CASH AND INTERNAL CONTROLS参考.ppt

When a customer fails to pay and the account is written off as uncollectible, his or her credit standing is jeopardized. To help restore credit standing, a customer sometimes volunteers to pay all or part of the amount owed. A company makes two entries when collecting an account previously written off by the allowance method. The first is to reverse the write-off and reinstate the customer’s account. The second entry records the collection of the reinstated account. To illustrate, if on March 11 Kent pays in full his account previously written off, the first entry is a debit to Accounts Receivable—J. Kent and a credit to Allowance for Doubtful Accounts for $520 to reinstate the account. The second entry is a debit to Cash and a credit to Accounts Receivable for $520 to record the receipt of the cash. The allowance method requires an estimate of bad debts expense to prepare an adjusting entry at the end of each accounting period. There are two common methods. The Percent of Sales Method is based on the income statement relation between bad debts expense and sales. The Accounts Receivable Methods are based on the balance sheet relation between accounts receivable and the allowance for doubtful accounts. When using the Percent of Sales Method, the estimate at the end of the period is determined by taking current period sales and multiplying by an established bad debt percentage. The bad debt percentage is determined based on past history of the company and current economic trends. Also, the sales transactions included in this computation are typically only the credit sales. There are not any collection issues to consider for cash sales transactions. Musicland has credit sales of $400,000 in the year 2011. Management estimates that 0.6% of credit sales will eventually prove to be uncollectible. Let’s look at recording Bad Debts Expense for 2011 using the percentage of sales method of estimating bad debts expense. Musicland’s Bad Debt Expense would be $2,400. This