Notesale: Turn your study into money

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UNIVERSITY OF THE WEST INDIES
Mona Campus
Financial Accounting – ACCT 1005(MS15D)

Financial Assets
Financial assets include not only cash but also assets that can be easily converted into cash
e
...
cash equivalents, S-T investments (marketable securities) and receivables
...

Financial Asset
1
...

Marketable Securities
3
...


Current Value
Face Amount
Current Market Value
Net realizable value or Estimated collectible
amount
...
Cash equivalents
are liquid S-T investments that are said to safe and mature within 90 days of the date of
acquisition
...
g
...
To a business, cash includes coins and paper money, money on deposit in
banks and any items that banks will accept for deposit e
...
cheques, money orders, travellers
cheques and bank credit card sales
...
g
...
This cash is not available for paying current liabilities and is therefore not
grouped with current assets but listed as an investment in the balance sheet
...
This is normally given in the form of a
chequing account
...
The unused line of
credit should be disclosed in the notes to the accounts
...

Cash management
 Avoid excessive cash (idle cash)
 Accurately account for cash
 Prevent theft and fraud by implementing proper internal control system
 Ensure that cash is available to deal with immediate transactions
1

Cash control
The business must have a system of internal control
...

 Separate duties so as to limit the chances of fraud
...
E
...
Accountants should not have access to the
assets, and those that have access (such as the cashier) should not have access to the
accounting records
...

 Prepare a controlling list of cash receipts
 All disbursement, except petty cash, should be made by cheque
...

 Cash budget should be prepared for each department on a month-by-month basis
...
Separate the function of
approving expenditure from the function of signing cheques
...

Cheques
A cheque is a document ordering a bank to pay cash from a depositor’s account
...
e
...
e
...
e
...

Bank Reconciliation Statements
This is a statement which seeks to explain the difference between the bank balance, as shown in
the general ledger of the business and the bank balance as shown on the bank statement of the
business
...


ii)

Deposits in transit/Outstanding Deposits
Money deposited by the business, but not yet recorded by the bank
...

Collections/Direct Credit
Amounts collected by the bank on behalf of the
business
...


2

v)

vi)
vii)
viii)

3
...

Errors
made by bank or business/depositor in recording cash transactions
...
EFT would be reflected on the bank statement
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






Goods or services sold on account results in the creation of accounts receivables
...
Note receivable may be classified as either
current or L-T, depending on the date of maturity
...
Such accounts are referred to as uncollectible
accounts expense, doubtful-debt expense or bad-debt expense
...

Accounts receivable are therefore shown in the balance sheet net of the estimated
uncollectible amount i
...
at net realizable value (NRV)
...


There are two ways of accounting for uncollectible receivables
a)
b)
a)

The Allowance Method
The Direct Write-Off method

The Allowance Method

This method is based on an estimate of collection losses and attempts to recognize bad debt
expenses in the same period that the related credit sales are made
...
Under the accrual basis of accounting the allowance method is generally
required for financial reporting purposes
...

i
...


Dr Uncollectible/Bad-Debt/Doubtful Debt Expense A/C
Cr
...


3

Balance Sheet Extract
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Less: Allowance for Uncollectible A/Cs

$

xxxxxxxx
(xxxxxxx)

$
xxxxxxx
xxxxxxx
xxxxxxx

iii) When debt is identified i
...
the account is deemed to be uncollectible, the asset is useless
and should be written-off
...

i
...
Dr Allowance for Uncollectible A/Cs
Cr Accounts Receivable, Customer A/C
Note: This does not change the NRV of the account receivable figure on the BS, since both
Accounts Receivable and Allowance for Uncollectible A/Cs are reduced by the same
amount
...
Percent-of-sales method (Also called the Income Statement Approach)
This method considers credit sales for the period
...
It ignores the current balance on the allowance account; the allowance account
is therefore adjusted by the amount of the expense calculated i
...
it is added to the amount
already on the account
...


4

2
...
Here the accounts are classified according to age
and a historic percentage applied to each category
...
Under
this approach, the allowance account is adjusted to the estimated amount
...


Recovery of Amount Previously Written-Off (Bad-Debt Recovered)



When an AR is written off, the debt does not die; the customer still owes the business but the
business simply ceases to pursue collection
...

i) Reinstate the account by reversing the entry made to write-off the account
i
...
Dr Accounts Receivable, Customer A/C
Cr Allowance for Uncollectible Account
ii) Record Collection

b)

Dr Cash
Cr Accounts Receivable, Customer A/C

Direct Write-Off Method

Bad-debt expense is not recognized until it has been determined that an account is uncollectible
...
When this method is used, accounts receivable will be shown
in the balance sheet at gross value i
...
accounts receivable are not shown at estimated NRV, as is
in the case of the allowance method, hence the balance sheet is said to be overstated
...
If a company makes most of its sales by cash, then the direct write-off
method may be acceptable, as accounts receivable will be small and its impact may not be
material
...

5

Internal Control for Accounts Receivable
Employee who maintains AR subsidiary ledger should not have access to cash receipts
...

Management of Accounts Receivable
Having accounts receivable means that cash is “tied up” and not earning revenues
...

Factor AR i
...
borrows funds using AR as collateral
...

Encourage bank related credit card (CC) sales
...
Non-payment affects
the CC Company and not the business
...


Financial Statements Analysis
Accounts receivable Turnover
tells how many times the business’s average investment in
receivables was converted into cash during the year, i
...
how quickly customers are paying on
their accounts
...


iii)

Acid-test ratio is a stringent test of liquidity which measures the ability of an entity to pay
its current liabilities immediately

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