hello and welcome this is Professor Sark and today I'm going to walk you through chapter 7even selected topics I want to remind you that ACCC sessions are selected tutorials they're quick tutorials you do need to read all of chapter 7 take notes from it seek help if you need help with any of the topics in this chapter and once you're completed with the coursework you are expected to be self-quizzing whether through flash cards or um just some quick sample problems that you continuously work through um you do need to practice in this chapter in order to um do well all right so chapter seven is all about short-term receivables we're going to talk about sales on account that's a review we're also going to talk about credit card sales we're going to spend the bulk of our time in this ACC session on bad debts and what happens when customers don't pay their receivables and then we're also going to talk about short-term notes receivable so just a refresher on sales on account if we provide a sale to a customer on account account the first thing that we do is we increase accounts receivable that's the account that tracks cash that we're going to receive in the future it's an asset account so if we increase it it's a debit we're going to record a credit to our revenue account called sales so this the first two entries here increase our sale or record our sale the second two injuries decrease our inventory so we debit cost of goods sold that's an expense account that's basically recording the expense of that inventory that we just sold and we're going to decrease increase merchandise inventory okay if we provide um sales on credit card so this is the first part of your handout that we're going to review um so oftentimes companies will not sell to our customers on account but we will sell on credit card transactions so credit cards offer a couple of different benefits number one they reduce risk if a customer does not pay their credit card bill it is not the company that sells it's not for example the Walmart that takes that that hit it's actually the bank that provides the credit card so it reduces risk and it increases the amount of sales that companies um that companies sell so here's a couple of different transactions and we'll talk about them as we work through them so number a or letter A sold $2,000 merchandise that cost $1,800 so right away you should know that there's here's a sales transa ction and our cost um our cost records the reduction of inventory so remember the larger amount records the sale the lesser amount is um our reduction in inventory and cost of goods sold the net cash receipts for these sales are immediately deposited in the seller's bank account MasterCard charges a 5% fee okay so the downfall of um selling merchandise on a credit card is that we incur a charge from the credit card company so first thing I I want you to do is record the sale so the sales is our credit and the sale is always recorded at the full amount the second thing is to go ahead and record the cash now because these sales are immediately deposited in the seller's bank account we just record that as a cash transaction it's all electronic we're not going to even realize there's a lag in time here so we're not going to collect the full amount of cash we're going to collect the cash or the sales transaction less the 5% fee so 2 ,000 less 2,000 * 5% okay and again this is because we're immediately depositing this cash into the seller's bank account so the fee is $100 we go ahead and re record a $1900 increase in cash and again this is because it's all done electronically you swipe that credit card it's all deposited into the sellers bank account immediately the difference here goes to a selling account called credit card expense this is just a um expense account it's a cost of doing business it's a selling expense $2,000 the cost of the sale times 5% that means we incur a $100 credit card expense now that's the top part of our transaction remember we still have to record cost of goods sold and merchandise inventory for the lesser amount the $1,800 now in B we're selling merchandise that cost $300 on an assortment of credit cards net cash receipts are received 10 days later so you see that we highlighted 10 days later this would be more of a mom and pop uh shop a small shop that's still doing the paper transactions or that swiping machine that sometimes you may have seen where swipes over your credit card and then you sign the three-part receipt so this company is taking all those receipts submitting them to the credit card company and receiving the cash 10 days later so it is a not considered a cash transaction we do however encourage 2% fee so again start with your sales we're going to record sales at the full amount $1,000 then we're going to go ahead and record accounts receivable so it's not a cash transaction since we have to wait there's a delay in when we receive our cash so we're going to go ahead and record it to accounts receivable not for the full ,000 but the full ,000 less the 2% transaction fee so $980 where does that credit card fee go it's just an expense credit card expense 1,000 2% um I'm sorry that should be a $20 fee not 200 okay we still have to record cost of goods sold and merchandise inventory for the lesser amount all right next thing we're going to talk about is what happens when customers don't pay so that's called a bad debt when we have a receivable not a credit card but an accounts receivable balance that does not get paid some small companies can use What's called the direct write off method where we just directly when we identify a customer that's not going to pay we directly write off that balance so here's an example on July 15th Riley determines it cannot collect $600 from eaten company a credit customer prepare the journal entry using the direct write-off method okay this is a this is also on your handout so if you think about accounts receivable it's got a debit balance it's an asset we're expecting to receive the money however if we are not going to get that money we want to write it off how do we close out an asset account we credit okay so AR for eaten company we're going to close out with a credit balance what are we going to record as a debit we're going to record it as a bad debt expense okay another cost of sales we're just writing it off directly to an expense account for $600 now if Riley later collects $200 from this company what do we have to do it's a two-step process first we reverse the original transaction okay so originally we debited bad debt expense and credited accounts receivable we're going to flip that we're going to credit bad debt expense and debit accounts receivable that's putting the transaction back on the books however we're only going to do it for $200 okay we didn't get the whole $600 but we do need a spot for accounts receivable to actually put that cash so a debit to accounts receivable for eaten for $200 and then go ahead and collect the cash just like you would any other transaction debit to cash credit to accounts receivable that's leaving a paper trail here remember that we wrote off this account we're going to put it back on the books and then take it off it's providing a trail of what happened what about the $400 balance owed from eaten so a lot of times students want to know okay it was originally $600 they paid 200 what about the rest of it in this case it's written off okay so it continues to be written off we don't have to do anything with it um perhaps we negotiated with this customer the customer wanted to do continued business with us but they could only come up with $200 at the time maybe we negotiated we'll take the 200 and we'll we'll sell to you again um so the $400 continue to be written off it doesn't reappear all right most companies are going to be required by Gap to use the allowance method the allowance method basically comes in two different forms percentage of sales or percentage of accounts receivable but what the allowance method does is it writes off at the end of every period it writes off the amount that it a company expects um expects to be uncollectible okay so at the end of every year let's say December 31st of every year your company you would go ahead and and figure out you'd analyze your accounts and you determine how much do we think will not be collectible and history gets that pretty close you know maybe we decide that based on history 2% of sales or .5% of accounts receivable are written off okay so we just look at history and companies get pretty good at doing this and we determine how much is going to be written off why do we do this to account for the um the matching principle we want to match our sales our revenues with the expenses so we're basically taking the expense in the same period of the sale that's the idea behind this allowance method there's two different methods as I mentioned before percentage of sales where you just take the sales times the percentage we think is uncollectible and record the entry and there's a percentage of accounts receivable which you can see is a little more complex you take accounts receivable times the percentage and then you have to look at this existing allowance for doubtful accounts balance and adjust for that beginning balance okay so let me walk you through these two steps um first off what is allowance for doubtful accounts it's a contra asset account it's married to the accounts receivable B accounts receivable if you look at a balance sheet you're going to see account receivable less this allowance for doubtful accounts and because it's a contra asset account it has the opposite balance of an an asset account so asset accounts normally increase with a debit and decrease with a credit but this is the opposite um Contra accounts are the opposite so they're married to accounts receivable but they have opposite balances okay so if we're working with the allowance account for percentage of sales Warner company's yearend unadjusted trial balance shows accounts receivable balance of 8,000 allowance for doubtful accounts of $100 credit balance and sales of 28,000 uncollectibles are estimated to be 1% of sales what's the year end adjusting entry okay again we do not know who we're going to write off we just know we want to record the bad debt expense in the same year as of sales so we have to figure this out sales are 28,000 we think 1% will be written off okay so take your sales times 1% that means we're going to write off $280 so we debit bad debt expense for 280 now the credit goes to a new account called the allowance for doubtful accounts this Contra asset account what we're basically doing is we're filling up a bucket for a rainy day okay we're kind of allocating a little bit of um allowance here it's it is what it is we're filling this up in a bucket and when we identify in the next year a customer that doesn't pay will pull from this bucket okay we'll empty the bucket as we determine a bad debt customer we don't know who won't pay at this point that's why we're just filling up a bucket and waiting waiting for the the customers that don't pay and then we'll use it up okay now if we're using percentage of accounts receivable remember that that one was a little more complex so Warner company's year in unadjusted trial balance shows accounts receivable of 8,000 allowance for doubtful accounts of a $100 credit and sales of 28,000 uncollectibles are estimated to be 2% of accounts receivable so what balances are we going to use counts receivable times 2% however don't forget we also have to go ahead and look at the existing allowance for doubtful accounts so our allowance for doubtful accounts has a $100 credit balance when we use percentage of accounts receivable this ending balance here accounts receivable times the percentage that's our goal okay so we have to adjust for what's already in the account we have a $100 credit already in the account remember that the allowance for doubtful accounts is a contra asset account so a credit balance is normal so we want to make the balance 160 so really all we need to do is fill it up with $60 more okay we're filling up our bucket we're going to debit bad debt expense for 60 and we're going to credit allowance for doubtful account for 60 okay right now if you adjusted this or if you um posted this entry and balanced your allowance for doubtful accounts you would have $160 in it our goal was 160 by adjusting just the difference between our goal and the existing balance now we filled up our bucket to $160 okay what about if we prepare a journal entry and Warner determines that $500 for HBC is deemed uncollectible okay so now we're going to actually use the bucket instead of debiting bad debt expense remember we've already done that at year end so this is January 3rd all we're going to do is pull from the bucket so we're debiting allowance for doubtful accounts for 500 we're emptying our bucket and we're crediting we're writing off hbc's accounts receivable okay some of you may have caught the fact that we emptied out more than we actually had remember we had $160 and now we're actually writing off 500 that's okay at the end of the year we'll pick that back up we'll refill up the bucket for any deficits okay and C it says prepare the journal entry for uncollectibles if the allowance for doubtful accounts had a starting debit balance of $100 so we're going back to our original amounts okay our year and adjusting entry where it's 8,000 time 2% okay so we our goal is 160 but we start with a not normal balance our balance should be a credit balance and we're starting with a debit balance so what we have to do is we have to compensate in our journal entry we have to add in more this is an example of where we poured out too much so here we debit bad debt expense for $260 and we credited the allowance account for $260 so what we're doing is we're wiping out that debit balance and adding in our normal balance so it's 160 what we really want plus we're compensating for the negative amount in our allowance account now a quick memory trick here is that when you're using the percentage of accounts receivable that's the only time you have to adjust for the allowance account the existing allowance account if you have a debit balance a beginning debit balance in the allowance account you add so take the d and debit and think add if you've got a beginning credit balance like we did in the first one you subtract okay but if it's a debit balance the allowance account has a beginning debit balance take the D and debit and add now if it's percentage of sales you don't care about this beginning balance so there's a couple of tricks in this chapter one is percentage of sales keep it simple let me go back um there's no good way for me to go back keep it simple percentage of sales do your multiplication and quick do your entry if it's percentage of accounts receivable you have to analyze the allowance account if it's a credit balance in the beginning subtract the amounts if it's a debit balance in the beginning add the amounts like we just did all right so here's from your workout sheet so we can just go through another example Warner company's yearend unadjusted trial balance shows accounts receivable of 9,000 allowance for doubtful accounts of $100 it's a credit balance and sales of 28,000 is this okay so this is just a slightly different uncollectibles are estimated to be 1.5% of accounts receivable okay so here would be a good point to pause the the video and try it on your own or you can just follow along so if we want to go ahead and prepare the December 31st adjusting entry first off we want to take 1.5% of accounts receivable so 9,000 * 1.5 is 135 that's our goal now we have to compensate for the $100 credit balance so we're just going to make an entry for $35 what are we going to enter bad debt expense for $35 allowance for doubtful accounts for $35 okay we're filling up that bucket and the bucket's balance is going to be$ 135 that's our goal right we already had $100 in there so all we're doing is adding $35 more so our bucket balance is $135 okay what amount would have been used in the year in adjusting entry if the allowance had a debit balance of 50 okay so if instead we started with a debit balance you'd go through 9,000 * 1.5 135 is our goal but we had a beginning abnormal balance right so we have to add that back in to compensate for a negative balance so now we have to adjust for 185 debit to bad debt expense credit for allowance okay what we did is we filled up our bucket here our bucket had a negative balance so we put in more we compensated right our balance still in the allowance account the balance in our bucket will still be 135 all right and see what would have been used in the year in adjusting entry if Warner estimates uncollectibles as .5% of sales okay sales keep it simple 28,000 time .5% is 140 debit bad debt expense for 140 credit the allowance account for 140 okay so a couple things to to be working on in this chapter in this unit know your journal entries if you're filling it up it's debit to bad debt expense credit to allowance for account outall accounts if you found a specific customer you're debiting the allowance account you're crediting your customer's account okay if it's percentage of accounts receivable you have to adjust for the beginning balance if it's a debit we add if it's a credit you subtract if it's percentage of sales you keep it simple you do your sales times your percentage and that's your entry amount now in your homework and on exams we may give you more than you need if we would give you this whole amount of data and we ask you for percentage of sales you need to know that we don't care about accounts receivable we don't care about the existing credit balance okay so you need to weed out what do you need to know and here's a good chapter for flashcards okay then the last part that we're going to talk about in the ACC session is notes receivable so notes receivable are signed you can see here it's signed it's a more formal agreement than accounts receivable it tells the number of days that we're loaning out the money it tells the day that the note was signed the due date the percentage okay couple things you want to know is the maker of the note is the person that signs the note and agrees to pay the the paye is the person that will be paid back the money one of my students one time told me that they thought employee is the person that's getting the cash right so the pay e is the person that's being paid back the money the maker or the payor is agreeing to pay back the paye okay we're going to learn how to compute interest we take the principal times the interest rate okay however this is a annual interest rate so if it was 12% and this is a 90day no excuse me 90-day note we want to go ahead and take principal times the interest rate of 12% and multiply that by 90 over 360 days to figure out what is the interest for 90 days often students want to know why 360 it's a banker rule we do know that there's 365 days in the year and when you're doing financial ratios use continue to use 365 but when we're Computing interest take it over 360 days for computing maturity start with the month that the note was signed so for example if you sign a 60-day note on June 11th start with June so June has 30 days in it take off the day that you sign the note that means that we're going to count 19 days in June but we want to get up to 60 days add in the next month the ne next month is July that's 31 days in July which brings us up to 50 days but we need 60 days so how many more days do we need 10 more days so 10 days in August that's the next month our due date then would be August 10th okay so this is a simple way you always start with the the month subtract off the day that you signed it and then keep adding months and days until you get to the desired number of days the last day that you write in there for example August 10th that's the maturity date okay a lot of students want to just say okay if it sign on June 11th and 60 days would be about two months so that' be July August 11th that's going to throw you off right because we're worried about exact days so it's August 10th not 11th okay the other thing that students want to know is can they bring a calendar into the exam and that is no at the end of your printout there is a little um rhyme in Blackboard there's a tutorial on counting days of the month using your fingers I don't care what method you do but when you graduate Harper with Accounting 101 on your transcripts I want you guys to know the days in the month okay again Blackboard has a cute little um hand trick that's very very very easy to use all right so here's an example um on August 1st ABC accepted a note for $2,000 a 90-day note dated August 1st granting a Time extension on a past due account of XYZ Z company okay so this is a past do accounts receivable account so what we're doing is we're saying hey customer you're not paying your accounts receivable balance we're going to charge you interest but we'll extend this into a loan will'll give you a excuse me a 90-day loan so what's the maturity start with the day that the note was signed August 31st minus off the day that we signed the note August 1st that gives us 30 days in August and our goal is 90 days so now we want to add in September so September has 30 days so that brings us a 60 days total and we need 30 more days right so October 30 yes there are 31 days in October however we only need 90 days so 30 in August 30 in September 30 in October that brings us to 90 total days our due date then is October 30th what's the interest remember we want to take principal times interest times the number of days divided by 360 so 2,000 * 10% * 90 over 360 means we have $50 of total interest so on August 1st let's record the entry remember we're converting a accounts receivable to notes receivable oh I've got this backwards no I don't I'm sorry I'm thinking payables so receivables are an asset if we're adding or increasing notes receivable we increase it with a debit and we're taking off or decreasing closing out accounts receivable for 2,000 okay notice on the day that we actually record the journal entry we're not recording or doing anything with interest we have not yet earned it the day that we sign the note on the day that we on the maturity day assuming the note is honored that means paid that's the day we're getting cash and we're closing out notes receivable okay so close out notes receivable at $2,000 then record cash you're getting not only the note note amount but also $50 in interest so 250 if you notice here my entry doesn't balance I've got 250 in debits 2,000 in credits I need a $50 credit is what is that it's interest it's interest Revenue okay you've now earned $50 in interest Revenue okay if we extend our note over a year end okay there's a couple of adjusting entries we need to be worried about so let's say on August 1st ABC accepts a note for $2,000 10% 90-day note granting an extension of a past to receivable okay so what's the maturity date August oops I'm sorry the notes dat of December 1st not August 1st so December 31st minus the day that we sign the note days in December is 30 add in January so we're up to 61 days I need 90 so I'm going to go ahead and add in February which unless it states it's leap year assume 28 days add in one more day to make 90 so the due date of the note is March 1st okay so how many num how many days do we have till a year end okay just December right there's only 30 days of the note that are December the interest earned in December then is 2,000 * 10% * 30 over 360 or $16.67 okay you would record this as an adjusting entry it's a debit to interest receivable and a credit to interest re interest revenue on December 31st okay how many days are in the New Year it would be January February and March so 31 28 and 1 okay which would be 60 days interest earned in the new year will be 2,000 * 10% * 60 over 360 or 3333 so on the maturity date okay close out notes receivable credit to notes receivable for the the whole amount of the note we're going to um debit cash for the entire amount of the note plus all the interest okay so 250 now the tricky part is what do we record how do we split up this $50 okay what you want to do is you want to record interest Revenue but only for the amount that was earned in the new year okay so $33 I rounded here $33 was earned in the new year what about the amount that was earned in the old year remember it was recorded as a receivable so now we're going to close the receivable with a credit to the interest receivable for $17 again I rounded so here we're closing out notes receivable we're closing out interest receivable and we're recording interest Revenue but only the amount that was earned in the current year all right so here let's do some practices is from your um workout so Dominica company's December 31st year in unadjusted trial balance shows a $10,000 balance in notes receivable the balance is from one 6% note dated December 1st with a period of 45 days prepare journal entries for the following scenarios the adjusting entry in December 31st okay so December 31st first off I'm going to figure out what's the due what's the actual duee date take off the day we signed it there's 30 days in December it's a 45-day note so I need 15 more days which would total 45 days so how many days are between the day that I signed it in December 31st 30 days so let's figure out how much interest was earned before the year end okay 10,000 * 6% * 30 days that were earned before December 31st is $50 so on December 31st we record interest receivable because we've not yet received it we're going to receive it in the future for $50 and interest revenue for $50 this is the amount that was earned in the old year okay the total amount of interest earned be 10,000 * 6% * 45 over 360 so we earned $75 in total interest Revenue $50 was earned in the old year and $25 will be earned in the New Year 10,000 * 6% time 15 days in January over 360 is $25 that will be earned next year if you're struggling with the year end here's what I want you to do I want you to just make a little diagram December 1st is the day that the note was signed January 15th is a due date I'm splitting this up by year end December 31st is year end okay you notice there's less days over here than there are in the old year okay $50 is interest Revenue that was earned in 2012 so remember we recorded that with an interest receivable and an interest Revenue interest revenue or you have to record the amount that was earned prior to year end you have to record that as Revenue earn in this old year 2012 for example 2013 we're going to record the the revenue that was actually earned in 2013 so $25 was earned in 2013 we're going to go ahead and record that interest Revenue over here we're going to close out our interest receivable and our note receivable so you must record Revenue in the year that it's actually earned even if it's not collected so on C the notes maturity date assuming that it's sorry we're going to start with assuming that it's honored okay so we're going to start with b okay so on January 15th close out notes receivable for 2 thou I'm sorry $110,000 record cash which is the receivable plus your total interest of $75 okay then you can close out we're going to close the interest receivable that we opened up here what's left is just interest Revenue $25 okay so that's a hard one but if you just break it down into close out the note record the cash for the entire amount close out the interest receivable and record just the revenue earned in the New Year it's a simple process it's just multiple step so keep working at it keep working at flashcards maybe split the the um flashcards into just journal entries so you get the hang of the journal entries and then add in numbers later okay in C assuming that it's Dishonored if something is Dishonored it's not paid okay so if it's not paid the only thing that would change in this journal entry would be that we put it into accounts receivable so in C if the maturity date assuming the note was Dishonored so C just references part C here we would do the same exact journal entry it's just we're going to put it back can do accounts receivable okay triggering our collection department to go and continue working with this customer to say okay you owe us please pay it's pass its maturity date we're going to go ahead and record it into accounts receivable all right so that's this chapter um I encourage you to read through it slowly take your notes practice do your journal or your um lots and lots of note cards for this chapter it's a long chapter um and just really really try to work through and get success on this chapter nine so um not chapter eight but chapter nine is going to have a lot of these similar Concepts in it with notes so if you can get it down in chapter 7 that's going to make chapter nine that much easier so if you have questions make sure you seek help have a great day