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Chapter 7
Introduction to Accounts 1-2 1-3 1-4 1-5 1-6 1-7 1-8 1-9 1-10 1-11 1-12 1-13 1-14 1-15 1-16 1-17 1-18 1-19 The accounting value of a firm’s assets is frequently referred to as the carrying value or the book value of the assets. Under generally accepted accounting principles (GAAP) or IFRS, audited financial statements of firms carry the assets at cost. Thus the terms carrying value and book value are unfortunate. They specifically say “value,” when in fact the accounting numbers are based on cost. This misleads many readers of financial statements to think that the firm’s assets are recorded at true market values. Market value is the price at which willing buyers and sellers would trade the assets. It would be only a coincidence if accounting value and market value were the same. In fact, management’s job is to create value for the firm that exceeds its cost.
1-24 1-25 1-26 1-27 1-28 1-29 1-30 1-31 1-32 • Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. The double entry has two equal and corresponding sides known as debit and credit. •
1-37 1-38 1-39 1-40 1-41 1-42 1-43 1-44 Two approaches to deal with the doubtful account receivables. (1) Directly Write Off (2) Allowance Method
1-45 If the CFO of the company thinks that there are $176 in account receivables are doubtful and he decides to directly write-off the account.
Directly Write-off Method
Date Account/Explanation Debit Credit 31- Aug- 17 Bad Debt Expense $176 Account Receivables $176 To Directly Write- off Account Change to Balance Sheet: Account receivable-$176. Equity (reserve)-$176. Thus, Asset=Liability+Equity.
1-46 If the CFO decides to use the allowance method. (3 steps) Estimate uncollectible receivables. Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts. When you decide to write off an account, debit allowance for doubtful accounts and credit the corresponding receivables account.
1-47 Change to Balance Sheet: Allowance for Doubtful Accounts+$176; Equity(Reserve)- $176. Thus, Asset=Liability+Equity.
1-48 Sometimes, people or businesses pay back the amount but at a later date, which means that you need to reverse the write off you made and record the collection of the receivables. It would involve the following entry:
