Accounting

Principles 2

Mr. Mohammed Ali

 Course Identification and
General Information
• Credit hours: 3 Hours
• Program (s) in which the course is offered:
• Bachelor degree of International Business
• Language of teaching the course: English
 Intended learning outcomes
of the course
• Subject Objectives:
• 1. Introduces students to the accounting function in
an organization to provide information to investors,
business firms, and the public at large.

• 2. Enable students to prepare accounts in accordance

with the principles of simple accounting and interpret
and analyze financial statements using certain rules.

• 3. Introduces students to the various types of

accounts.
Assessment Tasks for Students
During the Semester
• Assessment and scoring breakdown:
• Mid-Term 20%
• Assignments 10%
• Attendance 10%
• Final Exam 60%
I. Learning Resources:
1. Required Textbook(s) (maximum two ).
  23. Jerry Weygandt, Paul Kimmel, Donald Kieso, Accounting Principles, 12E, John Wiley and Sons, Inc, 2015.
24.  

1.  
  23. Professor Muhammad Ammanullah Khan: Financial Accounting, Latest Edition
24. Frank Wood‟s: Business Accounting 1, Eleventh Edition
25. Meigs and Meigs, Accounting for Business Decision, 9th Edition/Latest Edition
 

1.  
  Williams, Haka, Bettner: Financial & Managerial Accounting, Latest Edition
, Prentice Hall
• Bob Sample opened the Campus Laundromat on September 1, 2017. During the first
month of operations, the following transactions occurred.

• Sept. 1 Bob invested $20,000 cash in the business.

• 2 The company paid $1,000 cash for store rent for September.
• 3 Purchased washers and dryers for $25,000, paying $10,000 in cash and
signing a $15,000, 6-month, 12% note payable.
• 4 Paid $1,200 for a one-year accident insurance policy.
• 10 Received a bill from the Daily News for online advertising of the opening
of the laundromat $200.
• 20 Bob withdrew $700 cash for personal use.
• 30 The company determined that cash receipts for laundry services for the
month were $6,200.

• Instructions
• (a) Journalize the September transactions. (Use J1 for the journal page number.)
• (b) Open ledger accounts and post the September transactions.
• (c) Prepare a trial balance at September 30, 2017.
 Accounting for
Receivables
• The term receivables refers to amounts due from
individuals and companies.
•
Receivables are important because they represent one of a
company’s most
liquid assets.

• Types of Receivables

1-Accounts receivable are amounts customers owe on account.

They result from the sale of goods and services. Companies
generally expect to collect
accounts receivable within 30 to 60 days.
• 2- Notes receivable are a written promise (as evidenced by a
formal instrument) for amounts to be received. The note
normally requires the collection of interest and extends for
time periods of 60–90 days or longer. Notes and accounts
receivable that result from sales transactions are often called
trade
receivables

• 3- Other receivables include nontrade receivables such as

• interest receivable,
• loans to company officers,
• advances to employees,
• and income taxes refundable.
 Recognizing Accounts
Receivable
• To review, assume that Jordache Co. on July 1, 2017, sells
merchandise on account to Polo Company for $1,000, terms
2/10, n/30. On July 5, Polo returns
merchandise with a sales price of $100 to Jordache Co. On
July 11, Jordache receives payment from Polo Company
for the balance due. The journal entries to
record these transactions on the books of Jordache Co. are as
follows. (Cost of goods sold entries are omitted.)
 PRACTICE QUESTION
• On May 1, Wilton sold merchandise on
account to Bates for $50,000, terms 3/15, net
45. On May 4, Bates returns merchandise with
a sales price of $2,000. On May 16, Wilton
receives payment from Bates for the balance
due. Prepare journal entries to record the
May transactions on Wilton’s books.
 Valuing Accounts
Receivable
• How should they report receivables in the financial
statements?
• Companies report accounts receivable on the balance sheet as
an asset. But determining the amount
to report is sometimes difficult because some receivables
will become uncollectible.

• Companies record credit losses as

• Bad Debt Expense (or Uncollectible Accounts Expense).
• Such losses are a normal and necessary risk of doing business
on a credit basis.
• Two methods are used in accounting for uncollectible
accounts:
• (1) the direct write-off method
• (2) the allowance method.

• Under the direct write-off method, when a company

determines a particular account to be uncollectible, it charges
the loss to Bad Debt Expense.
• Assume, for example, that Warden Co. writes off as
uncollectible M. E. Doran’s $200 balance on December 12.
Warden’s entry is as follows.

Unless bad debt losses are insignificant, the direct write-off method is
not acceptable for financial reporting purposes.
• ALLOWANCE METHOD FOR UNCOLLECTIBLE
ACCOUNTS
The allowance method of accounting for bad debts involves
estimating uncollectible accounts at the end of each period.
This provides better matching on the
income statement.

• GAAP requires the allowance method for financial

reporting purposes when bad debts are material in
amount.
• Assume that Hampson Furniture has credit sales of $1,200,000 in
2017. Of this amount, $200,000 remains uncollected at December
31.

• The credit manager estimates that $12,000 of these sales will be

uncollectible.

• (debits) Bad Debt Expense and

• (credits) increases Allowance for Doubtful Accounts, as follows.
• As the table shows, the company deducts the allowance
account from accounts receivable in the current assets section
of the balance sheet.( Contra Account )

• The amount of $188,000 represents the expected cash

realizable value of the accounts receivable at the statement
date
• RECORDING THE WRITE-OFF OF AN
UNCOLLECTIBLE ACCOUNT
• Companies use various methods of collecting past-due accounts,
such as letters, calls, and legal action. In the credit card industry,
for example, it is standard practice to
write off accounts that are 210 days past due.

• Assume that the financial vice president of Hampson Furniture

authorizes a write-off of the $500 balance owed by R. A. Ware on
March 1, 2018.

• Under the allowance method, companies debit every bad debt

write-off to the allowance account rather than to Bad Debt
Expense.
A write-off affects only balance sheet accounts—not income
statement accounts. The write-off of the account reduces both
Accounts Receivable and Allowance for
Doubtful Accounts.
Cash realizable value in the balance sheet, therefore, remains the same
• RECOVERY OF AN UNCOLLECTIBLE ACCOUNT Occasionally, a
company collects from a customer after it has written off the account as
uncollectible.
The company makes two entries to record the recovery of a bad debt.
• (1) It reverses the entry made in writing off the account. This reinstates the
customer’s account.
• (2) It journalizes the collection in the usual manner.

• Assume that on July 1, R. A. Ware pays the $500 amount that

Hampson had written off on March 1. Hampson makes the following
entries.
• ESTIMATING THE ALLOWANCE
Two bases are used to determine this amount:
• (1) percentage of sales and
• (2) percentage of receivables.

• Both bases are generally accepted. The choice is a

management decision.
• Percentage-of-Sales In the percentage-of-sales basis,
management estimates
what percentage of credit sales will be uncollectible.

• Assume that Gonzalez Company elects to

use the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2017 are
$800,000, the estimated bad debt expense is $8,000 (1% *
$800,000).
• Percentage-of-Receivables Under the percentage-of-receivables
basis, management estimates what percentage of receivables will
result in losses from uncollectible accounts. The company
prepares an aging schedule, in which it classifies customer
balances by the length of time they have been unpaid
• The amount of the bad debt adjusting entry is the difference between the
required balance and the existing balance in the allowance account.
• If the trial balance shows Allowance for Doubtful
Accounts with a credit balance of $528, the company will make an adjusting
entry for $1,700 =($2,228 - $528)
• The allowance account will have a debit balance prior to adjustment when
it makes the adjusting entry. Thus, if there had been a $500 debit
balance in the allowance account before adjustment,
• the adjusting entry would have been for $2,728 = ($2,228 + $500) to
arrive at a credit balance
of $2,228 (see T-account in margin).
• The percentage-of-receivables basis will normally result in the better
approximation of cash realizable value.
 PRACTICAL QUESTIONS
• Hughes Company has a credit balance of $5,000 in its
Allowance for Doubtful Accounts before any adjustments are
made at the end of the year. Based on
review and aging of its accounts receivable at the end
of the year, Hughes estimates that $60,000 of its
receivables are uncollectible. The amount of bad debt
expense which should be reported for the year is:

• (a) $5,000. (c) $60,000.

(b) $55,000. (d) $65,000.
• Use the same information as in Question 4, except
that Hughes has a debit balance of $5,000 in its
Allowance for Doubtful Accounts before any
adjustments are made at the end of the year. In this
situation, the amount of bad debt expense that should
be reported for the year is:

• (a) $5,000. (c) $60,000.

(b) $55,000. (d) $65,000.
• (b) By crediting Allowance for Doubtful Accounts for $55,000, the new
balance will be the required balance of $60,000. This
adjusting entry debits Bad Debt Expense for $55,000 and credits
Allowance for Doubtful Accounts for $55,000,
• not (a) $5,000, (c) $60,000, or (d) $65,000.

• (d) By crediting Allowance for Doubtful Accounts for $65,000, the new
balance will be the required balance of $60,000. This
adjusting entry debits Bad Debt Expense for $65,000 and credits
Allowance for Doubtful Accounts for $65,000,
• not (a) $5,000, (b) $55,000, or (c) $60,000.
• Brule Co. has been in business five years. The unadjusted trial balance
at the end of the current year shows:
Accounts Receivable $30,000 Dr.
• Sales Revenue $180,000 Cr.
Allowance for Doubtful Accounts $2,000 Dr.
•
Brule estimates bad debts to be 10% of receivables. Prepare the entry
necessary to adjust Allowance for Doubtful Accounts.
• The ledger of Nuro Company at the end of the current year shows Accounts
Receivable $180,000, Sales Revenue $1,800,000, and Sales Returns and
Allowances $60,000.

• Instructions
(a) If Nuro uses the direct write-off method to account for uncollectible
accounts, journalize the adjusting entry at December 31, assuming Nuro
determines that Willie’s $2,900 balance is uncollectible.
•
(b) If Allowance for Doubtful Accounts has a credit balance of $4,300 in the
trial balance,
journalize the adjusting entry at December 31, assuming bad debts are
expected to be (1) 1 % of net sales, and (2) 10% of accounts receivable.

• (c) If Allowance for Doubtful Accounts has a debit balance of $410 in the trial
balance, journalize the adjusting entry at December 31, assuming bad debts are
expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.
Solution
SALE OF RECEIVABLES
• Companies sell receivables for two major reasons.

• First, they may be the only reasonable source of cash

• Second, billing and collection are often time-consuming and
costly.

• A common sale of receivables is a sale to a factor.

• A factor is a finance company or bank that buys receivables

from businesses and then collects the payments directly from the
customers.
•Example
.

To illustrate, assume that Hendredon Furniture factors

$600,000 of receivables to Federal Factors. Federal
Factors assesses a service charge of 2% of the amount of
receivables sold. The journal entry to record the sale by
Hendredon Furniture on April 2, 2017, is as follows.
 Notes Receivable.
• A promissory note
• is a written promise to pay a specified amount of money on demand
or at a definite time.
• Promissory notes may be used
• (1) when individuals and companies lend or borrow money,
• (2) when the amount of the transaction and the credit period exceed
normal limits,
(3) in settlement of accounts receivable.
•
In a promissory note, the party making the promise to pay is called
the maker. The party to whom payment is to be made is called the
payee.
 Determining the Maturity Date
• Months (first day)
• the maturity date of a three-month note dated
• May 1 is August 1.
• Months (Last day)
• A note drawn on the last day of a month matures on the last day of a
subsequent month.
• That is, a July 31 note due in two months matures on September 30.
• Days
• When the due date is stated in terms of days, you need to count the
exact number of days to determine the maturity date. In counting,
omit the date the note is issued but include the due date.
• For example, the maturity date of a 60-day note dated July 17
is September 15,
Computing Interest
 Note Receivable Question

• Gambit Stores accepts from Leonard Co. a

$3,400, 90-day, 6% note dated May 10 in
settlement of Leonard’s overdue account.

• (a) What is the maturity date of the note?

(b) What is the interest payable at the maturity
date?
Solution