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Jose Cintron, MBA-CPC
(954) 374-8298
Josecintron.mba@gmail.com
Accounting Principles 1D
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Internal Control for Cash
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Internal Control and Cash
One of the most important steps your unit can take to protect cash — and
you — is to separate cash handling duties among different people. With
proper separation of duties, no single person has control over the entire
cash process.
Best practice is to have different people:
Receive and deposit cash
Record cash payments to receivable records
Reconcile cash receipts to deposits and the general ledger
Bill for goods and services
Follow up on collection of returned checks
Distribute payroll or other checks
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Cash Internal Controls
Note: The key to effective cash control while separating duties is to
minimize the number of people who actually handle cash before it's
deposited.
Potential consequences if duties are not separated:
Concealed errors or irregularities going unchecked
Lost or stolen cash receipts
Inaccurate application of cash receipts to department accounts
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Account Receivables
Accounts receivable are amounts owed by customers on account. They
result from the sale of goods and services. Companies generally expect
to collect these receivables within 30 to 60 days. Accounts receivable are
the most significant type of claim held by a company.
Notes receivable are claims for which formal instruments of credit are
issued as proof of the debt. A note receivable normally extends for time
periods of 60–90 days or longer and requires the debtor to pay interest.
Notes and accounts receivable that result from sales transactions are
often called trade receivables.
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Recognizing Accounts Receivable
We sold merchandise on account for $300 to ABC.
ABC, Accounts Receivable 300
Sales 300
We collect the payment in cash for the previous sale.
Cash 300
ABC, Account Receivable 300
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How companies recognize
accounts receivable
Jordache Co. on July 1, 2010, sells merchandise on account to Polo
Company for $1,000 terms 2/10, n/30. On July 5, Polo returns
merchandise worth $100 to Jordache Co. On July 11, Jordache receives
payment from Polo Company for the balance due.
July 1 Accounts Receivable—Polo Company 1,000
Sales 1,000
(To record sales on account)
July 5 Sales Returns and Allowances 100
Accounts Receivable—Polo Company 100
(To record merchandise returned)
July 11 Cash ($900-$18) 882
Sales Discounts ($900 × .02) 18
Accounts Receivable—Polo Company 900
(To record collection of accounts receivable)
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Direct Write-Off Method
for Uncollectible**
Under the direct write-off method, when a company determines a
particular account to be uncollectible, it charges the loss to Bad Debts
Expense. Assume, for example, that on December 12 Warden Co. writes
off as uncollectible M. E. Doran's $200 balance. The entry is:
Dec. 12 Bad Debts Expense 200
Accounts Receivable—M. E. Doran 200
(To record write-off of M. E. Doran account)
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Recording Estimated
Uncollectibles
The allowance method, assume that Hampson Furniture has credit sales
of $1,200,000 in 2010. Of this amount, $200,000 remains uncollected at
December 31. The credit manager estimates that $12,000 of these sales
will be uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31 Bad Debts Expense 12,000
Allowance for Doubtful Accounts 12,000
(To record estimate of uncollectible accounts)
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Allowance Method for
Uncollectible
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.
1. Companies estimate uncollectible accounts receivable. They match this estimated
expense against revenues in the same accounting period in which they record the
revenues.
2. Companies debit estimated uncollectibles to Bad Debts Expense and credit them to
Allowance for Doubtful Accounts (a contra-asset account) through an adjusting entry at
the end of each period.
3. When companies write off a specific account, they debit actual uncollectibles to
Allowance for Doubtful Accounts and credit that amount to Accounts Receivable.
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Allowance for Doubtful
Accounts
Hampson reports Bad Debts Expense in the income statement as an
operating expense (usually as a selling expense).
Allowance for Doubtful Accounts shows the estimated amount of claims
on customers that the company expects will become uncollectible in the
future.
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Recording the Write-Off of
an Uncollectible Account
To illustrate a receivables write-off, 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, 2011. The entry to record
the write-off is:
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable—R. A. Ware 500
(Write-off of R. A. Ware account)
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Recovery of an
Uncollectible Account.
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.
To illustrate, assume that on July 1, R. A. Ware pays the $500 amount
that Hampson had written off on March 1. These are the entries:
July 1 Accounts Receivable—R. A. Ware 500
Allowance for Doubtful Accounts 500
(To reverse write-off of R. A. Ware account )
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Record delivery cost
May 6 Merchandise Inventory 150
Cash 150
(To record payment of freight on goods purchased)
May 4 Freight-out (or Delivery Expense) 150
Cash 150
(To record payment of freight on goods sold)
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FOB Shipping or Destination
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Account Receivable Aging
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Entry to record the purchase
Stereo makes the following journal entry to record its purchase from PW
Audio Supply. The entry increases (debits) Merchandise Inventory and
increases (credits) Accounts Payable.
May 4 Merchandise Inventory 3,800
Accounts Payable 3,800
(To record goods purchased on account from PW Audio Supply)
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Purchase Returns and Allowances
Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods
costing $300. The following entry by Sauk Stereo for the returned
merchandise decreases (debits) Accounts Payable and decreases (credits)
Merchandise Inventory
May 8 Accounts Payable 300
Merchandise Inventory 300
(To record return of goods purchased from
PW Audio Supply)
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Purchase Discounts
When the buyer pays an invoice within the discount period, the amount
of the discount decreases Merchandise Inventory. May 14, the last day of
the discount period. The cash discount is $70 ($3,500 × 2%), and Sauk
Stereo pays $3,430 ($3,500 - $70).
May 14 Accounts Payable 3,500
Cash 3,430
Merchandise Inventory 70
(To record payment within discount
period)
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Purchase Transactions
On September 5, De La Hoya Company buys merchandise on
account from AGM Company. The selling price of the goods is
$1,500, and the cost to AGM Company was $800. On September
8, De La Hoya returns defective goods with a selling price of
$200 and a scrap value of $80. Record the transactions on the
books of AGM Company.
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Purchase transactions
Sept. 5 Accounts Receivable 1,500
Sales 1,500
(To record credit sale)
5 Cost of Goods Sold 800
Merchandise Inventory 800
(To record cost of goods sold on account)
Sept. 8 Sales Returns and Allowances 200
Accounts Receivable 200
(To record credit granted for receipt of returned goods)
8 Merchandise Inventory 80
Cost of Goods Sold 80
(To record scrap value of goods returned)
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Recording Sales of Merchandise
Companies record sales revenues, like service revenues, when earned, in
compliance with the revenue recognition principle.
May 4 Accounts Receivable 3,800
Sales 3,800
(To record credit sale to Sauk Stereo per invoice #731)
May 4 Cost of Goods Sold 2,400
Merchandise Inventory 2,400
(To record cost of merchandise sold on invoice #731 to Sauk Stereo
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Sales Returns and Allowances
Audio Supply's entries to record credit for returned goods involve (1) an
increase in Sales Returns and Allowances and a decrease in Accounts
Receivable at the $300 selling price, and (2) an increase in Merchandise
Inventory (assume a $140 cost) and a decrease in Cost of Goods Sold.
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
(To record credit granted to Sauk Stereo for returned goods)
May 8 Merchandise Inventory 140
Cost of Goods Sold 140
(To record cost of goods returned)
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Adjusting Entries
Suppose that Audio Supply has an unadjusted balance of $40,500 in
Merchandise Inventory. Through a physical count, Audio determines that
its actual merchandise inventory at year-end is $40,000. The company
would make an adjusting as follow
Cost of Goods Sold 500
Merchandise Inventory 500
(To adjust inventory to physical count)
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Closing Entries
A merchandising company, like a service company, closes to Income
Summary all accounts that affect net income. In journalizing, the
company credits all temporary accounts with debit balances, and debits
all temporary accounts with credit balances, as shown below for Audio
Supply. Audio closes Cost of Goods Sold to Income Summary.
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Closing Entries
Dec. 31 Sales 480,000
Income Summary 480,000
(To close income statement accounts with credit balances)
31 Income Summary 450,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Cost of Goods Sold 316,000
Store Salaries Expense 45,000
Administrative Salaries Expense 19,000
Freight-out 7,000
Advertising Expense 16,000
Utilities Expense 17,000
Depreciation Expense 8,000
Insurance Expense 2,000
(To close income statement accounts with debit balances)
31 Income Summary 30,000
R.A. Lamb, Capital 30,000
(To close net income to capital)
31 R.A. Lamb, Capital 15,000
R.A. Lamb, Drawing 15,000
(To close drawings to capital)
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Closing Entries EX.
The trial balance of Celine's Sports Wear Shop at December 31 shows
Sales $162,400, Sales Returns and Allowances $4,800, Sales Discounts
$3,600, Cost of Goods Sold $110,000, Rental Revenue $6,000, Freight-
out $1,800, Rent Expense $8,800, and Salaries and Wages Expense
$22,000. Prepare the closing entries for the above accounts.
1. Close all temporary accounts with credit balances to Income
Summary by debiting these accounts.
2. Close all temporary accounts with debit balances, except drawings, to
Income Summary by crediting these accounts.
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Closing Entries (solution)
Dec. 31 Sales 162,400
Rental Revenue 6,000
Income Summary 168,400
(To close accounts with credit balances)
31 Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
(To close accounts with debit balances) 168,400-151,000=17,400
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Who are you???
Professor Jose Cintron

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Accounting principles 1D

  • 1. www.mba4help.com Jose Cintron, MBA-CPC (954) 374-8298 Josecintron.mba@gmail.com Accounting Principles 1D
  • 3. www.mba4help.com Internal Control and Cash One of the most important steps your unit can take to protect cash — and you — is to separate cash handling duties among different people. With proper separation of duties, no single person has control over the entire cash process. Best practice is to have different people: Receive and deposit cash Record cash payments to receivable records Reconcile cash receipts to deposits and the general ledger Bill for goods and services Follow up on collection of returned checks Distribute payroll or other checks
  • 4. www.mba4help.com Cash Internal Controls Note: The key to effective cash control while separating duties is to minimize the number of people who actually handle cash before it's deposited. Potential consequences if duties are not separated: Concealed errors or irregularities going unchecked Lost or stolen cash receipts Inaccurate application of cash receipts to department accounts
  • 5. www.mba4help.com Account Receivables Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Companies generally expect to collect these receivables within 30 to 60 days. Accounts receivable are the most significant type of claim held by a company. Notes receivable are claims for which formal instruments of credit are issued as proof of the debt. A note receivable normally extends for time periods of 60–90 days or longer and requires the debtor to pay interest. Notes and accounts receivable that result from sales transactions are often called trade receivables.
  • 6. www.mba4help.com Recognizing Accounts Receivable We sold merchandise on account for $300 to ABC. ABC, Accounts Receivable 300 Sales 300 We collect the payment in cash for the previous sale. Cash 300 ABC, Account Receivable 300
  • 7. www.mba4help.com How companies recognize accounts receivable Jordache Co. on July 1, 2010, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. On July 5, Polo returns merchandise worth $100 to Jordache Co. On July 11, Jordache receives payment from Polo Company for the balance due. July 1 Accounts Receivable—Polo Company 1,000 Sales 1,000 (To record sales on account) July 5 Sales Returns and Allowances 100 Accounts Receivable—Polo Company 100 (To record merchandise returned) July 11 Cash ($900-$18) 882 Sales Discounts ($900 × .02) 18 Accounts Receivable—Polo Company 900 (To record collection of accounts receivable)
  • 8. www.mba4help.com Direct Write-Off Method for Uncollectible** Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran's $200 balance. The entry is: Dec. 12 Bad Debts Expense 200 Accounts Receivable—M. E. Doran 200 (To record write-off of M. E. Doran account)
  • 9. www.mba4help.com Recording Estimated Uncollectibles The allowance method, assume that Hampson Furniture has credit sales of $1,200,000 in 2010. Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is: Dec. 31 Bad Debts Expense 12,000 Allowance for Doubtful Accounts 12,000 (To record estimate of uncollectible accounts)
  • 10. www.mba4help.com Allowance Method for Uncollectible 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. 1. Companies estimate uncollectible accounts receivable. They match this estimated expense against revenues in the same accounting period in which they record the revenues. 2. Companies debit estimated uncollectibles to Bad Debts Expense and credit them to Allowance for Doubtful Accounts (a contra-asset account) through an adjusting entry at the end of each period. 3. When companies write off a specific account, they debit actual uncollectibles to Allowance for Doubtful Accounts and credit that amount to Accounts Receivable.
  • 11. www.mba4help.com Allowance for Doubtful Accounts Hampson reports Bad Debts Expense in the income statement as an operating expense (usually as a selling expense). Allowance for Doubtful Accounts shows the estimated amount of claims on customers that the company expects will become uncollectible in the future.
  • 12. www.mba4help.com Recording the Write-Off of an Uncollectible Account To illustrate a receivables write-off, 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, 2011. The entry to record the write-off is: Mar. 1 Allowance for Doubtful Accounts 500 Accounts Receivable—R. A. Ware 500 (Write-off of R. A. Ware account)
  • 13. www.mba4help.com Recovery of an Uncollectible Account. 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. To illustrate, assume that on July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. These are the entries: July 1 Accounts Receivable—R. A. Ware 500 Allowance for Doubtful Accounts 500 (To reverse write-off of R. A. Ware account )
  • 14. www.mba4help.com Record delivery cost May 6 Merchandise Inventory 150 Cash 150 (To record payment of freight on goods purchased) May 4 Freight-out (or Delivery Expense) 150 Cash 150 (To record payment of freight on goods sold)
  • 17. www.mba4help.com Entry to record the purchase Stereo makes the following journal entry to record its purchase from PW Audio Supply. The entry increases (debits) Merchandise Inventory and increases (credits) Accounts Payable. May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 (To record goods purchased on account from PW Audio Supply)
  • 18. www.mba4help.com Purchase Returns and Allowances Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. The following entry by Sauk Stereo for the returned merchandise decreases (debits) Accounts Payable and decreases (credits) Merchandise Inventory May 8 Accounts Payable 300 Merchandise Inventory 300 (To record return of goods purchased from PW Audio Supply)
  • 19. www.mba4help.com Purchase Discounts When the buyer pays an invoice within the discount period, the amount of the discount decreases Merchandise Inventory. May 14, the last day of the discount period. The cash discount is $70 ($3,500 × 2%), and Sauk Stereo pays $3,430 ($3,500 - $70). May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 (To record payment within discount period)
  • 20. www.mba4help.com Purchase Transactions On September 5, De La Hoya Company buys merchandise on account from AGM Company. The selling price of the goods is $1,500, and the cost to AGM Company was $800. On September 8, De La Hoya returns defective goods with a selling price of $200 and a scrap value of $80. Record the transactions on the books of AGM Company.
  • 21. www.mba4help.com Purchase transactions Sept. 5 Accounts Receivable 1,500 Sales 1,500 (To record credit sale) 5 Cost of Goods Sold 800 Merchandise Inventory 800 (To record cost of goods sold on account) Sept. 8 Sales Returns and Allowances 200 Accounts Receivable 200 (To record credit granted for receipt of returned goods) 8 Merchandise Inventory 80 Cost of Goods Sold 80 (To record scrap value of goods returned)
  • 22. www.mba4help.com Recording Sales of Merchandise Companies record sales revenues, like service revenues, when earned, in compliance with the revenue recognition principle. May 4 Accounts Receivable 3,800 Sales 3,800 (To record credit sale to Sauk Stereo per invoice #731) May 4 Cost of Goods Sold 2,400 Merchandise Inventory 2,400 (To record cost of merchandise sold on invoice #731 to Sauk Stereo
  • 23. www.mba4help.com Sales Returns and Allowances Audio Supply's entries to record credit for returned goods involve (1) an increase in Sales Returns and Allowances and a decrease in Accounts Receivable at the $300 selling price, and (2) an increase in Merchandise Inventory (assume a $140 cost) and a decrease in Cost of Goods Sold. May 8 Sales Returns and Allowances 300 Accounts Receivable 300 (To record credit granted to Sauk Stereo for returned goods) May 8 Merchandise Inventory 140 Cost of Goods Sold 140 (To record cost of goods returned)
  • 24. www.mba4help.com Adjusting Entries Suppose that Audio Supply has an unadjusted balance of $40,500 in Merchandise Inventory. Through a physical count, Audio determines that its actual merchandise inventory at year-end is $40,000. The company would make an adjusting as follow Cost of Goods Sold 500 Merchandise Inventory 500 (To adjust inventory to physical count)
  • 25. www.mba4help.com Closing Entries A merchandising company, like a service company, closes to Income Summary all accounts that affect net income. In journalizing, the company credits all temporary accounts with debit balances, and debits all temporary accounts with credit balances, as shown below for Audio Supply. Audio closes Cost of Goods Sold to Income Summary.
  • 26. www.mba4help.com Closing Entries Dec. 31 Sales 480,000 Income Summary 480,000 (To close income statement accounts with credit balances) 31 Income Summary 450,000 Sales Returns and Allowances 12,000 Sales Discounts 8,000 Cost of Goods Sold 316,000 Store Salaries Expense 45,000 Administrative Salaries Expense 19,000 Freight-out 7,000 Advertising Expense 16,000 Utilities Expense 17,000 Depreciation Expense 8,000 Insurance Expense 2,000 (To close income statement accounts with debit balances) 31 Income Summary 30,000 R.A. Lamb, Capital 30,000 (To close net income to capital) 31 R.A. Lamb, Capital 15,000 R.A. Lamb, Drawing 15,000 (To close drawings to capital)
  • 27. www.mba4help.com Closing Entries EX. The trial balance of Celine's Sports Wear Shop at December 31 shows Sales $162,400, Sales Returns and Allowances $4,800, Sales Discounts $3,600, Cost of Goods Sold $110,000, Rental Revenue $6,000, Freight- out $1,800, Rent Expense $8,800, and Salaries and Wages Expense $22,000. Prepare the closing entries for the above accounts. 1. Close all temporary accounts with credit balances to Income Summary by debiting these accounts. 2. Close all temporary accounts with debit balances, except drawings, to Income Summary by crediting these accounts.
  • 28. www.mba4help.com Closing Entries (solution) Dec. 31 Sales 162,400 Rental Revenue 6,000 Income Summary 168,400 (To close accounts with credit balances) 31 Income Summary 151,000 Cost of Goods Sold 110,000 Sales Returns and Allowances 4,800 Sales Discounts 3,600 Freight-out 1,800 Rent Expense 8,800 Salaries and Wages Expense 22,000 (To close accounts with debit balances) 168,400-151,000=17,400