385

496

325
$10,660

$ 1,201

2004 The McGraw-Hill Companie

6-47

Aging of Accounts Receivable

Days Past Due

Customer
Aaron, R.
Baxter, T.
Clark, J.

Total
Record
Not Yetthe Dec. 31, 2003, adjusting A/R
Due assuming
1-30
31-60
61-90
Over 90 Balance
entry
that the
Allowance
$ 235
$ 235
for$Doubtful
Accounts currently has a1,500
1,200
300
$
50
$ 200 $ 500
750
$50 credit
balance.

Zak, R.
Total
% Uncollectible
Estimated
Uncoll. Amount

McGraw-Hill/Irwin

$ 3,500
0.01

$ 2,550
0.04

325
$ 1,830
0.10

35

102

183

$ 1,540
0.25

$ 1,240
0.40

385

496

325
$10,660

$ 1,201

2004 The McGraw-Hill Companie

6-48

Aging of Accounts Receivable

GENERAL JOURNAL
Date

Description

Dec. 31 Bad Debt Expense

Allowance for Doubtful Accounts

1,201
1,201
-50
50
$$ 1,151
1,151
McGraw-Hill/Irwin

Page 76
Post.
Ref.

Debit

Credit

1,151
1,151

Desired
Desired Balance
Balance After posting, the
Allowance
Credit
Credit Balance
Balance
account would
Adjusting
Adjusting Entry
Entry
look like this . . .

2004 The McGraw-Hill Companie

6-49

Aging of Accounts Receivable

Allowance for Doubtful Accounts
50

Notice that the balance

after adjustment is equal
to the estimate of $1,201
based on the aging
analysis performed
earlier.

McGraw-Hill/Irwin

1,151
1,201

Balance at
12/31/2003
before adj.
2003 adjustment
Balance at
12/31/2003
after adj.

2004 The McGraw-Hill Companie

6-50

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

2004 The McGraw-Hill Companie

6-51

Receivable Turnover
Receivable
Turnover =

Net Sales
Average Net Trade Receivables

Timberland
Timberlandreported
reported2000
2000net
netsales
salesof
of$1,091,478,000.
$1,091,478,000.
December
December31,
31,1999,
1999,receivables
receivableswere
were$78,696,000
$78,696,000and
and
December
December31,
31,2000,
2000,receivables
receivableswere
were$105,727,000.
$105,727,000.

This
Thisratio
ratiomeasures
measureshow
how many
manytimes
times average
average
receivables
receivablesare
arerecorded
recordedand
andcollected
collectedfor
forthe
theyear.
year.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie

6-52

Receivable Turnover
Receivable
Turnover =

Net Sales
Average Net Trade Receivables

Receivable
$1,091,478,000
Turnover = ($105,727,000 + $78,696,000) 2
= 11.8 times
This
Thisratio
ratiomeasures
measureshow
how many
manytimes
times average
average
receivables
receivablesare
arerecorded
recordedand
andcollected
collectedfor
forthe
theyear.
year.
2000 Receivables Turnover Comparisons
Timberland
11.8
McGraw-Hill/Irwin

Skechers
8.4

Wolverine
4.2

2004 The McGraw-Hill Companie

6-53

End of Chapter 6

McGraw-Hill/Irwin

2004 The McGraw-Hill Companie