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[{"Name":"Introduction to Accounts Receivable","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Valuation of Receivables","Duration":"5m 48s","ChapterTopicVideoID":26660,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/26660.jpeg","UploadDate":"2021-10-10T09:51:29.2070000","DurationForVideoObject":"PT5M48S","Description":null,"MetaTitle":"Valuation of Receivables: Video + Workbook | Proprep","MetaDescription":"Accounts Receivable - Introduction to Accounts Receivable. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/accounts-receivable/introduction-to-accounts-receivable/vid27482","VideoComments":[],"Subtitles":[{"Start":"00:00.200 ","End":"00:04.380","Text":"Hello and welcome to this series of video presentations"},{"Start":"00:04.380 ","End":"00:08.450","Text":"on accounts receivable brought to you by Proprep."},{"Start":"00:08.450 ","End":"00:11.730","Text":"In this section, we will discuss the need to account"},{"Start":"00:11.730 ","End":"00:15.225","Text":"for both doubtful debts and sales returns."},{"Start":"00:15.225 ","End":"00:21.060","Text":"We will understand how accounts receivable are measured and also presented in"},{"Start":"00:21.060 ","End":"00:23.900","Text":"the balance sheet and we will distinguish between"},{"Start":"00:23.900 ","End":"00:28.820","Text":"expected and materialized credit losses."},{"Start":"00:28.820 ","End":"00:35.240","Text":"The term credit losses refers to losses relating to sales on credit,"},{"Start":"00:35.240 ","End":"00:38.570","Text":"often referred to as bad debts."},{"Start":"00:38.570 ","End":"00:40.295","Text":"In this particular video,"},{"Start":"00:40.295 ","End":"00:43.955","Text":"we focus on the valuation of receivables."},{"Start":"00:43.955 ","End":"00:50.360","Text":"You know already that accounts receivable are created with respect to credit sales."},{"Start":"00:50.360 ","End":"00:54.125","Text":"Sales and credit, where the goods are sold now"},{"Start":"00:54.125 ","End":"00:58.415","Text":"and the customer will pay the cash in a later period."},{"Start":"00:58.415 ","End":"01:01.775","Text":"There are some sales recognition rules that apply."},{"Start":"01:01.775 ","End":"01:07.265","Text":"Although the specifics of these rules are beyond the scope of this module,"},{"Start":"01:07.265 ","End":"01:09.394","Text":"I have at most cases,"},{"Start":"01:09.394 ","End":"01:12.680","Text":"the sales are in fact recorded upon delivery of goods and"},{"Start":"01:12.680 ","End":"01:17.930","Text":"services and not beforehand to valuation issues."},{"Start":"01:17.930 ","End":"01:20.180","Text":"The first valuation issue,"},{"Start":"01:20.180 ","End":"01:26.705","Text":"how much cash is expected to be ultimately collected in respect of those credit sales."},{"Start":"01:26.705 ","End":"01:32.645","Text":"The second valuation issue is how to measure a right of return."},{"Start":"01:32.645 ","End":"01:38.540","Text":"In other words, the customers too satisfied with the product and wants to return it."},{"Start":"01:38.540 ","End":"01:42.830","Text":"These valuation issues stem from a conceptual question."},{"Start":"01:42.830 ","End":"01:45.290","Text":"This question is, should the loss of"},{"Start":"01:45.290 ","End":"01:51.290","Text":"cash inflows resulting from customers fairly to pay on the 1 hand,"},{"Start":"01:51.290 ","End":"01:55.265","Text":"or customers returning merchandise on the other hand,"},{"Start":"01:55.265 ","End":"01:58.390","Text":"should this loss be reported 1 in"},{"Start":"01:58.390 ","End":"02:04.385","Text":"the current period or maybe in a later period when it materializes."},{"Start":"02:04.385 ","End":"02:07.910","Text":"But remember, if it isn\u0027t a later period,"},{"Start":"02:07.910 ","End":"02:12.515","Text":"this will be based on expectations and estimates."},{"Start":"02:12.515 ","End":"02:17.870","Text":"Now, it probably will materialize in a later period."},{"Start":"02:17.870 ","End":"02:21.620","Text":"Because if the goods are sold in the current period,"},{"Start":"02:21.620 ","End":"02:28.340","Text":"it is probably only in that later period that the entity will establish that either"},{"Start":"02:28.340 ","End":"02:36.060","Text":"the customer fails to pay or that the customer ultimately wants to return those goods."},{"Start":"02:36.130 ","End":"02:40.520","Text":"Now accounting rules are based on the idea that when"},{"Start":"02:40.520 ","End":"02:44.420","Text":"recording sales in the current period against an asset,"},{"Start":"02:44.420 ","End":"02:47.975","Text":"let\u0027s stop there and think about what to be record."},{"Start":"02:47.975 ","End":"02:52.645","Text":"When we record sales in a particular period,"},{"Start":"02:52.645 ","End":"03:02.250","Text":"we say debit accounts receivable and we put the credit entry to sales."},{"Start":"03:02.250 ","End":"03:08.975","Text":"Accounts receivable being the asset and sales being the income account."},{"Start":"03:08.975 ","End":"03:12.175","Text":"When we record this in the current period,"},{"Start":"03:12.175 ","End":"03:14.890","Text":"we need to measure that asset,"},{"Start":"03:14.890 ","End":"03:18.370","Text":"the asset being the accounts receivable at"},{"Start":"03:18.370 ","End":"03:23.020","Text":"a value that anticipates future cash collections."},{"Start":"03:23.020 ","End":"03:29.740","Text":"Now if the cash collection in the future is expected to be lower than the sales amount."},{"Start":"03:29.740 ","End":"03:33.910","Text":"Other words low than the amount recorded as income."},{"Start":"03:33.910 ","End":"03:40.780","Text":"Then the entity needs to establish what is called an allowance for credit losses."},{"Start":"03:40.780 ","End":"03:45.050","Text":"Also called an allowance for doubtful debts,"},{"Start":"03:45.050 ","End":"03:48.920","Text":"is maybe rafted in because it\u0027s quite important to appreciate that term."},{"Start":"03:48.920 ","End":"03:54.290","Text":"The term allowance for credit losses can also be"},{"Start":"03:54.290 ","End":"03:59.870","Text":"called allowance for doubtful debts and when this is recorded,"},{"Start":"03:59.870 ","End":"04:03.125","Text":"it is recorded as a contra asset."},{"Start":"04:03.125 ","End":"04:07.010","Text":"Now a contra asset is a negative asset and we will look"},{"Start":"04:07.010 ","End":"04:10.745","Text":"at this more detail in a later slide."},{"Start":"04:10.745 ","End":"04:15.740","Text":"Kelly, this credit loss or allowance needs to be estimated because"},{"Start":"04:15.740 ","End":"04:21.770","Text":"these losses will early materialize in a later or future period."},{"Start":"04:21.770 ","End":"04:24.814","Text":"When a right to return exists,"},{"Start":"04:24.814 ","End":"04:28.700","Text":"not all sales recorded in the current period will"},{"Start":"04:28.700 ","End":"04:33.080","Text":"ultimately translate into cash because goods will be returned."},{"Start":"04:33.080 ","End":"04:34.685","Text":"There\u0027s lots of cash,"},{"Start":"04:34.685 ","End":"04:36.845","Text":"although takes place in the future,"},{"Start":"04:36.845 ","End":"04:40.655","Text":"needs to be estimated in the current period."},{"Start":"04:40.655 ","End":"04:46.025","Text":"Now the returns related to credit sales and allowance is recorded."},{"Start":"04:46.025 ","End":"04:49.130","Text":"However, for return related to cash sales,"},{"Start":"04:49.130 ","End":"04:52.385","Text":"you will see a liability needs to be recorded."},{"Start":"04:52.385 ","End":"04:54.440","Text":"This table here just gives you"},{"Start":"04:54.440 ","End":"05:00.379","Text":"a practical idea of the important relevance of accounts receivable."},{"Start":"05:00.379 ","End":"05:06.665","Text":"It looks at the amount of accounts receivable as a percentage"},{"Start":"05:06.665 ","End":"05:13.640","Text":"of either total assets or sales in relation to a number of different companies."},{"Start":"05:13.640 ","End":"05:17.900","Text":"Maybe look at a company like Netflix or Vodafone."},{"Start":"05:17.900 ","End":"05:21.515","Text":"There\u0027s a very small percentage of accounts receivable"},{"Start":"05:21.515 ","End":"05:25.970","Text":"as a percentage of other assets or sales."},{"Start":"05:25.970 ","End":"05:28.685","Text":"The focus on the company called Next."},{"Start":"05:28.685 ","End":"05:35.570","Text":"Next is a large British clothing retailer who sell a lot of their products on credit."},{"Start":"05:35.570 ","End":"05:40.400","Text":"Here you\u0027ll see accounts receivable comprise a substantial"},{"Start":"05:40.400 ","End":"05:47.729","Text":"34% of total assets, 29% of sales."}],"ID":27482},{"Watched":false,"Name":"Exercise 1 - part 1","Duration":"1m 18s","ChapterTopicVideoID":26457,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.180","Text":"Today we\u0027re going to do exercise F2F,"},{"Start":"00:04.180 ","End":"00:11.025","Text":"exercise F2F deals with the recording of bad debt expenses and write-offs."},{"Start":"00:11.025 ","End":"00:16.155","Text":"Let\u0027s read through the information provided at the end of 20X1,"},{"Start":"00:16.155 ","End":"00:18.255","Text":"that\u0027s the end of 20X1,"},{"Start":"00:18.255 ","End":"00:22.814","Text":"F2F reports 55,000 in accounts receivable,"},{"Start":"00:22.814 ","End":"00:28.065","Text":"net of 3,700, and allowance for doubtful debts."},{"Start":"00:28.065 ","End":"00:31.530","Text":"Now, during 20X2 the next year,"},{"Start":"00:31.530 ","End":"00:37.665","Text":"it records 1,233,900 in sales,"},{"Start":"00:37.665 ","End":"00:43.080","Text":"and we could assume all of those are credit sales during 20X2,"},{"Start":"00:43.080 ","End":"00:49.340","Text":"if F2F writes off 1,200 in uncollectable debt,"},{"Start":"00:49.340 ","End":"00:52.465","Text":"then at the end of 20X2,"},{"Start":"00:52.465 ","End":"00:59.165","Text":"the receivables of 62,400 have not been paid yet."},{"Start":"00:59.165 ","End":"01:08.110","Text":"It also estimates that the allowance for bad debts at the end of 20X2 to be 4,950."},{"Start":"01:08.110 ","End":"01:11.690","Text":"Required: Pass the necessary entries,"},{"Start":"01:11.690 ","End":"01:17.910","Text":"as the journals, but using the transaction worksheet provided on the next slide."}],"ID":27483},{"Watched":false,"Name":"Exercise 1 - part 2","Duration":"7m 5s","ChapterTopicVideoID":26458,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.700","Text":"The solution to F2F."},{"Start":"00:02.700 ","End":"00:07.905","Text":"We are given a transaction worksheet with a column for cash which is an asset,"},{"Start":"00:07.905 ","End":"00:10.050","Text":"receivables which is an asset,"},{"Start":"00:10.050 ","End":"00:16.680","Text":"the allowance for bad debt or doubtful debt which is a negative asset, if you like."},{"Start":"00:16.680 ","End":"00:21.510","Text":"It\u0027s a measurement account which reduces the value of your receivables balance."},{"Start":"00:21.510 ","End":"00:24.075","Text":"Then we\u0027re given a column for income statement,"},{"Start":"00:24.075 ","End":"00:26.400","Text":"and that E stands for equity."},{"Start":"00:26.400 ","End":"00:32.490","Text":"Perhaps just put little Q in there or call it OE to differentiate it from E for expenses."},{"Start":"00:32.490 ","End":"00:35.550","Text":"Now let\u0027s work through the information that was given to us."},{"Start":"00:35.550 ","End":"00:39.345","Text":"The first point we were given was that at the end of 20X1,"},{"Start":"00:39.345 ","End":"00:43.460","Text":"F2F reports 55,000 in accounts receivable,"},{"Start":"00:43.460 ","End":"00:48.890","Text":"and that this was net of 3,700 allowance for doubtful debt."},{"Start":"00:48.890 ","End":"00:52.710","Text":"We need to work out what the gross accounts receivable was,"},{"Start":"00:52.710 ","End":"00:56.825","Text":"in other words, before deducting the allowance for doubtful debt."},{"Start":"00:56.825 ","End":"01:05.070","Text":"The gross amount must have been the 55,000 plus the 3,700 which is 58,700."},{"Start":"01:05.210 ","End":"01:13.100","Text":"Let\u0027s put the balances into our transaction worksheet as our opening balance for 20X2."},{"Start":"01:13.100 ","End":"01:18.650","Text":"We have our opening balance for receivables as the 58,700,"},{"Start":"01:18.650 ","End":"01:21.470","Text":"remember, that is gross."},{"Start":"01:21.470 ","End":"01:26.015","Text":"Then we show the loans separately at 3,700."},{"Start":"01:26.015 ","End":"01:31.175","Text":"On the face of the balance sheet for accounts receivable,"},{"Start":"01:31.175 ","End":"01:36.955","Text":"we would\u0027ve shown an amount of 55,000 net."},{"Start":"01:36.955 ","End":"01:39.155","Text":"But for the purposes of the worksheet,"},{"Start":"01:39.155 ","End":"01:41.825","Text":"we show these 2 amounts separately."},{"Start":"01:41.825 ","End":"01:45.125","Text":"Now let\u0027s move on to the second point given to us."},{"Start":"01:45.125 ","End":"01:49.070","Text":"The second point states during 20X2,"},{"Start":"01:49.070 ","End":"01:51.755","Text":"it records as F2F the company."},{"Start":"01:51.755 ","End":"01:58.445","Text":"During 20X2, F2F records 1,233,900 in sales,"},{"Start":"01:58.445 ","End":"02:01.510","Text":"and we can assume that all of them were in credit."},{"Start":"02:01.510 ","End":"02:06.005","Text":"That would be processed by debiting the receivables."},{"Start":"02:06.005 ","End":"02:08.045","Text":"This is a debit to receivables,"},{"Start":"02:08.045 ","End":"02:10.958","Text":"increasing the asset account,"},{"Start":"02:10.958 ","End":"02:17.870","Text":"and we would have put the 1,233,900 credit into this column for income statement."},{"Start":"02:17.870 ","End":"02:21.305","Text":"This is actually crediting the sales account."},{"Start":"02:21.305 ","End":"02:24.040","Text":"We\u0027re crediting an income."},{"Start":"02:24.040 ","End":"02:26.145","Text":"Let\u0027s look at the 3rd point."},{"Start":"02:26.145 ","End":"02:28.995","Text":"The 3rd states that during 20X2,"},{"Start":"02:28.995 ","End":"02:34.650","Text":"F2F writes-off 1,200 in uncollectible debt."},{"Start":"02:34.650 ","End":"02:37.040","Text":"When we write-off an uncollectible debt,"},{"Start":"02:37.040 ","End":"02:41.510","Text":"we must directly reduce the receivables account so"},{"Start":"02:41.510 ","End":"02:46.880","Text":"that that data does not receive statements from us going forward."},{"Start":"02:46.880 ","End":"02:50.731","Text":"This is a credit to the receivables accounts."},{"Start":"02:50.731 ","End":"02:54.065","Text":"We are removing the data from our receivables account,"},{"Start":"02:54.065 ","End":"02:56.840","Text":"and we\u0027re debiting the allowance."},{"Start":"02:56.840 ","End":"03:00.575","Text":"Notice that we don\u0027t debit bad debt expense,"},{"Start":"03:00.575 ","End":"03:03.799","Text":"we\u0027re debiting the allowance for the bad debt instead."},{"Start":"03:03.799 ","End":"03:05.950","Text":"Now let\u0027s look at the 4th point."},{"Start":"03:05.950 ","End":"03:07.710","Text":"The 4th point stated,"},{"Start":"03:07.710 ","End":"03:09.790","Text":"at the end of 20X2,"},{"Start":"03:09.790 ","End":"03:14.630","Text":"receivables of 62,400 have not been paid yet."},{"Start":"03:14.630 ","End":"03:17.240","Text":"What they\u0027re telling us there is that is"},{"Start":"03:17.240 ","End":"03:22.365","Text":"our closing balance on the receivables account at the end of 20X2."},{"Start":"03:22.365 ","End":"03:24.845","Text":"Let\u0027s put that into the transaction worksheet."},{"Start":"03:24.845 ","End":"03:29.780","Text":"Here, we have our ending balance for the receivables 62,400."},{"Start":"03:29.780 ","End":"03:34.695","Text":"Now, if we take the opening balance at the sales and subtract the write-off,"},{"Start":"03:34.695 ","End":"03:37.880","Text":"we don\u0027t yet get to 62,400."},{"Start":"03:37.880 ","End":"03:40.250","Text":"The missing amount is obviously,"},{"Start":"03:40.250 ","End":"03:42.065","Text":"the cash that we\u0027ve received."},{"Start":"03:42.065 ","End":"03:44.810","Text":"If we add these 3 figures up together,"},{"Start":"03:44.810 ","End":"03:51.725","Text":"we get 1,291,400 instead of 62,400."},{"Start":"03:51.725 ","End":"03:54.515","Text":"If we subtract the 62,400,"},{"Start":"03:54.515 ","End":"04:01.870","Text":"we get to a figure of 1,229,000."},{"Start":"04:01.870 ","End":"04:04.475","Text":"That is how much we must have received in cash."},{"Start":"04:04.475 ","End":"04:05.950","Text":"Let\u0027s record that,"},{"Start":"04:05.950 ","End":"04:11.810","Text":"so the cash collection is 1,229,000 and that is obviously,"},{"Start":"04:11.810 ","End":"04:13.205","Text":"a credit to the receivables."},{"Start":"04:13.205 ","End":"04:14.645","Text":"We have our opening balance,"},{"Start":"04:14.645 ","End":"04:19.015","Text":"58,700 debit plus the sales debits."},{"Start":"04:19.015 ","End":"04:20.690","Text":"Credits, in other words,"},{"Start":"04:20.690 ","End":"04:25.340","Text":"subtract the write-off and then credit the amount collected from those data,"},{"Start":"04:25.340 ","End":"04:28.610","Text":"and that then gives us the 62,400."},{"Start":"04:28.610 ","End":"04:32.935","Text":"The contra entry would be a debit to your cash or bank account."},{"Start":"04:32.935 ","End":"04:37.070","Text":"The 5th point, the company estimates the allowance for"},{"Start":"04:37.070 ","End":"04:41.675","Text":"bad debts at the end of 20X2 to be 4,950."},{"Start":"04:41.675 ","End":"04:43.925","Text":"What they\u0027re telling us here is that"},{"Start":"04:43.925 ","End":"04:46.970","Text":"is the closing balance for the allowance for bad debts."},{"Start":"04:46.970 ","End":"04:52.250","Text":"Let\u0027s put that into the transaction worksheet."},{"Start":"04:52.250 ","End":"04:57.095","Text":"We have our 4,950 as our ending balance."},{"Start":"04:57.095 ","End":"05:01.925","Text":"But if you take your allowance of 3,700 and you subtract the write-off,"},{"Start":"05:01.925 ","End":"05:07.190","Text":"so remember the allowance has a credit balance and we\u0027ve got a write-off of 1,200,"},{"Start":"05:07.190 ","End":"05:10.263","Text":"that would have been a debit against the allowance for doubtful debts,"},{"Start":"05:10.263 ","End":"05:13.535","Text":"that doesn\u0027t give us 4,950."},{"Start":"05:13.535 ","End":"05:16.340","Text":"Instead, that gives us an amount of"},{"Start":"05:16.340 ","End":"05:22.250","Text":"2,500 credit balance but it needs to be a credit balance of 4,950."},{"Start":"05:22.250 ","End":"05:27.630","Text":"We\u0027re missing an amount of 2,450."},{"Start":"05:27.630 ","End":"05:32.630","Text":"We must have adjusted our allowance for doubtful debts or allowance for bad debts upwards"},{"Start":"05:32.630 ","End":"05:38.230","Text":"by 2,450 during 20X2. Let\u0027s record that."},{"Start":"05:38.230 ","End":"05:42.410","Text":"We\u0027ve got 2,450 extra credit balance going into"},{"Start":"05:42.410 ","End":"05:48.680","Text":"our allowance account to increase the ending balance to reflect 4,950."},{"Start":"05:48.680 ","End":"05:52.340","Text":"The debit entry goes through our income statement."},{"Start":"05:52.340 ","End":"05:53.945","Text":"This is from our equity,"},{"Start":"05:53.945 ","End":"05:55.310","Text":"that E for equity."},{"Start":"05:55.310 ","End":"05:59.855","Text":"This is a debit and this is the bad debt expense."},{"Start":"05:59.855 ","End":"06:03.320","Text":"Now, if you have a look under the receivables column, total that,"},{"Start":"06:03.320 ","End":"06:08.810","Text":"that came to 62,400 and the allowance account was 4,950."},{"Start":"06:08.810 ","End":"06:13.360","Text":"Those are 2 actual closing balances for these 2 accounts."},{"Start":"06:13.360 ","End":"06:18.400","Text":"The net of these 2 accounts is an amount of 57,450,"},{"Start":"06:18.400 ","End":"06:24.050","Text":"and that is going to appear in the balance sheet as your receivables balance."},{"Start":"06:24.050 ","End":"06:27.181","Text":"Now we\u0027ve added up the cash and we\u0027ve added up the income statement,"},{"Start":"06:27.181 ","End":"06:29.990","Text":"but these are incomplete balances."},{"Start":"06:29.990 ","End":"06:32.870","Text":"We don\u0027t know what the opening balance was on cash,"},{"Start":"06:32.870 ","End":"06:35.390","Text":"and we don\u0027t know what else went through the income statements."},{"Start":"06:35.390 ","End":"06:38.450","Text":"The 1,231,450 is not the profit figure,"},{"Start":"06:38.450 ","End":"06:44.715","Text":"but it\u0027s certainly how these 2 transactions have affected our income statement."},{"Start":"06:44.715 ","End":"06:47.320","Text":"The cash column, as I say,"},{"Start":"06:47.320 ","End":"06:50.150","Text":"that is not the total closing balance"},{"Start":"06:50.150 ","End":"06:52.640","Text":"for cash and that\u0027s because we didn\u0027t know what the opening balance was,"},{"Start":"06:52.640 ","End":"06:58.370","Text":"but these transactions that we were given have indeed affected our cash account by"},{"Start":"06:58.370 ","End":"07:06.040","Text":"increasing it by 1.229,000 or 1,229,000."}],"ID":27484},{"Watched":false,"Name":"Accounting for bad debts","Duration":"2m 15s","ChapterTopicVideoID":26661,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.800 ","End":"00:05.310","Text":"Hello. Welcome to another video presentation in the series"},{"Start":"00:05.310 ","End":"00:09.780","Text":"on accounts receivable brought to you by Proprep."},{"Start":"00:09.780 ","End":"00:16.260","Text":"In this video, we will focus on the accounting for bad or doubtful debts."},{"Start":"00:16.260 ","End":"00:21.270","Text":"Accounting for bad or doubtful debts requires a three-step procedure."},{"Start":"00:21.270 ","End":"00:25.275","Text":"Step 1 is to estimate the uncollectable amount."},{"Start":"00:25.275 ","End":"00:29.835","Text":"This is the amount which the entity expects will not collect from the customer."},{"Start":"00:29.835 ","End":"00:33.270","Text":"Other words, the expected credit loss over"},{"Start":"00:33.270 ","End":"00:37.050","Text":"the life of the underlying asset, the accounts receivable."},{"Start":"00:37.050 ","End":"00:39.465","Text":"The many ways to do this,"},{"Start":"00:39.465 ","End":"00:42.130","Text":"some which are beyond the scope of the module."},{"Start":"00:42.130 ","End":"00:45.290","Text":"But you will see examples of estimation of"},{"Start":"00:45.290 ","End":"00:49.350","Text":"the uncollectable amount in examples that follow."},{"Start":"00:49.370 ","End":"00:54.410","Text":"Second would be create this allowance for bad or doubtful debts."},{"Start":"00:54.410 ","End":"00:58.850","Text":"Note this allowance is a contra asset account,"},{"Start":"00:58.850 ","End":"01:02.705","Text":"similar to what you\u0027ve seen for accumulated depreciation."},{"Start":"01:02.705 ","End":"01:05.920","Text":"Therefore, the accounting entry looks like this."},{"Start":"01:05.920 ","End":"01:11.150","Text":"Here is a debit to an expense account called bad debts."},{"Start":"01:11.150 ","End":"01:17.360","Text":"Bad debts as an expense account and the credit goes to the allowance accounts."},{"Start":"01:17.360 ","End":"01:20.740","Text":"The allowance for doubtful debts."},{"Start":"01:20.740 ","End":"01:27.245","Text":"This allowance for doubtful debts can also be called an allowance for credit losses."},{"Start":"01:27.245 ","End":"01:31.550","Text":"This account is the contra asset account."},{"Start":"01:31.550 ","End":"01:33.295","Text":"Step number 3,"},{"Start":"01:33.295 ","End":"01:36.590","Text":"when finally the amount owed from the customers written"},{"Start":"01:36.590 ","End":"01:40.459","Text":"off after all attempts to collect the debt failed."},{"Start":"01:40.459 ","End":"01:44.930","Text":"This involves reversing the amount or removing the amount in"},{"Start":"01:44.930 ","End":"01:50.765","Text":"the allowance account and actually writing off the asset the accounts receivable."},{"Start":"01:50.765 ","End":"01:56.170","Text":"The entry here will be a debit to the allowance account."},{"Start":"01:56.170 ","End":"01:58.700","Text":"I won\u0027t write it out again in full."},{"Start":"01:58.700 ","End":"02:00.260","Text":"This is the negative asset,"},{"Start":"02:00.260 ","End":"02:02.015","Text":"the allowance for doubtful debts,"},{"Start":"02:02.015 ","End":"02:04.145","Text":"or the allowance for credit losses."},{"Start":"02:04.145 ","End":"02:06.725","Text":"And the credit will go to the asset,"},{"Start":"02:06.725 ","End":"02:09.040","Text":"the accounts receivable account,"},{"Start":"02:09.040 ","End":"02:11.025","Text":"that is the asset account,"},{"Start":"02:11.025 ","End":"02:16.170","Text":"and that entry writes off the asset as a debt."}],"ID":27485},{"Watched":false,"Name":"Exercise 2 - part 1","Duration":"2m 38s","ChapterTopicVideoID":26459,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.375","Text":"Today, we\u0027re doing the exercise ABC."},{"Start":"00:03.375 ","End":"00:06.750","Text":"ABC Inc reports the following categories of accounts"},{"Start":"00:06.750 ","End":"00:11.153","Text":"receivable were outstanding as of 31 December,"},{"Start":"00:11.153 ","End":"00:13.605","Text":"20X8, the fiscal year end,"},{"Start":"00:13.605 ","End":"00:17.789","Text":"alongside the percentage of the balance that would be doubtful."},{"Start":"00:17.789 ","End":"00:24.000","Text":"We have a total accounts receivable of 57,000."},{"Start":"00:24.000 ","End":"00:27.120","Text":"That\u0027s broken down into 4 different categories, A, B, C,"},{"Start":"00:27.120 ","End":"00:32.325","Text":"and D. Category A are those receivables that are not yet overdue."},{"Start":"00:32.325 ","End":"00:39.360","Text":"We\u0027ve got 35,000 currency units of debtors or receivables are not yet overdue."},{"Start":"00:39.360 ","End":"00:41.005","Text":"Then we have category B."},{"Start":"00:41.005 ","End":"00:42.800","Text":"These people are overdue,"},{"Start":"00:42.800 ","End":"00:44.545","Text":"but by less than 1 month."},{"Start":"00:44.545 ","End":"00:48.029","Text":"There are 12,000 currency units in that category."},{"Start":"00:48.029 ","End":"00:52.430","Text":"Then we have Categories C. These are overdue by greater than 1 month,"},{"Start":"00:52.430 ","End":"00:54.440","Text":"but less than 6 months."},{"Start":"00:54.440 ","End":"00:57.585","Text":"There are 7,000 currency units within that category."},{"Start":"00:57.585 ","End":"01:01.640","Text":"Then Category D, which is overdue by greater than 6 months."},{"Start":"01:01.640 ","End":"01:03.019","Text":"These are very overdue."},{"Start":"01:03.019 ","End":"01:05.045","Text":"3,000 currency units."},{"Start":"01:05.045 ","End":"01:09.595","Text":"You\u0027ll see here that the percentage of these categories changes."},{"Start":"01:09.595 ","End":"01:12.855","Text":"Category A, because they\u0027re not yet overdue,"},{"Start":"01:12.855 ","End":"01:17.675","Text":"we just simply take 5 percent of them and classify these as doubtful debts."},{"Start":"01:17.675 ","End":"01:20.450","Text":"The company has estimated that in category B,"},{"Start":"01:20.450 ","End":"01:23.815","Text":"15 percent of those debts will become bad,"},{"Start":"01:23.815 ","End":"01:27.795","Text":"Category C, 25 percent of those will become bad,"},{"Start":"01:27.795 ","End":"01:31.055","Text":"and 50 percent of Category D will go bad."},{"Start":"01:31.055 ","End":"01:34.385","Text":"You can see that the doubtful debt actually increases"},{"Start":"01:34.385 ","End":"01:38.805","Text":"the higher the risk of the accounts receivable."},{"Start":"01:38.805 ","End":"01:41.140","Text":"This is the least risk, is Category A."},{"Start":"01:41.140 ","End":"01:43.910","Text":"The greatest risk is sitting with Category D,"},{"Start":"01:43.910 ","End":"01:48.090","Text":"the debts that are greater than 6 months overdue. The required."},{"Start":"01:48.090 ","End":"01:51.290","Text":"1, what is the ending balance of"},{"Start":"01:51.290 ","End":"01:55.430","Text":"the allowance for doubtful debts at the end of our fiscal year or financial year?"},{"Start":"01:55.430 ","End":"02:00.980","Text":"Then 2, if the opening balance of the allowance being the allowance for doubtful debt is"},{"Start":"02:00.980 ","End":"02:07.190","Text":"0 and the ending balance of this account is as calculated in Part 1,"},{"Start":"02:07.190 ","End":"02:10.700","Text":"so we\u0027ll calculate that in Part 1 and then use that in Part 2,"},{"Start":"02:10.700 ","End":"02:16.715","Text":"and assuming that there were no write-offs that were recorded during the period,"},{"Start":"02:16.715 ","End":"02:22.190","Text":"how much is the bad debt expense that should be recognized in the income statement?"},{"Start":"02:22.190 ","End":"02:25.400","Text":"3, if the opening balance of the allowance,"},{"Start":"02:25.400 ","End":"02:26.900","Text":"being the allowance for doubtful debts,"},{"Start":"02:26.900 ","End":"02:29.555","Text":"is 3.5 thousand currency units,"},{"Start":"02:29.555 ","End":"02:33.530","Text":"and assuming no write-offs were recorded during the period,"},{"Start":"02:33.530 ","End":"02:38.879","Text":"how much would the bad debt expense be in the income statement?"}],"ID":27486},{"Watched":false,"Name":"Exercise 2 - part 2","Duration":"4m 56s","ChapterTopicVideoID":26460,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.305","Text":"This attempt, the solution to ABC involving the aging of accounts receivable."},{"Start":"00:05.305 ","End":"00:07.600","Text":"The required involved 3 parts."},{"Start":"00:07.600 ","End":"00:09.280","Text":"Let\u0027s start with Part 1."},{"Start":"00:09.280 ","End":"00:12.895","Text":"What is the ending balance of the allowance for doubtful debts?"},{"Start":"00:12.895 ","End":"00:16.840","Text":"We were given the total of the accounts receivable at the end of the year being"},{"Start":"00:16.840 ","End":"00:21.184","Text":"57,000 and this was broken down into 4 different categories."},{"Start":"00:21.184 ","End":"00:24.940","Text":"We were then given the percentages to use in order to calculate"},{"Start":"00:24.940 ","End":"00:29.875","Text":"the doubtful debt allowance per category at the end of the year."},{"Start":"00:29.875 ","End":"00:35.335","Text":"Category A, those debts that are not yet overdue was 35,000"},{"Start":"00:35.335 ","End":"00:40.600","Text":"currency units and 5 percent of that was deemed to be doubtful at the end of the year."},{"Start":"00:40.600 ","End":"00:49.290","Text":"So 5 percent or 0.05 multiplied by 35,000 gives us 1,750."},{"Start":"00:49.290 ","End":"00:54.000","Text":"Then Category B, these debtors were overdue but less than 1 month."},{"Start":"00:54.000 ","End":"00:58.890","Text":"We used a percentage of 15 percent of the 12,000 currency"},{"Start":"00:58.890 ","End":"01:03.690","Text":"units sitting within that category and we get 1,800."},{"Start":"01:03.690 ","End":"01:08.955","Text":"It\u0027s 12,000 multiplied by 15 percent or 0.15."},{"Start":"01:08.955 ","End":"01:15.470","Text":"Then Category C. Category C is overdue by greater than 1 month but less than 6 months,"},{"Start":"01:15.470 ","End":"01:19.180","Text":"that 7,000 currency units and 25 percent,"},{"Start":"01:19.180 ","End":"01:24.930","Text":"so it\u0027s 7,000 multiplied by 25 percent gives us 1,750."},{"Start":"01:24.930 ","End":"01:28.180","Text":"Category D, overdue by greater than 6 months."},{"Start":"01:28.180 ","End":"01:31.580","Text":"These are the worst debtors in our 4 categories."},{"Start":"01:31.580 ","End":"01:34.220","Text":"There are 3,000 owing by these debtors,"},{"Start":"01:34.220 ","End":"01:36.698","Text":"1/2 of them, 50 percent,"},{"Start":"01:36.698 ","End":"01:38.160","Text":"are expected to go bad."},{"Start":"01:38.160 ","End":"01:42.940","Text":"So 3,000 multiplied by 50 percent is 1,500."},{"Start":"01:42.940 ","End":"01:47.870","Text":"If we add all of those doubtful debts per category,"},{"Start":"01:47.870 ","End":"01:50.960","Text":"we get to 6,800 and that is"},{"Start":"01:50.960 ","End":"01:56.650","Text":"the closing balance on our allowance for doubtful debts at the end of the financial year."},{"Start":"01:56.650 ","End":"01:58.900","Text":"Now let\u0027s look at Part 2."},{"Start":"01:58.900 ","End":"02:02.615","Text":"If the opening balance of the allowance is 0,"},{"Start":"02:02.615 ","End":"02:06.740","Text":"and the ending balance is as calculated in Part 1,"},{"Start":"02:06.740 ","End":"02:12.920","Text":"and assuming there were no write-offs that were recorded during the period,"},{"Start":"02:12.920 ","End":"02:16.554","Text":"there are no actual bad debts that happened during the period,"},{"Start":"02:16.554 ","End":"02:21.605","Text":"how much bad debt expense should be recognized in the income statement?"},{"Start":"02:21.605 ","End":"02:23.460","Text":"Well, in Part 1,"},{"Start":"02:23.460 ","End":"02:26.000","Text":"the allowance was 6,800,"},{"Start":"02:26.000 ","End":"02:30.605","Text":"so the closing balance per Part 1 is 6,800."},{"Start":"02:30.605 ","End":"02:37.985","Text":"Now, we are to use that 6,800 as the closing balance in Part 2. Let\u0027s put that in."},{"Start":"02:37.985 ","End":"02:41.660","Text":"If our allowance account has an opening balance of"},{"Start":"02:41.660 ","End":"02:45.230","Text":"0 and the ending balance as per Part 1,"},{"Start":"02:45.230 ","End":"02:47.705","Text":"which we\u0027ve just seen was 6,800,"},{"Start":"02:47.705 ","End":"02:50.765","Text":"what would the bad debt expense have been?"},{"Start":"02:50.765 ","End":"02:53.325","Text":"It must have been 6,800."},{"Start":"02:53.325 ","End":"02:57.290","Text":"We\u0027ve got a credit balance in our allowance account because remember although"},{"Start":"02:57.290 ","End":"03:01.130","Text":"their allowance relates to an asset is actually a negative asset account,"},{"Start":"03:01.130 ","End":"03:03.095","Text":"it runs with a credit balance."},{"Start":"03:03.095 ","End":"03:04.580","Text":"The opening balance is 0,"},{"Start":"03:04.580 ","End":"03:07.250","Text":"if the closing balance has 6,800,"},{"Start":"03:07.250 ","End":"03:08.630","Text":"that\u0027s a credit balance."},{"Start":"03:08.630 ","End":"03:12.755","Text":"That must mean that we put in 6,800 on the credit side"},{"Start":"03:12.755 ","End":"03:18.080","Text":"and we must have debited the bad debt expense with 6,800."},{"Start":"03:18.080 ","End":"03:22.940","Text":"This is in brackets to indicate that our E for equity,"},{"Start":"03:22.940 ","End":"03:26.045","Text":"not E for expense, is decreasing."},{"Start":"03:26.045 ","End":"03:29.375","Text":"Bad debt expense is 6,800."},{"Start":"03:29.375 ","End":"03:31.295","Text":"Now, let\u0027s look at Part 3."},{"Start":"03:31.295 ","End":"03:36.410","Text":"If the opening balance of the allowance is 3,500 as opposed to 0 in"},{"Start":"03:36.410 ","End":"03:41.795","Text":"Part 2 and the ending balances is as calculated in Part 1,"},{"Start":"03:41.795 ","End":"03:44.675","Text":"which is what we did in Part 2,"},{"Start":"03:44.675 ","End":"03:47.940","Text":"and that was 6,800,"},{"Start":"03:47.940 ","End":"03:51.155","Text":"and assuming there are no write-offs,"},{"Start":"03:51.155 ","End":"03:53.795","Text":"just like we assumed in Part 2,"},{"Start":"03:53.795 ","End":"03:58.115","Text":"how much would the bad debt expense be in the income statement?"},{"Start":"03:58.115 ","End":"04:01.984","Text":"This is a solution calculating the bad debt expense,"},{"Start":"04:01.984 ","End":"04:05.255","Text":"assuming we had an opening allowance of 3,500."},{"Start":"04:05.255 ","End":"04:09.395","Text":"There is our opening balance in the allowance account of 3,500,"},{"Start":"04:09.395 ","End":"04:11.195","Text":"that\u0027s a credit balance."},{"Start":"04:11.195 ","End":"04:17.675","Text":"We then are told to assume that the ending balance is 6,800 per Part 1."},{"Start":"04:17.675 ","End":"04:22.595","Text":"Since there are no write-offs of actual bad debts,"},{"Start":"04:22.595 ","End":"04:28.115","Text":"the bad debt expense must simply be 3,300."},{"Start":"04:28.115 ","End":"04:33.245","Text":"We must have credited the allowance because remember the allowance is a negative asset."},{"Start":"04:33.245 ","End":"04:37.850","Text":"We must therefore, have debited the bad debt expense and"},{"Start":"04:37.850 ","End":"04:42.140","Text":"the bad debt expense gets expensed within the income statement."},{"Start":"04:42.140 ","End":"04:45.700","Text":"That E refers to equity."},{"Start":"04:45.700 ","End":"04:48.830","Text":"The income statement produces profit or loss,"},{"Start":"04:48.830 ","End":"04:52.940","Text":"and the profit or loss increases or decreases your equity."},{"Start":"04:52.940 ","End":"04:57.060","Text":"That E doesn\u0027t refer to an expense."}],"ID":27487},{"Watched":false,"Name":"Estimating the lifetime credit loss","Duration":"18m 13s","ChapterTopicVideoID":26662,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.140 ","End":"00:04.110","Text":"Hello and welcome to another video presentation in"},{"Start":"00:04.110 ","End":"00:09.150","Text":"the series on Accounts Receivable brought to you by Proprep."},{"Start":"00:09.150 ","End":"00:16.560","Text":"In this video, we will focus on estimating the expected lifetime credit loss."},{"Start":"00:16.560 ","End":"00:19.650","Text":"There are a number of ways to estimate"},{"Start":"00:19.650 ","End":"00:24.265","Text":"the expected credit loss or the expected doubtful debts."},{"Start":"00:24.265 ","End":"00:28.565","Text":"The first way, and probably an easier or more simple way,"},{"Start":"00:28.565 ","End":"00:35.210","Text":"is to make an overall estimate based on the outstanding balance of accounts receivable."},{"Start":"00:35.210 ","End":"00:40.070","Text":"For example, entity may take 5% of the balance of accounts"},{"Start":"00:40.070 ","End":"00:45.394","Text":"receivable and use this as the estimation for the allowance."},{"Start":"00:45.394 ","End":"00:53.539","Text":"However, a slightly more sophisticated method would be to apply aging to the accounts."},{"Start":"00:53.539 ","End":"00:59.750","Text":"Now what aging entails is looking at the accounts receivable in terms of"},{"Start":"00:59.750 ","End":"01:06.365","Text":"groupings based on the period of time that the customers have not yet paid."},{"Start":"01:06.365 ","End":"01:12.630","Text":"For example, customers whose balances are outstanding for less than a month,"},{"Start":"01:12.630 ","End":"01:15.645","Text":"maybe for 1 month to 2 months,"},{"Start":"01:15.645 ","End":"01:19.830","Text":"or maybe then 2 months or 3 months and beyond."},{"Start":"01:19.830 ","End":"01:23.840","Text":"Now clearly, accounts that have been overdue or outstanding for"},{"Start":"01:23.840 ","End":"01:30.110","Text":"longer periods carry a higher risk of ultimately being a bad debt,"},{"Start":"01:30.110 ","End":"01:33.440","Text":"and therefore, currently a doubtful debt."},{"Start":"01:33.440 ","End":"01:40.640","Text":"A larger percentage is applied to those that are overdue for a longer period and here"},{"Start":"01:40.640 ","End":"01:44.180","Text":"past experience can be a good guide in estimating"},{"Start":"01:44.180 ","End":"01:48.410","Text":"the pattern of potential future bad debts."},{"Start":"01:48.410 ","End":"01:50.630","Text":"An entity also needs to think about"},{"Start":"01:50.630 ","End":"01:54.080","Text":"future developments that may affect the ability of its customers,"},{"Start":"01:54.080 ","End":"01:56.120","Text":"its debtors to pay,"},{"Start":"01:56.120 ","End":"01:58.300","Text":"such as: a recession,"},{"Start":"01:58.300 ","End":"02:04.220","Text":"a global pandemic, or any regional and political tensions."},{"Start":"02:04.220 ","End":"02:08.870","Text":"Let us now look at an example of the aging of accounts receivable."},{"Start":"02:08.870 ","End":"02:13.520","Text":"The example tells us in the 20X1 year and based on past experience,"},{"Start":"02:13.520 ","End":"02:21.255","Text":"this company arts and crafts applies an estimation of 1% to accounts receivable,"},{"Start":"02:21.255 ","End":"02:24.050","Text":"not yet overdue and this would typically"},{"Start":"02:24.050 ","End":"02:27.650","Text":"be customers to whom we have sold in the current period,"},{"Start":"02:27.650 ","End":"02:29.390","Text":"the current month, so therefore,"},{"Start":"02:29.390 ","End":"02:30.965","Text":"less than 30 days,"},{"Start":"02:30.965 ","End":"02:37.595","Text":"a 30% estimate of doubtful debts to accounts overdue, 30-60 days,"},{"Start":"02:37.595 ","End":"02:44.795","Text":"and 60% for customers who are overdue more than 60 days."},{"Start":"02:44.795 ","End":"02:49.730","Text":"Now on the balance sheet date which is 31 December of this 20X1 year,"},{"Start":"02:49.730 ","End":"02:52.535","Text":"the company arts and crafts reports,"},{"Start":"02:52.535 ","End":"02:57.320","Text":"accounts receivable of 130,000 currency units."},{"Start":"02:57.320 ","End":"02:59.978","Text":"You\u0027re told of that amount of 130,000,"},{"Start":"02:59.978 ","End":"03:03.730","Text":"100,000 is not yet overdue,"},{"Start":"03:03.730 ","End":"03:05.610","Text":"sold in the current month,"},{"Start":"03:05.610 ","End":"03:12.120","Text":"15,000 is overdue, 30-60 days and the remainder clearly also,"},{"Start":"03:12.120 ","End":"03:17.370","Text":"therefore, 15,000 is overdue more than 60 days."},{"Start":"03:17.370 ","End":"03:25.715","Text":"You\u0027re required to estimate the allowance for doubtful debts at the end of 20X1 and"},{"Start":"03:25.715 ","End":"03:29.075","Text":"past required entry to recognize"},{"Start":"03:29.075 ","End":"03:34.125","Text":"the bad debt expense and tell you also the allowance for doubtful debts."},{"Start":"03:34.125 ","End":"03:37.310","Text":"Firstly we\u0027re going to estimate the allowance."},{"Start":"03:37.310 ","End":"03:40.625","Text":"Looking at the information given in the question,"},{"Start":"03:40.625 ","End":"03:46.950","Text":"we know that debtors of 100,000 are not"},{"Start":"03:46.950 ","End":"03:53.990","Text":"yet overdue and therefore the estimation of potential bad debts on this is 1%,"},{"Start":"03:53.990 ","End":"03:57.700","Text":"which comes to an amount of 1,000."},{"Start":"03:57.700 ","End":"03:59.670","Text":"We know that debts,"},{"Start":"03:59.670 ","End":"04:06.845","Text":"which are 15,000 are in fact 30-60 days overdue and we apply"},{"Start":"04:06.845 ","End":"04:14.780","Text":"a 30% estimation of non collectability on those and that amounts to 4,000."},{"Start":"04:14.780 ","End":"04:17.140","Text":"These are currency units clearly,"},{"Start":"04:17.140 ","End":"04:19.220","Text":"also currency units over here."},{"Start":"04:19.220 ","End":"04:28.230","Text":"The remaining 15,000 because remember the total accounts receivable of 130,000,"},{"Start":"04:28.230 ","End":"04:33.150","Text":"the remaining 15,000 are overdue more than 60 days."},{"Start":"04:33.150 ","End":"04:41.425","Text":"Here we have an estimate of 60% of non collectability and this amounts to 9,000."},{"Start":"04:41.425 ","End":"04:51.305","Text":"Therefore, the total of the potential bad debts comes to 14,500 currency units."},{"Start":"04:51.305 ","End":"04:53.720","Text":"Looking at the accounting procedure,"},{"Start":"04:53.720 ","End":"05:02.665","Text":"we need to record a journal entry which will debit a bad debt as an expense account"},{"Start":"05:02.665 ","End":"05:06.590","Text":"and the amount we know is 14,500 and"},{"Start":"05:06.590 ","End":"05:11.990","Text":"the credit will go to the allowance for doubtful debt."},{"Start":"05:11.990 ","End":"05:17.210","Text":"As we know, the allowance for doubtful debts can also be called the allowance for"},{"Start":"05:17.210 ","End":"05:24.085","Text":"credit losses and clearly also 14,500 credit."},{"Start":"05:24.085 ","End":"05:28.325","Text":"On the income statement as an expense,"},{"Start":"05:28.325 ","End":"05:36.270","Text":"we will see the bad debts expense sitting there of 14,500."},{"Start":"05:36.270 ","End":"05:40.690","Text":"On the balance sheet as a current asset,"},{"Start":"05:40.690 ","End":"05:43.990","Text":"we will see the accounts receivable."},{"Start":"05:43.990 ","End":"05:46.855","Text":"Now when we look at the accounts receivable,"},{"Start":"05:46.855 ","End":"05:50.050","Text":"debt will be shown at the full amount of"},{"Start":"05:50.050 ","End":"05:56.364","Text":"130,000 and then we\u0027ll have to have less the allowance."},{"Start":"05:56.364 ","End":"05:58.555","Text":"I\u0027m not going to write it out here in full."},{"Start":"05:58.555 ","End":"06:05.350","Text":"The allowance for doubtful debts or credit losses of 14,500,"},{"Start":"06:05.350 ","End":"06:11.270","Text":"giving a net amount of 115,500."},{"Start":"06:11.550 ","End":"06:16.434","Text":"Now looking at the same information on a worksheet,"},{"Start":"06:16.434 ","End":"06:22.015","Text":"we can record the sales by increasing the asset accounts receivable"},{"Start":"06:22.015 ","End":"06:28.050","Text":"by 130,000 and recording on the income statement the sales,"},{"Start":"06:28.050 ","End":"06:31.925","Text":"which is an income item of 130,000."},{"Start":"06:31.925 ","End":"06:35.050","Text":"We then record the bad debts expense and"},{"Start":"06:35.050 ","End":"06:38.785","Text":"the corresponding allowance for doubtful debts or bad debts."},{"Start":"06:38.785 ","End":"06:42.865","Text":"This we know is a contra asset to be recorded as a negative"},{"Start":"06:42.865 ","End":"06:52.600","Text":"14,500 and show the 14,500 as an expense on the income statement."},{"Start":"06:52.600 ","End":"06:55.555","Text":"Looking at the balance,"},{"Start":"06:55.555 ","End":"06:57.505","Text":"at the end of the period,"},{"Start":"06:57.505 ","End":"07:03.900","Text":"the accounts receivable remains at 130,000."},{"Start":"07:03.900 ","End":"07:09.455","Text":"The allowance for doubtful debts is the 14,500."},{"Start":"07:09.455 ","End":"07:12.065","Text":"As you saw in the previous slide,"},{"Start":"07:12.065 ","End":"07:16.995","Text":"the amount shown on the balance sheet as"},{"Start":"07:16.995 ","End":"07:27.210","Text":"a current asset for accounts receivable is the net 115,500."},{"Start":"07:28.590 ","End":"07:33.198","Text":"This example looks at a situation where the allowance for"},{"Start":"07:33.198 ","End":"07:37.970","Text":"doubtful debt is measured as a percentage of receivables."},{"Start":"07:39.330 ","End":"07:43.375","Text":"It is practical when the receivables comprise"},{"Start":"07:43.375 ","End":"07:48.835","Text":"a large number of individual and relatively small balances."},{"Start":"07:48.835 ","End":"07:52.960","Text":"In 20X1, this company Arts and Crafts applies"},{"Start":"07:52.960 ","End":"07:59.275","Text":"a 3 percent allowance for doubtful debts to the balance of its accounts receivable."},{"Start":"07:59.275 ","End":"08:03.745","Text":"At the balance sheet date of 3112 of the X1 year,"},{"Start":"08:03.745 ","End":"08:08.860","Text":"it reports accounts receivable of 130,000 currency units."},{"Start":"08:08.860 ","End":"08:14.395","Text":"We are required to estimate the allowance for doubtful debts at the end of the 20X1 year,"},{"Start":"08:14.395 ","End":"08:17.140","Text":"and to pass the required entry to recognize"},{"Start":"08:17.140 ","End":"08:20.879","Text":"the bad debt expense and the corresponding allowance,"},{"Start":"08:20.879 ","End":"08:25.825","Text":"in this case, assuming the opening balance of the allowance is 0."},{"Start":"08:25.825 ","End":"08:30.866","Text":"We can calculate the allowance by looking at the balance in accounts receivable,"},{"Start":"08:30.866 ","End":"08:36.650","Text":"so the balance in accounts receivable is the amount of 130,000,"},{"Start":"08:36.990 ","End":"08:44.320","Text":"and we are told that we are applying a 3 percent estimation of the allowance for"},{"Start":"08:44.320 ","End":"08:51.612","Text":"doubtful debts that come to the amount of 3,900 currency units."},{"Start":"08:51.612 ","End":"08:56.635","Text":"That will be the estimation of the allowance for doubtful debts."},{"Start":"08:56.635 ","End":"09:04.360","Text":"The accounting entry to process will be a debit to the bad debts expense."},{"Start":"09:04.360 ","End":"09:10.120","Text":"Bad debts as an expense for the 3,900,"},{"Start":"09:10.120 ","End":"09:19.885","Text":"and the credit to the allowance for doubtful debts for the amount also clearly of 3,900."},{"Start":"09:19.885 ","End":"09:23.365","Text":"Looking at this on an accounting worksheets"},{"Start":"09:23.365 ","End":"09:28.030","Text":"and processing the entry giving rise to the balance in accounts receivable,"},{"Start":"09:28.030 ","End":"09:30.070","Text":"it would\u0027ve been an increase in accounts"},{"Start":"09:30.070 ","End":"09:34.345","Text":"receivable based on the credit sale of a 130,000,"},{"Start":"09:34.345 ","End":"09:40.705","Text":"with the other side of the entry being recorded in the income statement as income."},{"Start":"09:40.705 ","End":"09:44.305","Text":"Then to recognize the allowance for doubtful debts,"},{"Start":"09:44.305 ","End":"09:49.435","Text":"the allowances created at 3,900,"},{"Start":"09:49.435 ","End":"09:51.355","Text":"which we know is a contra asset,"},{"Start":"09:51.355 ","End":"09:53.140","Text":"it\u0027s the credit side of the entry,"},{"Start":"09:53.140 ","End":"10:01.585","Text":"3,900, and the debit side of the entry goes to the income statement also for 3,900."},{"Start":"10:01.585 ","End":"10:03.864","Text":"That\u0027s the bad debt expense."},{"Start":"10:03.864 ","End":"10:06.880","Text":"To relate this to the previous slide,"},{"Start":"10:06.880 ","End":"10:10.210","Text":"the entry in the income statement is the debit to"},{"Start":"10:10.210 ","End":"10:13.600","Text":"the bad debts expense and the entry you see here"},{"Start":"10:13.600 ","End":"10:16.495","Text":"in the allowance for doubtful debts column"},{"Start":"10:16.495 ","End":"10:20.905","Text":"is the credit side of the entry in the previous slide."},{"Start":"10:20.905 ","End":"10:25.660","Text":"The balances we saw in accounts receivable is 130,000."},{"Start":"10:25.660 ","End":"10:31.720","Text":"The balance in the allowance for doubtful debts is 3,900."},{"Start":"10:31.720 ","End":"10:34.375","Text":"Clearly, the balance sheet,"},{"Start":"10:34.375 ","End":"10:37.555","Text":"which we prepare at the end of the financial period,"},{"Start":"10:37.555 ","End":"10:45.260","Text":"will show a net amount for accounts receivable of 126,100."},{"Start":"10:45.510 ","End":"10:50.320","Text":"This example is now a continuation of the previous example."},{"Start":"10:50.320 ","End":"10:51.670","Text":"We will go to the following year,"},{"Start":"10:51.670 ","End":"10:53.515","Text":"the end of 20X2,"},{"Start":"10:53.515 ","End":"10:56.860","Text":"and the company Arts and Crafts applies, in this case,"},{"Start":"10:56.860 ","End":"11:00.430","Text":"an estimation of 4 percent of the balance of accounts"},{"Start":"11:00.430 ","End":"11:04.210","Text":"receivable to estimate the allowance for doubtful debts."},{"Start":"11:04.210 ","End":"11:08.200","Text":"You\u0027re told rate is higher than the previous year because of"},{"Start":"11:08.200 ","End":"11:12.333","Text":"a economic recession in the 20X2 year."},{"Start":"11:12.333 ","End":"11:17.035","Text":"Further no receivables were written off in this current 20X2 year,"},{"Start":"11:17.035 ","End":"11:20.410","Text":"and there\u0027s further information given to you that the company collected"},{"Start":"11:20.410 ","End":"11:23.860","Text":"120,000 owed from customers."},{"Start":"11:23.860 ","End":"11:28.285","Text":"Remember, it was owed 130,000 at the end of the 20X1 year,"},{"Start":"11:28.285 ","End":"11:31.495","Text":"so 12000 of that has been collected,"},{"Start":"11:31.495 ","End":"11:36.850","Text":"and there were further credit sales in the current year of a 140,000."},{"Start":"11:36.850 ","End":"11:39.370","Text":"We are required now to estimate the allowance for"},{"Start":"11:39.370 ","End":"11:42.715","Text":"doubtful debts at the end of the 20X2 year,"},{"Start":"11:42.715 ","End":"11:46.240","Text":"and to also pass the required entry to recognize"},{"Start":"11:46.240 ","End":"11:49.150","Text":"the bad debt expense for the current year and"},{"Start":"11:49.150 ","End":"11:52.790","Text":"therefore to address the allowance for doubtful debts."},{"Start":"11:52.790 ","End":"11:55.530","Text":"This continues from that previous example,"},{"Start":"11:55.530 ","End":"11:58.305","Text":"where you will recall and as I\u0027ve said,"},{"Start":"11:58.305 ","End":"12:01.140","Text":"is that balance of accounts receivable of"},{"Start":"12:01.140 ","End":"12:07.620","Text":"130 and the balance of the allowance for doubtful debts of 3,900."},{"Start":"12:07.620 ","End":"12:13.170","Text":"In order to compute the amount of the adjustment to the allowance for"},{"Start":"12:13.170 ","End":"12:19.120","Text":"doubtful debts and therefore the bad debts expense debit for the 20X2 year,"},{"Start":"12:19.120 ","End":"12:21.789","Text":"we need to compute an establish"},{"Start":"12:21.789 ","End":"12:26.574","Text":"the balance in the accounts receivable account at the end of 20X2,"},{"Start":"12:26.574 ","End":"12:30.790","Text":"so focusing on then the accounts receivable."},{"Start":"12:30.790 ","End":"12:35.080","Text":"We know the accounts receivable had an opening balance at"},{"Start":"12:35.080 ","End":"12:39.820","Text":"the beginning of 20X2 of 130,000,"},{"Start":"12:39.820 ","End":"12:44.095","Text":"which is the balance of the end of the previous year, the 20X1 year."},{"Start":"12:44.095 ","End":"12:50.815","Text":"We are told there were 120,000 of cash collected during the year."},{"Start":"12:50.815 ","End":"12:55.210","Text":"See this cash received of 120,000,"},{"Start":"12:55.210 ","End":"13:00.790","Text":"which clearly reduces the balance owing by the debtors or the accounts receivable,"},{"Start":"13:00.790 ","End":"13:05.695","Text":"and we are told there are credit sales of 140,000,"},{"Start":"13:05.695 ","End":"13:11.680","Text":"which clearly increases the amount of the balance in the accounts receivable account."},{"Start":"13:11.680 ","End":"13:17.875","Text":"We can therefore compute the ending balance in the accounts receivable to be 150,000."},{"Start":"13:17.875 ","End":"13:24.910","Text":"Just remember this opening balance is the balance at the beginning of the X2 year,"},{"Start":"13:24.910 ","End":"13:27.355","Text":"so on 1 January X2,"},{"Start":"13:27.355 ","End":"13:32.860","Text":"and this here is the balance at December 31 of the X2 year."},{"Start":"13:32.860 ","End":"13:39.160","Text":"Having determined the ending balance of 150,000 in accounts receivable,"},{"Start":"13:39.160 ","End":"13:40.780","Text":"at the end of 20X2,"},{"Start":"13:40.780 ","End":"13:46.210","Text":"we can now turn our attention to the computation of the allowance for doubtful debts."},{"Start":"13:46.210 ","End":"13:49.390","Text":"Now, to compute the allowance for doubtful debts,"},{"Start":"13:49.390 ","End":"13:54.310","Text":"we use the balance in the accounts receivable account at the end of the year."},{"Start":"13:54.310 ","End":"13:58.610","Text":"We know the balance is 150,000."},{"Start":"13:59.970 ","End":"14:07.225","Text":"The equation tells us that we are now applying a 4 percent estimation of"},{"Start":"14:07.225 ","End":"14:10.600","Text":"the balance on accounts receivable to determine"},{"Start":"14:10.600 ","End":"14:14.905","Text":"the allowance for doubtful debts at the end of the 20X2 year,"},{"Start":"14:14.905 ","End":"14:22.420","Text":"so 150,000 multiplied by 4 percent gives us an amount of 6,000."},{"Start":"14:22.420 ","End":"14:27.205","Text":"That 6,000 is the allowance for doubtful debts that we need,"},{"Start":"14:27.205 ","End":"14:28.330","Text":"I\u0027ll put here need,"},{"Start":"14:28.330 ","End":"14:31.255","Text":"to have at the end of the 20X2 year."},{"Start":"14:31.255 ","End":"14:34.045","Text":"But then what is the balance existing,"},{"Start":"14:34.045 ","End":"14:38.110","Text":"that currently exists in the allowance for doubtful debts account?"},{"Start":"14:38.110 ","End":"14:41.950","Text":"You know from the previous example in the 20X1,"},{"Start":"14:41.950 ","End":"14:44.320","Text":"and there were no movements in X2,"},{"Start":"14:44.320 ","End":"14:50.605","Text":"the balance on the allowance for doubtful debts was 3,900."},{"Start":"14:50.605 ","End":"14:53.515","Text":"Therefore, we\u0027re required to process"},{"Start":"14:53.515 ","End":"14:59.385","Text":"an increase in the allowance for doubtful debts of 2,100."},{"Start":"14:59.385 ","End":"15:05.420","Text":"The county entry for this will be a debit to the bad debts as"},{"Start":"15:05.420 ","End":"15:14.240","Text":"an expense account for 2,100 and a credit to the allowance for debts."},{"Start":"15:14.240 ","End":"15:16.340","Text":"The allowance for doubtful debts,"},{"Start":"15:16.340 ","End":"15:18.665","Text":"which is the negative asset account,"},{"Start":"15:18.665 ","End":"15:21.970","Text":"takes the credit for 2,100."},{"Start":"15:21.970 ","End":"15:27.080","Text":"You will see in the worksheet on the following slide how this entry will then"},{"Start":"15:27.080 ","End":"15:33.825","Text":"increase the balance in the allowance account up to the required number of 6,000."},{"Start":"15:33.825 ","End":"15:36.010","Text":"Looking at the worksheet,"},{"Start":"15:36.010 ","End":"15:41.395","Text":"and we\u0027ll start off by filling in the opening balances at the beginning of 20X2."},{"Start":"15:41.395 ","End":"15:47.260","Text":"We know for accounts receivable the balance is 130,000 as an asset,"},{"Start":"15:47.260 ","End":"15:50.575","Text":"and the allowance for doubtful debts is the contra asset,"},{"Start":"15:50.575 ","End":"15:53.830","Text":"we know of 3,900."},{"Start":"15:53.830 ","End":"15:59.680","Text":"Then we were told it was cash collected in the periods and increasing the acid cache of a"},{"Start":"15:59.680 ","End":"16:07.150","Text":"120,000 and a decrease in the asset accounts receivable of 120,000."},{"Start":"16:07.150 ","End":"16:10.929","Text":"Just thinking back to your double entry bookkeeping,"},{"Start":"16:10.929 ","End":"16:14.235","Text":"the increase in cash would clearly be a debit to cash,"},{"Start":"16:14.235 ","End":"16:20.165","Text":"and the decrease in accounts receivable would clearly be a credit accounts receivable."},{"Start":"16:20.165 ","End":"16:22.610","Text":"Then we are told there are sales,"},{"Start":"16:22.610 ","End":"16:26.195","Text":"you remember over a 140,000 in the year credit sales."},{"Start":"16:26.195 ","End":"16:31.090","Text":"Credit sales we know increases the accounts receivable 140,000."},{"Start":"16:31.090 ","End":"16:38.360","Text":"The credit goes to the sales account on the income statement for 140,000."},{"Start":"16:39.370 ","End":"16:42.335","Text":"Now again, just remembering debits and credits."},{"Start":"16:42.335 ","End":"16:45.350","Text":"This would be a debit to the asset accounts receivable,"},{"Start":"16:45.350 ","End":"16:50.780","Text":"and those would be a credit to the income account sales."},{"Start":"16:50.780 ","End":"16:55.460","Text":"Now we know, and I have already computed on the previous slide,"},{"Start":"16:55.460 ","End":"16:57.365","Text":"the balance in accounts receivable,"},{"Start":"16:57.365 ","End":"17:04.625","Text":"I put it in here, is 150,000 at the end of 20X2."},{"Start":"17:04.625 ","End":"17:10.760","Text":"On that, you recall we computed the amount of the allowance for doubtful debts,"},{"Start":"17:10.760 ","End":"17:14.855","Text":"which we know the allowance based on 150,000,"},{"Start":"17:14.855 ","End":"17:20.900","Text":"needs to be a contra asset of 6,900."},{"Start":"17:20.900 ","End":"17:23.840","Text":"That\u0027s where again, on the previous slide,"},{"Start":"17:23.840 ","End":"17:26.690","Text":"we determine the amount of the bad debts expense."},{"Start":"17:26.690 ","End":"17:29.675","Text":"An expense of 2100,"},{"Start":"17:29.675 ","End":"17:34.330","Text":"and the increase in the allowance of 2100,"},{"Start":"17:34.330 ","End":"17:36.535","Text":"came with a double entry."},{"Start":"17:36.535 ","End":"17:39.454","Text":"Here is the debit to the bad debt expense,"},{"Start":"17:39.454 ","End":"17:42.920","Text":"and here\u0027s the credit to the allowance for doubtful debts."},{"Start":"17:42.920 ","End":"17:46.370","Text":"I\u0027ll just complete and fill in the balance here of"},{"Start":"17:46.370 ","End":"17:50.705","Text":"a 150,000 the accounts receivable account."},{"Start":"17:50.705 ","End":"17:53.330","Text":"Again, as in the previous example,"},{"Start":"17:53.330 ","End":"17:56.285","Text":"when we go to the balance sheet at the end of the year,"},{"Start":"17:56.285 ","End":"18:04.040","Text":"the balance sheet shows a net balance of 144,000 is reported on"},{"Start":"18:04.040 ","End":"18:07.970","Text":"the balance sheet for the accounts receivable and the words"},{"Start":"18:07.970 ","End":"18:13.710","Text":"the estimated future cash collections from that particular asset."}],"ID":27488},{"Watched":false,"Name":"Exercise 3 - part 1","Duration":"1m 32s","ChapterTopicVideoID":26461,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.384","Text":"This exercise involves recording bad debt expenses and write-offs."},{"Start":"00:05.384 ","End":"00:07.620","Text":"At the end of 20X1,"},{"Start":"00:07.620 ","End":"00:11.505","Text":"Gog reports 60,000 in accounts receivable."},{"Start":"00:11.505 ","End":"00:13.950","Text":"Also at the end of 20X1,"},{"Start":"00:13.950 ","End":"00:15.960","Text":"it set the allowance for bad debts at"},{"Start":"00:15.960 ","End":"00:19.995","Text":"5 percent of that ending balance of the receivables."},{"Start":"00:19.995 ","End":"00:22.650","Text":"Now, during 20X2, the next year,"},{"Start":"00:22.650 ","End":"00:27.169","Text":"it records 1.2 million in sales."},{"Start":"00:27.169 ","End":"00:34.595","Text":"During 20X2, Gog writes off 1,500 in uncollectible dates."},{"Start":"00:34.595 ","End":"00:37.340","Text":"Then at the end of 20X2,"},{"Start":"00:37.340 ","End":"00:41.450","Text":"the receivables of 80,000 have not been paid yet."},{"Start":"00:41.450 ","End":"00:44.240","Text":"The company estimates that the allowance for"},{"Start":"00:44.240 ","End":"00:48.620","Text":"bad debt at the end of 20X2 to be 3 percent,"},{"Start":"00:48.620 ","End":"00:50.870","Text":"in other words, 2 percent lower than last year."},{"Start":"00:50.870 ","End":"00:55.610","Text":"Last year we used 5 percent to calculate the allowance for bad debts."},{"Start":"00:55.610 ","End":"00:58.580","Text":"But now we\u0027re using 3 percent as a result of"},{"Start":"00:58.580 ","End":"01:02.011","Text":"an improvement in the macroeconomic conditions."},{"Start":"01:02.011 ","End":"01:04.820","Text":"Required, pass the necessary entries in"},{"Start":"01:04.820 ","End":"01:08.315","Text":"the transaction worksheet provided on the next slide."},{"Start":"01:08.315 ","End":"01:11.870","Text":"The transaction worksheet has a column for cash,"},{"Start":"01:11.870 ","End":"01:14.810","Text":"which is an asset, a column for receivables, which is an asset,"},{"Start":"01:14.810 ","End":"01:18.470","Text":"a column for the allowance being the allowance for bad or doubtful debts,"},{"Start":"01:18.470 ","End":"01:21.470","Text":"and then an income statement column."},{"Start":"01:21.470 ","End":"01:26.015","Text":"We\u0027re going to show all the movements from the opening balance to the closing balance."},{"Start":"01:26.015 ","End":"01:27.845","Text":"The movements include sales,"},{"Start":"01:27.845 ","End":"01:30.725","Text":"the cash collected, any write-offs,"},{"Start":"01:30.725 ","End":"01:33.540","Text":"and any bad debt expense."}],"ID":27489},{"Watched":false,"Name":"Exercise 3 - part 2","Duration":"6m 15s","ChapterTopicVideoID":26462,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.060","Text":"Let\u0027s try the solution to Gog."},{"Start":"00:03.060 ","End":"00:05.460","Text":"We\u0027re given 6 points to go through."},{"Start":"00:05.460 ","End":"00:07.005","Text":"Let\u0027s look at the first 1."},{"Start":"00:07.005 ","End":"00:08.775","Text":"At the end of 20X1,"},{"Start":"00:08.775 ","End":"00:12.210","Text":"Gog reports 60,000 in accounts receivable."},{"Start":"00:12.210 ","End":"00:14.565","Text":"Given that we are working with 20X2,"},{"Start":"00:14.565 ","End":"00:18.540","Text":"what they\u0027re telling us, that is our opening balance in 20X2."},{"Start":"00:18.540 ","End":"00:21.955","Text":"Let\u0027s put that into the transaction worksheet."},{"Start":"00:21.955 ","End":"00:23.855","Text":"Under the Receivables column,"},{"Start":"00:23.855 ","End":"00:26.195","Text":"we have an opening balance of 60,000."},{"Start":"00:26.195 ","End":"00:30.300","Text":"That\u0027s a debit balance because receivables is an asset."},{"Start":"00:30.310 ","End":"00:34.010","Text":"The second point states that at the end of 20X1,"},{"Start":"00:34.010 ","End":"00:36.410","Text":"Gog set the allowance for bad debts at"},{"Start":"00:36.410 ","End":"00:39.500","Text":"5 percent of the ending balance of the receivables."},{"Start":"00:39.500 ","End":"00:42.815","Text":"Well, the ending balance of the receivables with 60,000,"},{"Start":"00:42.815 ","End":"00:46.800","Text":"so 5 percent of 60,000 is 3,000."},{"Start":"00:46.800 ","End":"00:51.755","Text":"60,000 multiplied by 5 percent gives us our allowance."},{"Start":"00:51.755 ","End":"00:55.790","Text":"You\u0027ll notice that this is in brackets and that is because it is a credit balance."},{"Start":"00:55.790 ","End":"00:59.900","Text":"The reason it is a credit balance is because although it states that it is an asset,"},{"Start":"00:59.900 ","End":"01:02.105","Text":"it is actually a negative asset."},{"Start":"01:02.105 ","End":"01:05.240","Text":"The allowance account is a measurement account that reduces"},{"Start":"01:05.240 ","End":"01:08.735","Text":"the value of the receivables. Let\u0027s look at the third point."},{"Start":"01:08.735 ","End":"01:11.355","Text":"Now, during 20X2,"},{"Start":"01:11.355 ","End":"01:15.640","Text":"Gog records 1.2 million in sales."},{"Start":"01:15.640 ","End":"01:18.035","Text":"We put in here sales,"},{"Start":"01:18.035 ","End":"01:20.720","Text":"1.2 million, under the Receivables column."},{"Start":"01:20.720 ","End":"01:27.965","Text":"That is a debit to the receivables column and 1.2 million credit in the income statement."},{"Start":"01:27.965 ","End":"01:31.415","Text":"That\u0027s a credit to the sales account, sales revenue."},{"Start":"01:31.415 ","End":"01:34.535","Text":"Now, we are assuming that all of the sales were credit sales,"},{"Start":"01:34.535 ","End":"01:39.020","Text":"it would make no difference if you assume that half of them will cash first."},{"Start":"01:39.020 ","End":"01:42.380","Text":"It would make no difference if we assume that half of them were created,"},{"Start":"01:42.380 ","End":"01:43.880","Text":"and the other half was cash,"},{"Start":"01:43.880 ","End":"01:45.635","Text":"or 75 percent was created,"},{"Start":"01:45.635 ","End":"01:47.855","Text":"and the 25 percent was cash,"},{"Start":"01:47.855 ","End":"01:50.660","Text":"the impact or the outcome would be the same."},{"Start":"01:50.660 ","End":"01:52.235","Text":"Your final answer would be the same."},{"Start":"01:52.235 ","End":"01:57.020","Text":"Always assume that the sales are all created unless told otherwise."},{"Start":"01:57.020 ","End":"02:00.200","Text":"The fourth, during 20X2,"},{"Start":"02:00.200 ","End":"02:04.760","Text":"Gog writes-off 1,500 in uncollectible debt."},{"Start":"02:04.760 ","End":"02:06.957","Text":"The write-off, 1,500,"},{"Start":"02:06.957 ","End":"02:09.260","Text":"comes out of the receivables account."},{"Start":"02:09.260 ","End":"02:11.795","Text":"The reason it comes out of the receivables account"},{"Start":"02:11.795 ","End":"02:15.320","Text":"is because we don\u0027t want to be sending them statements any longer."},{"Start":"02:15.320 ","End":"02:17.840","Text":"We\u0027re crediting the receivables account"},{"Start":"02:17.840 ","End":"02:21.230","Text":"directly and we are debiting the allowance account."},{"Start":"02:21.230 ","End":"02:25.563","Text":"Notice that we do not debit bad debt or doubtful debt expense,"},{"Start":"02:25.563 ","End":"02:28.175","Text":"we debit the allowance account instead."},{"Start":"02:28.175 ","End":"02:29.690","Text":"The fifth point,"},{"Start":"02:29.690 ","End":"02:31.805","Text":"at the end of 20X2,"},{"Start":"02:31.805 ","End":"02:35.480","Text":"receivables of 80,000 have not been paid yet."},{"Start":"02:35.480 ","End":"02:38.120","Text":"In other words, they haven\u0027t yet been received by the company."},{"Start":"02:38.120 ","End":"02:42.740","Text":"That means that the ending balance of the receivables account is 80,000."},{"Start":"02:42.740 ","End":"02:45.575","Text":"However, if you add these figures up here,"},{"Start":"02:45.575 ","End":"02:48.755","Text":"the 60,000 plus the 1.2 million,"},{"Start":"02:48.755 ","End":"02:50.827","Text":"less than 1,500,"},{"Start":"02:50.827 ","End":"02:52.745","Text":"it doesn\u0027t give you 80,000."},{"Start":"02:52.745 ","End":"02:58.580","Text":"Instead, it gives you 1,258,500."},{"Start":"02:58.580 ","End":"03:01.400","Text":"That\u0027s not the closing balance of 80,000,"},{"Start":"03:01.400 ","End":"03:12.130","Text":"so we have to work out the difference in 1,258,500 less the 80,000, gives us 1,178,500."},{"Start":"03:12.130 ","End":"03:15.815","Text":"That must have been the cash that we collected."},{"Start":"03:15.815 ","End":"03:23.575","Text":"This is a credit to the accounts receivable and a debit to your cash in bank."},{"Start":"03:23.575 ","End":"03:26.935","Text":"Now, that will add up to 80,000."},{"Start":"03:26.935 ","End":"03:30.665","Text":"Last point we were given is that Gog estimates"},{"Start":"03:30.665 ","End":"03:34.530","Text":"the allowance or bad debts at the end of 20X2 at 3 percent,"},{"Start":"03:34.530 ","End":"03:36.650","Text":"which is 2 percent lower than last year."},{"Start":"03:36.650 ","End":"03:39.845","Text":"Remember, we used 5 percent at the end of 20X1."},{"Start":"03:39.845 ","End":"03:43.310","Text":"Now, at the end of 20X2, we\u0027re using 3 percent."},{"Start":"03:43.310 ","End":"03:49.164","Text":"We\u0027re using slightly lower as a result of an improvement in the macroeconomic conditions."},{"Start":"03:49.164 ","End":"03:55.045","Text":"80,000 multiply it by the 3 percent gives us 2,400"},{"Start":"03:55.045 ","End":"03:57.620","Text":"and that is the balance that must appear in"},{"Start":"03:57.620 ","End":"04:00.680","Text":"our allowance for doubtful debts account at the end of the year."},{"Start":"04:00.680 ","End":"04:02.975","Text":"That\u0027s a credit balance."},{"Start":"04:02.975 ","End":"04:07.955","Text":"However, if we take 3,000 as our opening balance,"},{"Start":"04:07.955 ","End":"04:12.425","Text":"we know that we debited it with 1,500 being the actual bad debts."},{"Start":"04:12.425 ","End":"04:14.960","Text":"That gives us a balance, closing balance,"},{"Start":"04:14.960 ","End":"04:18.080","Text":"which should be reflected at 1,500 credit,"},{"Start":"04:18.080 ","End":"04:21.140","Text":"but we need it to reflect 2,400."},{"Start":"04:21.140 ","End":"04:27.685","Text":"That means we need to put in an extra 900 to make up the difference, the 900 credits."},{"Start":"04:27.685 ","End":"04:32.360","Text":"900 credits will fix the problem so that"},{"Start":"04:32.360 ","End":"04:37.355","Text":"our allowance account will come to 2,400 and what is this adjustment?"},{"Start":"04:37.355 ","End":"04:39.260","Text":"It is the bad debit adjustment."},{"Start":"04:39.260 ","End":"04:44.210","Text":"We\u0027re crediting the allowance to increase the allowance to 2,400,"},{"Start":"04:44.210 ","End":"04:48.125","Text":"and debiting the bad debts expense."},{"Start":"04:48.125 ","End":"04:50.930","Text":"Now, if we add up the receivables and the allowance,"},{"Start":"04:50.930 ","End":"04:53.480","Text":"those totals which were actually well,"},{"Start":"04:53.480 ","End":"04:56.390","Text":"this was given to us and then we had to calculate this 1,"},{"Start":"04:56.390 ","End":"04:58.895","Text":"those are actual balances that would appear"},{"Start":"04:58.895 ","End":"05:01.940","Text":"in our balance sheet and would show the net effect of those 2,"},{"Start":"05:01.940 ","End":"05:05.960","Text":"in fact, of 77,600,"},{"Start":"05:05.960 ","End":"05:08.060","Text":"so that would appear in the balance sheet."},{"Start":"05:08.060 ","End":"05:11.570","Text":"The cash column and the income statement column do not"},{"Start":"05:11.570 ","End":"05:15.305","Text":"need to be added up unless you\u0027re specifically asked to add them up,"},{"Start":"05:15.305 ","End":"05:17.180","Text":"but if you do add them up,"},{"Start":"05:17.180 ","End":"05:22.775","Text":"remember that the 1,178,500 total is actually just the impact on the cash,"},{"Start":"05:22.775 ","End":"05:24.560","Text":"it is not the cash balance."},{"Start":"05:24.560 ","End":"05:27.335","Text":"The reason for that is that we do not know the opening balance,"},{"Start":"05:27.335 ","End":"05:31.880","Text":"or any of the other transactions that may have affected that cash account."},{"Start":"05:31.880 ","End":"05:34.565","Text":"Similarly, in the income statement column,"},{"Start":"05:34.565 ","End":"05:39.365","Text":"that 1,199,100 is not the profit for the year."},{"Start":"05:39.365 ","End":"05:41.750","Text":"It\u0027s simply the impact on the profit or loss."},{"Start":"05:41.750 ","End":"05:43.110","Text":"The reason, obviously,"},{"Start":"05:43.110 ","End":"05:46.760","Text":"is that what we are given here are 2 transactions, and no doubt,"},{"Start":"05:46.760 ","End":"05:48.440","Text":"there were many other transactions,"},{"Start":"05:48.440 ","End":"05:51.245","Text":"maybe at many other income and expense accounts"},{"Start":"05:51.245 ","End":"05:53.795","Text":"that affected profit or loss for the year."},{"Start":"05:53.795 ","End":"05:55.490","Text":"These 2 totals,"},{"Start":"05:55.490 ","End":"05:59.090","Text":"1,178,5000 and the 1,199,100,"},{"Start":"05:59.090 ","End":"06:03.461","Text":"those are simply impacts on those columns,"},{"Start":"06:03.461 ","End":"06:05.930","Text":"so impact on cash and impact on profit loss."},{"Start":"06:05.930 ","End":"06:08.645","Text":"Those are not final balances."},{"Start":"06:08.645 ","End":"06:15.870","Text":"Whereas the 80,000 and the 2,400 are indeed the final balances in those 2 accounts."}],"ID":27490},{"Watched":false,"Name":"Write offs","Duration":"15m 22s","ChapterTopicVideoID":26655,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.050 ","End":"00:04.260","Text":"Hello and welcome to another video presentation in this series"},{"Start":"00:04.260 ","End":"00:08.640","Text":"on accounts receivable brought to you by Proprep."},{"Start":"00:08.640 ","End":"00:14.190","Text":"In this video, we will focus on the write-off of bad debts."},{"Start":"00:14.190 ","End":"00:21.405","Text":"An entity will clearly attempt all possible measures to collect the debt owing,"},{"Start":"00:21.405 ","End":"00:23.955","Text":"such as applying for a court order,"},{"Start":"00:23.955 ","End":"00:25.950","Text":"arbitration with the customer,"},{"Start":"00:25.950 ","End":"00:28.800","Text":"making concessions on the amount owing,"},{"Start":"00:28.800 ","End":"00:30.780","Text":"and maybe delaying payments."},{"Start":"00:30.780 ","End":"00:33.989","Text":"However, after it has been established that recovering"},{"Start":"00:33.989 ","End":"00:37.620","Text":"the amount is unlikely or certainly impossible,"},{"Start":"00:37.620 ","End":"00:40.720","Text":"the amount owed has to be written off."},{"Start":"00:40.720 ","End":"00:44.690","Text":"This means that the amount is no longer an asset so therefore,"},{"Start":"00:44.690 ","End":"00:48.740","Text":"needs to be removed from the account receivable as the asset"},{"Start":"00:48.740 ","End":"00:54.440","Text":"and this is done against the allowance for doubtful debts account."},{"Start":"00:54.440 ","End":"01:01.504","Text":"This example explains the accounting for the write-off of bad debts as an expense,"},{"Start":"01:01.504 ","End":"01:06.440","Text":"as well as further illustrating what we\u0027ve seen in previous examples and that is"},{"Start":"01:06.440 ","End":"01:12.290","Text":"the adjustment for the allowance for doubtful debts at the end of the period."},{"Start":"01:12.290 ","End":"01:18.634","Text":"Therefore, you will see both types of entries coming up in the solution,"},{"Start":"01:18.634 ","End":"01:21.605","Text":"the write-off of an actual bad debt,"},{"Start":"01:21.605 ","End":"01:26.620","Text":"as well as the adjustments to the allowance for doubtful debts at the end of the period."},{"Start":"01:26.620 ","End":"01:28.460","Text":"What are we told here?"},{"Start":"01:28.460 ","End":"01:31.535","Text":"We are told that at the end of the 20X1 year,"},{"Start":"01:31.535 ","End":"01:36.708","Text":"this company Arts and Crafts reports an amount of 115,500"},{"Start":"01:36.708 ","End":"01:43.760","Text":"and you\u0027re told that is net of the allowance for doubtful debts of 14,500."},{"Start":"01:43.760 ","End":"01:46.640","Text":"I will talk more about that on the following slide,"},{"Start":"01:46.640 ","End":"01:47.960","Text":"but for the moment,"},{"Start":"01:47.960 ","End":"01:58.280","Text":"just remember that if the amount of 115,500 is net of the allowance of 14,500,"},{"Start":"01:58.280 ","End":"02:01.400","Text":"the amount sitting in the accounts"},{"Start":"02:01.400 ","End":"02:09.430","Text":"receivable account must be a total therefore of 130,000."},{"Start":"02:09.490 ","End":"02:12.605","Text":"Then during the 20X2 year,"},{"Start":"02:12.605 ","End":"02:16.675","Text":"you\u0027re told the company attempted to collect all that is owed,"},{"Start":"02:16.675 ","End":"02:22.730","Text":"which was successful except you\u0027re told for an amount of 10,000."},{"Start":"02:22.730 ","End":"02:28.550","Text":"That therefore, is the amount that needs to be written off as a bad debt."},{"Start":"02:28.550 ","End":"02:31.100","Text":"Coming to the end of 20X2,"},{"Start":"02:31.100 ","End":"02:34.520","Text":"the company you\u0027re told reports accounts or"},{"Start":"02:34.520 ","End":"02:39.289","Text":"trade receivables of 150,000 and you\u0027re given the breakdown of that,"},{"Start":"02:39.289 ","End":"02:41.990","Text":"110,000 is not overdue,"},{"Start":"02:41.990 ","End":"02:46.310","Text":"25,000 is overdue 30 to 60 days,"},{"Start":"02:46.310 ","End":"02:51.380","Text":"and the remainder is overdue 60 days or more."},{"Start":"02:51.380 ","End":"02:53.555","Text":"Based on past experience,"},{"Start":"02:53.555 ","End":"02:56.870","Text":"the company in estimating the allowance for doubtful debts"},{"Start":"02:56.870 ","End":"03:01.575","Text":"applies 1 percent to the balances not overdue,"},{"Start":"03:01.575 ","End":"03:05.225","Text":"30 percent to those overdue 30 to 60 days,"},{"Start":"03:05.225 ","End":"03:10.610","Text":"and 60 percent to those overdue more than 60 days."},{"Start":"03:10.610 ","End":"03:15.020","Text":"We are required here to estimate the allowance for doubtful debts at the end of"},{"Start":"03:15.020 ","End":"03:20.390","Text":"the 20X2 year to calculate how much cash was collected during"},{"Start":"03:20.390 ","End":"03:24.335","Text":"the year in relation to account receivable and"},{"Start":"03:24.335 ","End":"03:31.040","Text":"also to pass the required entry to recognize the bad debts expense."},{"Start":"03:31.040 ","End":"03:34.970","Text":"The first computation we are asked to do is to"},{"Start":"03:34.970 ","End":"03:39.125","Text":"calculate the allowance for doubtful debts at the end of the current year,"},{"Start":"03:39.125 ","End":"03:41.870","Text":"that is the end of the 20X2 year."},{"Start":"03:41.870 ","End":"03:47.000","Text":"This requires us clearly to examine the breakdown of the balances in"},{"Start":"03:47.000 ","End":"03:52.760","Text":"the account receivable account to determine the allowance for doubtful debts."},{"Start":"03:52.760 ","End":"03:57.330","Text":"Let\u0027s write this out here, allowance for doubtful debts."},{"Start":"03:58.450 ","End":"04:03.545","Text":"We need to look at the amount of the accounts receivable account."},{"Start":"04:03.545 ","End":"04:10.180","Text":"We know there\u0027s 150,000 in the account receivable broken down as given in the question."},{"Start":"04:10.180 ","End":"04:15.660","Text":"Therefore, we take the 110,000 and we know that is not yet"},{"Start":"04:15.660 ","End":"04:22.340","Text":"overdue and to those account we apply a 1 percent estimation of non-collectability,"},{"Start":"04:22.340 ","End":"04:25.055","Text":"which amounts to 1,100."},{"Start":"04:25.055 ","End":"04:30.710","Text":"We then go to the 25,000 next batch of account receivable,"},{"Start":"04:30.710 ","End":"04:37.730","Text":"which is 30 to 60 days overdue and this is a 30 percent chance of not being collected,"},{"Start":"04:37.730 ","End":"04:40.945","Text":"which amounts to 7,500."},{"Start":"04:40.945 ","End":"04:48.120","Text":"Remembering that the total is an amount of 150,000 therefore, the remainder,"},{"Start":"04:48.120 ","End":"04:50.715","Text":"which clearly is 15,000,"},{"Start":"04:50.715 ","End":"04:56.300","Text":"we\u0027re told has a 60 percent chance of not being collected,"},{"Start":"04:56.300 ","End":"04:59.990","Text":"which comes to an amount of 9,000."},{"Start":"04:59.990 ","End":"05:04.040","Text":"Therefore, the total allowance that is required,"},{"Start":"05:04.040 ","End":"05:05.945","Text":"or as I\u0027ve said in previous slides,"},{"Start":"05:05.945 ","End":"05:13.505","Text":"the total allowance that is needed at the end of the 20X2 year is 17,000."},{"Start":"05:13.505 ","End":"05:16.250","Text":"As before, we look at what amount is"},{"Start":"05:16.250 ","End":"05:19.895","Text":"existing in the allowance for doubtful debts account."},{"Start":"05:19.895 ","End":"05:24.200","Text":"Well, we\u0027re told in the question there\u0027s an amount of 14,500,"},{"Start":"05:24.200 ","End":"05:28.250","Text":"but a bit further thought is required here because that"},{"Start":"05:28.250 ","End":"05:33.566","Text":"14,500 was in fact the balance at the end of 20X1,"},{"Start":"05:33.566 ","End":"05:35.855","Text":"but we\u0027re told in the current year,"},{"Start":"05:35.855 ","End":"05:39.430","Text":"there\u0027s been a write-off of 10,000."},{"Start":"05:39.430 ","End":"05:45.725","Text":"Now, what then is the accounting entry for a write-off of a bad debt?"},{"Start":"05:45.725 ","End":"05:51.895","Text":"I\u0027ll say that again."},{"Start":"05:51.895 ","End":"05:53.409","Text":"Now think about this."},{"Start":"05:53.409 ","End":"05:57.185","Text":"When we created the allowance in the first place,"},{"Start":"05:57.185 ","End":"06:03.080","Text":"we put the debits to the,"},{"Start":"06:03.080 ","End":"06:04.295","Text":"and I\u0027ll abbreviate here,"},{"Start":"06:04.295 ","End":"06:08.780","Text":"bad debts as an expense account and their credits went"},{"Start":"06:08.780 ","End":"06:13.745","Text":"to the allowance for doubtful debts as the contra asset account."},{"Start":"06:13.745 ","End":"06:17.240","Text":"Now when we actually write off a bad debt,"},{"Start":"06:17.240 ","End":"06:20.630","Text":"the debit goes to the allowance account,"},{"Start":"06:20.630 ","End":"06:23.270","Text":"the allowance for doubtful debts,"},{"Start":"06:23.270 ","End":"06:25.300","Text":"the negative asset,"},{"Start":"06:25.300 ","End":"06:30.125","Text":"and the credit goes to the accounts receivable account."},{"Start":"06:30.125 ","End":"06:35.030","Text":"Therefore, we are processing a debit to the allowance for doubtful debts."},{"Start":"06:35.030 ","End":"06:39.890","Text":"Remember, this is the credit balance of 14,500 and therefore,"},{"Start":"06:39.890 ","End":"06:43.570","Text":"we have to subtract the amount of that debit,"},{"Start":"06:43.570 ","End":"06:45.887","Text":"which in this case is 10,000,"},{"Start":"06:45.887 ","End":"06:51.155","Text":"that\u0027s the debit to the allowance for doubtful debts as part of the write-off."},{"Start":"06:51.155 ","End":"06:54.290","Text":"Therefore, the balance at the end of"},{"Start":"06:54.290 ","End":"07:02.665","Text":"the X2 year in the allowance for doubtful debts account is clearly 4,500."},{"Start":"07:02.665 ","End":"07:07.130","Text":"Therefore, the increase in the allowance for doubtful debts,"},{"Start":"07:07.130 ","End":"07:11.990","Text":"in this case, is an amount of 13,100."},{"Start":"07:11.990 ","End":"07:23.390","Text":"Now we\u0027re also asked to compute the amount of the cash received in the current year."},{"Start":"07:23.390 ","End":"07:26.930","Text":"As I said before,"},{"Start":"07:26.930 ","End":"07:33.920","Text":"the balance sheet reported a net amount of 115,500 at the end of 20X1,"},{"Start":"07:33.920 ","End":"07:35.780","Text":"the end of the previous year."},{"Start":"07:35.780 ","End":"07:42.560","Text":"Therefore, if the balance sheet shows the net amount of 115,500,"},{"Start":"07:42.560 ","End":"07:47.270","Text":"that clearly comprises the balance in the accounts receivable account"},{"Start":"07:47.270 ","End":"07:52.865","Text":"less the amount in the allowance for doubtful debts,"},{"Start":"07:52.865 ","End":"07:55.740","Text":"abbreviated d/d, doubtful debts."},{"Start":"07:55.740 ","End":"08:03.110","Text":"If the allowance for doubtful debts we told is an amount of 14,500, therefore clearly,"},{"Start":"08:03.110 ","End":"08:06.140","Text":"the account receivable must be a total of"},{"Start":"08:06.140 ","End":"08:14.490","Text":"130,000 at that date to give us a net balance of 115,500."},{"Start":"08:14.490 ","End":"08:24.805","Text":"Therefore, if the balance account receivable is 130,000 and there was 10,000 write-off,"},{"Start":"08:24.805 ","End":"08:31.285","Text":"the amount of the cash collected is an amount of 120,000."},{"Start":"08:31.285 ","End":"08:34.570","Text":"Using the calculation that we\u0027ve already done,"},{"Start":"08:34.570 ","End":"08:42.055","Text":"let us now looked at the worksheet and see how those will be recorded on the worksheet."},{"Start":"08:42.055 ","End":"08:45.250","Text":"Well, you\u0027re told there\u0027s an opening balance in accounts"},{"Start":"08:45.250 ","End":"08:50.440","Text":"receivable of 130,000 which we can put in."},{"Start":"08:50.440 ","End":"08:57.670","Text":"There is also the opening balance in the allowance for doubtful debts of 14,500."},{"Start":"08:57.670 ","End":"09:02.800","Text":"We have just computed that there\u0027s cash collected of 120,000."},{"Start":"09:02.800 ","End":"09:07.585","Text":"Therefore, an increase in the asset cash of 120,000 and"},{"Start":"09:07.585 ","End":"09:12.835","Text":"a decrease in the amount of the account receivable of 120,000."},{"Start":"09:12.835 ","End":"09:15.580","Text":"Again, looking at double entry,"},{"Start":"09:15.580 ","End":"09:17.275","Text":"this will be clearly an increase,"},{"Start":"09:17.275 ","End":"09:21.025","Text":"a debit to the asset cash and a decrease,"},{"Start":"09:21.025 ","End":"09:23.884","Text":"a credit to the asset account receivable."},{"Start":"09:23.884 ","End":"09:26.655","Text":"We now have the write-off of the bad debt."},{"Start":"09:26.655 ","End":"09:32.880","Text":"The write-off the bad debt is shown against the allowance for doubtful debts."},{"Start":"09:32.880 ","End":"09:38.710","Text":"Therefore, we have 10,000 which will be a debit to the allowance for doubtful debts,"},{"Start":"09:38.710 ","End":"09:45.535","Text":"and a decrease in the amount of accounts receivable of 10,000 as well."},{"Start":"09:45.535 ","End":"09:47.590","Text":"Remember this is the debit,"},{"Start":"09:47.590 ","End":"09:51.025","Text":"the allowance for doubtful debts because remember the balance is a credit."},{"Start":"09:51.025 ","End":"09:53.050","Text":"We\u0027re debiting it to reduce it,"},{"Start":"09:53.050 ","End":"09:56.950","Text":"and we are putting a credit to the accounts receivable account."},{"Start":"09:56.950 ","End":"10:05.410","Text":"Other words, reducing the balance owing from our customers because of the write-off."},{"Start":"10:05.410 ","End":"10:10.300","Text":"We then go to the credit sales for the period."},{"Start":"10:10.300 ","End":"10:12.400","Text":"You are told this example,"},{"Start":"10:12.400 ","End":"10:18.190","Text":"that the ending balance in accounts receivable is an amount of 150,000."},{"Start":"10:18.190 ","End":"10:26.335","Text":"Therefore, we can compute the amount of credit sales must be also a 150,000 for the year."},{"Start":"10:26.335 ","End":"10:30.790","Text":"An increase in asset accounts receivable for 150,000 and"},{"Start":"10:30.790 ","End":"10:36.775","Text":"an increase in income on the income statement of 150,000 as well."},{"Start":"10:36.775 ","End":"10:41.110","Text":"The accounting entries, a debit to the asset accounts receivable,"},{"Start":"10:41.110 ","End":"10:45.895","Text":"and a credit to a sales income account on the income statement."},{"Start":"10:45.895 ","End":"10:50.125","Text":"Finally, we come back to the adjustment to the allowance for doubtful debts,"},{"Start":"10:50.125 ","End":"10:53.350","Text":"which we have computed on the previous slide,"},{"Start":"10:53.350 ","End":"11:01.230","Text":"and you will recall the increase in the allowance is an amount of 13,100."},{"Start":"11:01.230 ","End":"11:04.850","Text":"This is recorded as an expense,"},{"Start":"11:04.850 ","End":"11:07.210","Text":"a bad debts expense, therefore,"},{"Start":"11:07.210 ","End":"11:11.560","Text":"13,100 as an expense going on"},{"Start":"11:11.560 ","End":"11:19.280","Text":"the income statement and an increase in the allowance for doubtful debts of 13,100."},{"Start":"11:19.290 ","End":"11:22.600","Text":"Remember, this is the debit to"},{"Start":"11:22.600 ","End":"11:28.105","Text":"the bad debts expense and this is the credit to the allowance for doubtful debts."},{"Start":"11:28.105 ","End":"11:32.260","Text":"We now end up with the balance in the allowance for doubtful debts,"},{"Start":"11:32.260 ","End":"11:36.835","Text":"the amount to be required, of 17,016."},{"Start":"11:36.835 ","End":"11:39.190","Text":"We now end up with a balance in the allowance for"},{"Start":"11:39.190 ","End":"11:42.190","Text":"doubtful debts at the amount which we have computed,"},{"Start":"11:42.190 ","End":"11:45.460","Text":"the amount that we need of 17,600."},{"Start":"11:45.460 ","End":"11:50.335","Text":"Clearly enough, on the balance sheet at the end of the current year,"},{"Start":"11:50.335 ","End":"11:59.380","Text":"we will report an amount of 132,400 on the face of the balance sheet."},{"Start":"11:59.380 ","End":"12:05.365","Text":"The 132,400 is the equivalent number of the"},{"Start":"12:05.365 ","End":"12:15.025","Text":"115,500 reported as the net amount of receivables at the end of the previous year."},{"Start":"12:15.025 ","End":"12:19.450","Text":"There are a number of important points to emphasize from the previous example."},{"Start":"12:19.450 ","End":"12:24.130","Text":"The first one is, as you\u0027ve seen the write-off of that amount of the accounts"},{"Start":"12:24.130 ","End":"12:27.099","Text":"receivable does not affect the income statement"},{"Start":"12:27.099 ","End":"12:30.835","Text":"because the write-off is a set-off against the allowance."},{"Start":"12:30.835 ","End":"12:36.340","Text":"Think about this, when we created the allowance for doubtful debts,"},{"Start":"12:36.340 ","End":"12:42.625","Text":"we process an accounting entry where we debited the bad debts expense account,"},{"Start":"12:42.625 ","End":"12:44.780","Text":"bad debts as an expense,"},{"Start":"12:44.780 ","End":"12:48.060","Text":"and we credited the allowance for doubtful debts,"},{"Start":"12:48.060 ","End":"12:53.255","Text":"that is a negative asset account."},{"Start":"12:53.255 ","End":"12:58.810","Text":"Remember the debit to the bad debt expense account,"},{"Start":"12:58.810 ","End":"13:01.660","Text":"that affects the income statement."},{"Start":"13:01.660 ","End":"13:08.905","Text":"When we actually write off the amount owing from an uncollectible debt,"},{"Start":"13:08.905 ","End":"13:11.785","Text":"the debit goes as we\u0027ve seen,"},{"Start":"13:11.785 ","End":"13:14.395","Text":"against this allowance account."},{"Start":"13:14.395 ","End":"13:20.530","Text":"The debit goes to the allowance for doubtful debts and the credit goes"},{"Start":"13:20.530 ","End":"13:26.635","Text":"to the accounts receivable to reduce the amount owing from customers."},{"Start":"13:26.635 ","End":"13:28.405","Text":"That\u0027s the asset account."},{"Start":"13:28.405 ","End":"13:30.820","Text":"Notice the entry for the write-off,"},{"Start":"13:30.820 ","End":"13:35.380","Text":"there\u0027s no income statement impact because the expense was"},{"Start":"13:35.380 ","End":"13:40.810","Text":"recognized in the previous period when we created the allowance."},{"Start":"13:40.810 ","End":"13:42.535","Text":"In this particular example,"},{"Start":"13:42.535 ","End":"13:46.060","Text":"the bad debt expense in the current year, in other words,"},{"Start":"13:46.060 ","End":"13:49.615","Text":"the adjustments to the allowance of 13,100,"},{"Start":"13:49.615 ","End":"13:55.690","Text":"is in fact smaller than the ending balance of the allowance of 17,600."},{"Start":"13:55.690 ","End":"14:00.280","Text":"This comes about because of the way that the company has been able to"},{"Start":"14:00.280 ","End":"14:06.655","Text":"collect more cash than what it anticipated at the end of the previous year."},{"Start":"14:06.655 ","End":"14:08.860","Text":"The end of 20X1,"},{"Start":"14:08.860 ","End":"14:10.675","Text":"the end of the previous year,"},{"Start":"14:10.675 ","End":"14:15.250","Text":"the Company showed accounts receivable of"},{"Start":"14:15.250 ","End":"14:25.645","Text":"130,000 and the allowance for doubtful debts of 14,500."},{"Start":"14:25.645 ","End":"14:27.760","Text":"As you\u0027ve seen a few times already,"},{"Start":"14:27.760 ","End":"14:36.415","Text":"it therefore showed on the balance sheet an amount of a 115,500 for accounts receivable."},{"Start":"14:36.415 ","End":"14:39.760","Text":"That amount as the asset,"},{"Start":"14:39.760 ","End":"14:43.540","Text":"represents the amount of the expected future in-flows."},{"Start":"14:43.540 ","End":"14:47.800","Text":"But in fact, what was collected in the previous period was in fact"},{"Start":"14:47.800 ","End":"14:51.820","Text":"more than the 115,000 that will be computed."},{"Start":"14:51.820 ","End":"14:59.035","Text":"There was in fact a 120,000 cash collected in the 20X2 year."},{"Start":"14:59.035 ","End":"15:04.840","Text":"The difference is the 4,500 additional cash"},{"Start":"15:04.840 ","End":"15:10.585","Text":"collected over and above what was estimated at the end of the previous year."},{"Start":"15:10.585 ","End":"15:16.150","Text":"That\u0027s the reason why we see a lower bedded expense being"},{"Start":"15:16.150 ","End":"15:18.955","Text":"recorded for the adjustment in the current year"},{"Start":"15:18.955 ","End":"15:22.910","Text":"compared to the ending balance of the allowance."}],"ID":27491},{"Watched":false,"Name":"Exercise 4 - part 1","Duration":"2m 30s","ChapterTopicVideoID":26463,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.140","Text":"Today\u0027s exercise is Professional Service Firm."},{"Start":"00:04.140 ","End":"00:06.990","Text":"Below you\u0027re provided selected information"},{"Start":"00:06.990 ","End":"00:10.065","Text":"from the financial statements of a professional service firm."},{"Start":"00:10.065 ","End":"00:12.239","Text":"We\u0027re given 2 sets of figures;"},{"Start":"00:12.239 ","End":"00:14.400","Text":"1 for the year 31st December,"},{"Start":"00:14.400 ","End":"00:18.225","Text":"20X0, and 1 for the year 31st December, 20X1."},{"Start":"00:18.225 ","End":"00:21.015","Text":"In this regard, we\u0027re given gross accounts receivable,"},{"Start":"00:21.015 ","End":"00:22.760","Text":"allowance for bad debts,"},{"Start":"00:22.760 ","End":"00:25.635","Text":"accounts written-off during 20X1,"},{"Start":"00:25.635 ","End":"00:28.160","Text":"we aren\u0027t given that for 20X0 though,"},{"Start":"00:28.160 ","End":"00:32.850","Text":"advances from customers being the unearned revenues,"},{"Start":"00:32.850 ","End":"00:37.410","Text":"and total fee revenues recognized in the income statement for 20X1."},{"Start":"00:37.410 ","End":"00:40.700","Text":"We\u0027re then told to assume that the opening balance of"},{"Start":"00:40.700 ","End":"00:45.685","Text":"the advances account was recognized as fee revenue during 20X1."},{"Start":"00:45.685 ","End":"00:48.900","Text":"That\u0027s the balance 6,000 at 31st December,"},{"Start":"00:48.900 ","End":"00:51.060","Text":"20X0 that we were given."},{"Start":"00:51.060 ","End":"00:57.200","Text":"So that 6,000 has since been recognized as revenue during the 20X1 year."},{"Start":"00:57.200 ","End":"00:58.715","Text":"If we look at the required,"},{"Start":"00:58.715 ","End":"01:00.500","Text":"you see there are 4 parts."},{"Start":"01:00.500 ","End":"01:05.510","Text":"The first part is to calculate the allowance for bad debts as at the 31st December,"},{"Start":"01:05.510 ","End":"01:08.765","Text":"20X1, given the information below."},{"Start":"01:08.765 ","End":"01:11.180","Text":"We\u0027re given the gross amount at 31st December,"},{"Start":"01:11.180 ","End":"01:14.880","Text":"20X1, that totals 130,000."},{"Start":"01:14.880 ","End":"01:18.402","Text":"Now, that 130,000 was given to us in the previous slide,"},{"Start":"01:18.402 ","End":"01:20.360","Text":"here\u0027s the previous slide."},{"Start":"01:20.360 ","End":"01:23.170","Text":"That 130,000 you see is the 31st December,"},{"Start":"01:23.170 ","End":"01:26.839","Text":"20X1 balance of the gross accounts receivable."},{"Start":"01:26.839 ","End":"01:28.655","Text":"Going back to the required,"},{"Start":"01:28.655 ","End":"01:31.280","Text":"we have a look here, that 130,000,"},{"Start":"01:31.280 ","End":"01:33.470","Text":"being the closing balance of the gross accounts receivable,"},{"Start":"01:33.470 ","End":"01:36.485","Text":"has been broken down into various categories."},{"Start":"01:36.485 ","End":"01:39.410","Text":"These categories are those debtors who"},{"Start":"01:39.410 ","End":"01:42.467","Text":"have specifically been identified as being a bad debt,"},{"Start":"01:42.467 ","End":"01:46.790","Text":"those debtors who are not yet overdue but are due within the next 3 months,"},{"Start":"01:46.790 ","End":"01:48.380","Text":"due between 3 and 6 months,"},{"Start":"01:48.380 ","End":"01:50.540","Text":"and due after 6 months."},{"Start":"01:50.540 ","End":"01:56.210","Text":"We\u0027re then told what percentage of each of these categories is considered doubtful."},{"Start":"01:56.210 ","End":"01:59.945","Text":"We have this specifically identified as bad, 6,000."},{"Start":"01:59.945 ","End":"02:02.075","Text":"All of those are considered doubtful."},{"Start":"02:02.075 ","End":"02:03.320","Text":"Those who are overdue,"},{"Start":"02:03.320 ","End":"02:06.005","Text":"60%, we think are doubtful."},{"Start":"02:06.005 ","End":"02:07.610","Text":"Due within the next 3 months,"},{"Start":"02:07.610 ","End":"02:09.350","Text":"4%, and so on."},{"Start":"02:09.350 ","End":"02:14.105","Text":"Then part 2, we are to calculate the bad debt expense for 20X1."},{"Start":"02:14.105 ","End":"02:19.745","Text":"Part 3, we are to calculate the total cash received from customers in 20X1."},{"Start":"02:19.745 ","End":"02:23.660","Text":"Then part 4 is to calculate the total cash received from customers in"},{"Start":"02:23.660 ","End":"02:30.450","Text":"20X1 in respect to the revenue recognized in the current and prior years."}],"ID":27492},{"Watched":false,"Name":"Exercise 4 - part 2","Duration":"13m 22s","ChapterTopicVideoID":26464,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:06.070","Text":"Let\u0027s attempts the solution to professional service firm question Part 1."},{"Start":"00:06.070 ","End":"00:10.690","Text":"In Part 1, we were asked to calculate the allowance for bad debts."},{"Start":"00:10.690 ","End":"00:13.008","Text":"This is the information that we were given,"},{"Start":"00:13.008 ","End":"00:20.820","Text":"so we were given 130,000 broken down into these categories based on their aging."},{"Start":"00:20.820 ","End":"00:24.010","Text":"The 130,000 is the gross accounts receivable that we were"},{"Start":"00:24.010 ","End":"00:28.030","Text":"given as being 31st December 20X1 balance."},{"Start":"00:28.030 ","End":"00:32.590","Text":"We\u0027re then told the percentage that is doubtful for each of these categories"},{"Start":"00:32.590 ","End":"00:37.630","Text":"and we had to calculate the allowance for bad debts. Let\u0027s do that."},{"Start":"00:37.630 ","End":"00:40.354","Text":"Allowance for bad debts are simply the gross amount"},{"Start":"00:40.354 ","End":"00:43.090","Text":"multiplied by the percentage that is doubtful,"},{"Start":"00:43.090 ","End":"00:46.210","Text":"so the specifically identified debtors;"},{"Start":"00:46.210 ","End":"00:49.375","Text":"those who are specifically identified as having gone bad,"},{"Start":"00:49.375 ","End":"00:52.680","Text":"6,000 currency units at 100 percent."},{"Start":"00:52.680 ","End":"00:58.335","Text":"That is going to contribute 6,000 towards allowance for bad debt balance."},{"Start":"00:58.335 ","End":"01:02.872","Text":"There are 12,000 currency units that are overdue to us,"},{"Start":"01:02.872 ","End":"01:05.995","Text":"60 percent of those are probably going to go bad,"},{"Start":"01:05.995 ","End":"01:10.690","Text":"so 60 percent times 12,000 is 7,200, and so on."},{"Start":"01:10.690 ","End":"01:11.950","Text":"Due within the next 3 months,"},{"Start":"01:11.950 ","End":"01:14.785","Text":"75,000 by 4 percent is 3,000."},{"Start":"01:14.785 ","End":"01:20.175","Text":"Due between 3 and 6 months 23,000 multiplied by 2 percent gives us 460."},{"Start":"01:20.175 ","End":"01:21.450","Text":"Due after 6 months,"},{"Start":"01:21.450 ","End":"01:24.440","Text":"14,000 at 1 percent is 140."},{"Start":"01:24.440 ","End":"01:29.870","Text":"We simply add all of those amounts together and that gives us"},{"Start":"01:29.870 ","End":"01:37.210","Text":"16,800,which will be our allowance for bad debt closing balance at 31st December 20X1."},{"Start":"01:37.210 ","End":"01:40.875","Text":"That\u0027s Part 1. Parts 2-4,"},{"Start":"01:40.875 ","End":"01:44.150","Text":"we\u0027ll do all of these together using this worksheet."},{"Start":"01:44.150 ","End":"01:45.740","Text":"Now we have just worked out"},{"Start":"01:45.740 ","End":"01:48.853","Text":"the ending balance or closing balance for the allowance for bad debts,"},{"Start":"01:48.853 ","End":"01:50.225","Text":"we did that in Part 1."},{"Start":"01:50.225 ","End":"01:53.330","Text":"That\u0027s 16,800 from Part 1."},{"Start":"01:53.330 ","End":"01:55.415","Text":"Now, what are the information we were given?"},{"Start":"01:55.415 ","End":"01:57.070","Text":"Let\u0027s go back to the question."},{"Start":"01:57.070 ","End":"02:02.870","Text":"Looking at the question, we were given figures for the 31st December 20X0: 110,000,"},{"Start":"02:02.870 ","End":"02:05.240","Text":"7,700, and 6,000."},{"Start":"02:05.240 ","End":"02:09.275","Text":"Those are all opening balances, gross accounts receivable,"},{"Start":"02:09.275 ","End":"02:10.355","Text":"allowance for bad debts,"},{"Start":"02:10.355 ","End":"02:14.420","Text":"and the advances from customers being unearned revenues; that\u0027s a liability."},{"Start":"02:14.420 ","End":"02:16.640","Text":"All those figures need to be included in"},{"Start":"02:16.640 ","End":"02:19.885","Text":"our worksheet as our opening balances, so let\u0027s put them in."},{"Start":"02:19.885 ","End":"02:23.000","Text":"Opening balance, 110,000 for the accounts receivable,"},{"Start":"02:23.000 ","End":"02:28.100","Text":"the 7,700 being a negative asset or a measurement asset,"},{"Start":"02:28.100 ","End":"02:30.560","Text":"allowance for bad debts; 7,700,"},{"Start":"02:30.560 ","End":"02:33.424","Text":"and then the advances 6,000 being a liability."},{"Start":"02:33.424 ","End":"02:34.880","Text":"What else were we given?"},{"Start":"02:34.880 ","End":"02:39.748","Text":"Well, 31st December 20X1 we were given the gross accounts receivable balance;"},{"Start":"02:39.748 ","End":"02:42.200","Text":"130,000, and the advances from customers"},{"Start":"02:42.200 ","End":"02:45.115","Text":"being the unearned revenue liability; 8 and 1/2 thousand."},{"Start":"02:45.115 ","End":"02:49.760","Text":"Now notice I didn\u0027t refer to the 5,600 and the 325,000,"},{"Start":"02:49.760 ","End":"02:52.854","Text":"and that\u0027s because those are not closing balances."},{"Start":"02:52.854 ","End":"02:58.445","Text":"The accounts written off during 20X1 and the total fee revenues recognized during 20X1,"},{"Start":"02:58.445 ","End":"03:03.880","Text":"they are not the balances that we\u0027re referring to being assets, liabilities, and equity."},{"Start":"03:03.880 ","End":"03:09.530","Text":"The 130,000 and 8 and 1/2 thousand are balances that we need to put into our worksheet."},{"Start":"03:09.530 ","End":"03:12.545","Text":"We go 130,000 and the 8 and 1/2 thousand."},{"Start":"03:12.545 ","End":"03:18.335","Text":"Now, let\u0027s look at those accounts written off during 20X1, they\u0027re 5,600."},{"Start":"03:18.335 ","End":"03:21.260","Text":"Now how are we going to process that into our worksheet?"},{"Start":"03:21.260 ","End":"03:25.370","Text":"Well, that movement was take them out of the accounts"},{"Start":"03:25.370 ","End":"03:32.100","Text":"receivable and we take them out of the allowance for bad debt."},{"Start":"03:34.280 ","End":"03:37.035","Text":"If you like; if you\u0027re interested,"},{"Start":"03:37.035 ","End":"03:45.530","Text":"what we\u0027ve done here in terms of journal entries is we have debited the allowance for"},{"Start":"03:45.530 ","End":"03:49.940","Text":"bad debts with the 5,600 to reduce"},{"Start":"03:49.940 ","End":"03:55.325","Text":"the allowance for bad debts and we have credited the accounts receivable,"},{"Start":"03:55.325 ","End":"03:58.300","Text":"asset account to reduce the accounts receivable."},{"Start":"03:58.300 ","End":"04:00.500","Text":"Both of these accounts are being reduced."},{"Start":"04:00.500 ","End":"04:03.455","Text":"Notice that the write-off does not affect equity."},{"Start":"04:03.455 ","End":"04:07.450","Text":"A write-off does not go straight to the expense account."},{"Start":"04:07.450 ","End":"04:13.835","Text":"Now, we had 7,700 being our predicted bad debt"},{"Start":"04:13.835 ","End":"04:20.045","Text":"at the beginning of the year and what we have now done is we have written off 5,600,"},{"Start":"04:20.045 ","End":"04:24.020","Text":"so the opening balance seems to be more pessimistic than needed"},{"Start":"04:24.020 ","End":"04:28.100","Text":"to have been because 7,700 was predicted to go bad,"},{"Start":"04:28.100 ","End":"04:31.640","Text":"but only 5,600 were predicted to go bad."},{"Start":"04:31.640 ","End":"04:35.720","Text":"But now that then means if you look at those 2 figures,"},{"Start":"04:35.720 ","End":"04:43.340","Text":"we should have 2,100 leftover in our allowance for bad debt but we don\u0027t."},{"Start":"04:43.340 ","End":"04:45.655","Text":"We have 16,800,"},{"Start":"04:45.655 ","End":"04:48.085","Text":"so what is this missing figure?"},{"Start":"04:48.085 ","End":"04:53.610","Text":"Well, you simply balanced it and it\u0027s 14,700 that is missing."},{"Start":"04:53.610 ","End":"04:59.070","Text":"Although we had 2,100 that should have been in"},{"Start":"04:59.070 ","End":"05:04.955","Text":"the account and we have a closing balance of 16,800 which we just worked out,"},{"Start":"05:04.955 ","End":"05:12.410","Text":"that means our allowance for bad debt needed to increase during the year by 14,700."},{"Start":"05:12.640 ","End":"05:21.490","Text":"That means then that we need to recognize an expense at the same time for the 14,700."},{"Start":"05:21.490 ","End":"05:27.697","Text":"In other words, what we\u0027re doing is we are debiting our doubtful debts or our bad debts;"},{"Start":"05:27.697 ","End":"05:29.450","Text":"if you like expense,"},{"Start":"05:29.450 ","End":"05:35.330","Text":"with 14,700 and we\u0027re crediting our doubtful debts or"},{"Start":"05:35.330 ","End":"05:42.610","Text":"bad debt allowance which is the negative asset with 14,700."},{"Start":"05:42.610 ","End":"05:48.770","Text":"When you predict what your doubtful debt is going to be at the end of the year,"},{"Start":"05:48.770 ","End":"05:52.280","Text":"that adjustment gets recognized as an expense."},{"Start":"05:52.280 ","End":"05:53.720","Text":"Notice the difference,"},{"Start":"05:53.720 ","End":"05:58.869","Text":"the actual write-off of a bad debt does not go through the expense,"},{"Start":"05:58.869 ","End":"06:01.610","Text":"but when you\u0027re predicting your bad debts,"},{"Start":"06:01.610 ","End":"06:04.770","Text":"that does go through the expense account."},{"Start":"06:04.770 ","End":"06:09.320","Text":"The next piece of information is assume that the opening balance of"},{"Start":"06:09.320 ","End":"06:13.565","Text":"the advances account was recognized as fee revenue during 20X1."},{"Start":"06:13.565 ","End":"06:15.080","Text":"What are we talking about here?"},{"Start":"06:15.080 ","End":"06:18.660","Text":"Well, it\u0027s the 31st December 20X0 balance of"},{"Start":"06:18.660 ","End":"06:22.460","Text":"6,000 that related to the advances from customers."},{"Start":"06:22.460 ","End":"06:25.160","Text":"In other words, these were the unearned revenues at the end of"},{"Start":"06:25.160 ","End":"06:28.460","Text":"20X0 that have since been earned."},{"Start":"06:28.460 ","End":"06:31.710","Text":"How do we record that on our worksheet?"},{"Start":"06:31.820 ","End":"06:34.445","Text":"Well, looking at the worksheet, we\u0027ve got"},{"Start":"06:34.445 ","End":"06:37.715","Text":"the advanced receipts now recognized as income."},{"Start":"06:37.715 ","End":"06:44.525","Text":"We have 6,000 coming out of our liability and being recognized as income in equity."},{"Start":"06:44.525 ","End":"06:48.410","Text":"Notice that these 6,000 in the equity column is a positive figure."},{"Start":"06:48.410 ","End":"06:50.225","Text":"In other words it\u0027s increasing equity,"},{"Start":"06:50.225 ","End":"06:52.600","Text":"so that is income."},{"Start":"06:52.600 ","End":"06:55.490","Text":"If you\u0027re interested in the journal entry,"},{"Start":"06:55.490 ","End":"07:00.320","Text":"what we\u0027ve done here is we have debited the liability; the advances account."},{"Start":"07:00.320 ","End":"07:03.560","Text":"We\u0027ve debited it because liabilities have a credit balance,"},{"Start":"07:03.560 ","End":"07:06.475","Text":"so by debiting it we are reducing it."},{"Start":"07:06.475 ","End":"07:10.580","Text":"It was 6,000 and then we\u0027re crediting the income,"},{"Start":"07:10.580 ","End":"07:12.995","Text":"so this is we\u0027re crediting the fee income."},{"Start":"07:12.995 ","End":"07:15.200","Text":"Income has a credit balance."},{"Start":"07:15.200 ","End":"07:17.840","Text":"Now if we have a look at this column we\u0027ve got"},{"Start":"07:17.840 ","End":"07:20.960","Text":"the opening balance of 6,000 and we\u0027ve subtracted 6,000,"},{"Start":"07:20.960 ","End":"07:23.540","Text":"so that should give us a balance of 0."},{"Start":"07:23.540 ","End":"07:26.900","Text":"However, we\u0027ve got a balance of 8 and 1/2 thousand,"},{"Start":"07:26.900 ","End":"07:29.650","Text":"so this is missing amount."},{"Start":"07:29.650 ","End":"07:32.307","Text":"The missing amount is obviously 8 and 1/2 thousand,"},{"Start":"07:32.307 ","End":"07:35.135","Text":"so the liability must have been increased during the year"},{"Start":"07:35.135 ","End":"07:39.515","Text":"by 8 and 1/2 thousand so that we have a closing balance of 8 and 1/2 thousand."},{"Start":"07:39.515 ","End":"07:44.060","Text":"That must have been the cash received in advance during the current year."},{"Start":"07:44.060 ","End":"07:47.140","Text":"This is the cash received in advance during the year,"},{"Start":"07:47.140 ","End":"07:48.708","Text":"8 and 1/2 thousand."},{"Start":"07:48.708 ","End":"07:52.010","Text":"What we\u0027ve done here if you\u0027re interested in the journal entries,"},{"Start":"07:52.010 ","End":"07:58.350","Text":"is we\u0027re debiting the cash to indicate that our cash asset has gone up by"},{"Start":"07:58.350 ","End":"08:01.940","Text":"8 and 1/2 thousand but we\u0027re saying here that we must"},{"Start":"08:01.940 ","End":"08:06.335","Text":"credit the advances account with 8 and 1/2 thousand."},{"Start":"08:06.335 ","End":"08:07.723","Text":"It\u0027s a liability,"},{"Start":"08:07.723 ","End":"08:11.120","Text":"and the reason we\u0027re doing that is because we haven\u0027t yet earned it."},{"Start":"08:11.120 ","End":"08:14.150","Text":"Now looking at the next piece of information that we\u0027re given,"},{"Start":"08:14.150 ","End":"08:19.326","Text":"total fee revenues recognized in the income statement for 20X1 are 325,000."},{"Start":"08:19.326 ","End":"08:21.485","Text":"How do we record that?"},{"Start":"08:21.485 ","End":"08:24.140","Text":"Now, what we must remember is that we\u0027ve been told that"},{"Start":"08:24.140 ","End":"08:27.110","Text":"the total fee revenue for the year is 325,000,"},{"Start":"08:27.110 ","End":"08:31.415","Text":"but we must notice that we\u0027ve already put 6,000 in as revenue for the year."},{"Start":"08:31.415 ","End":"08:34.520","Text":"That was the advances that we\u0027d received in a prior;"},{"Start":"08:34.520 ","End":"08:40.840","Text":"the 6,000, that we\u0027ve now reversed and recognized as income."},{"Start":"08:41.300 ","End":"08:47.710","Text":"That means that we need to process a further 319,000."},{"Start":"08:47.710 ","End":"08:50.340","Text":"We\u0027ve got 325 as our total revenue,"},{"Start":"08:50.340 ","End":"08:52.230","Text":"we\u0027ve already got 6,000 in there,"},{"Start":"08:52.230 ","End":"08:57.105","Text":"so we\u0027re going to have to add another 319,000 being the fee revenue for the current year."},{"Start":"08:57.105 ","End":"09:02.310","Text":"The 2 together, 6,000 and 319,000 gives us the 325,000."},{"Start":"09:02.310 ","End":"09:06.130","Text":"Now, what\u0027s the contra entry to that 319,000?"},{"Start":"09:06.130 ","End":"09:08.960","Text":"Here we\u0027re recognizing it as income,"},{"Start":"09:08.960 ","End":"09:10.220","Text":"but where does the other side go?"},{"Start":"09:10.220 ","End":"09:13.580","Text":"Well, we first put it into the accounts receivable."},{"Start":"09:13.580 ","End":"09:18.620","Text":"Notice we first assume that all revenue was due to a credit transaction."},{"Start":"09:18.620 ","End":"09:20.270","Text":"In other words, all the fees that we earned during"},{"Start":"09:20.270 ","End":"09:23.285","Text":"the year were originally given to our customers on credit."},{"Start":"09:23.285 ","End":"09:25.054","Text":"We always just assume that,"},{"Start":"09:25.054 ","End":"09:30.590","Text":"and it\u0027ll work itself out in the wash. Before I move on to the next stage,"},{"Start":"09:30.590 ","End":"09:33.365","Text":"I want to show you the journal entry if you\u0027re interested."},{"Start":"09:33.365 ","End":"09:40.510","Text":"This 319,000 is a debit to the accounts receivable of 319,000,"},{"Start":"09:40.510 ","End":"09:49.160","Text":"and that 319,000 in the income statement column is a credit to fee income of 319,000."},{"Start":"09:49.160 ","End":"09:54.860","Text":"Let\u0027s move on. Looking at this accounts receivable column if you add"},{"Start":"09:54.860 ","End":"10:01.045","Text":"the opening balance of 110 and subtract the 5,600 and then add the 319,000,"},{"Start":"10:01.045 ","End":"10:04.115","Text":"you will not get to 130,000."},{"Start":"10:04.115 ","End":"10:13.730","Text":"Add this up and then subtract 130,000 and you get to 293,400."},{"Start":"10:13.730 ","End":"10:18.815","Text":"This was greater than the 130,000 by 293,400."},{"Start":"10:18.815 ","End":"10:22.945","Text":"What is this? It must be the cash received from the debtors."},{"Start":"10:22.945 ","End":"10:25.050","Text":"What would the contra entry then be?"},{"Start":"10:25.050 ","End":"10:26.930","Text":"Well, it must be cash."},{"Start":"10:26.930 ","End":"10:28.425","Text":"What would the entry be?"},{"Start":"10:28.425 ","End":"10:32.200","Text":"Debit cash, 293,400,"},{"Start":"10:32.200 ","End":"10:37.640","Text":"and credit; the accounts receivable with 293,400."},{"Start":"10:37.640 ","End":"10:40.798","Text":"Your cash is going up, it\u0027s an asset,"},{"Start":"10:40.798 ","End":"10:45.770","Text":"and because we\u0027re crediting the accounts receivable we\u0027re reducing that asset."},{"Start":"10:45.770 ","End":"10:50.930","Text":"We\u0027ve filled everything in except for the totals for cash and the income statement."},{"Start":"10:50.930 ","End":"10:53.090","Text":"If we look at the cash, if we add that up,"},{"Start":"10:53.090 ","End":"10:59.575","Text":"it\u0027s 301,900 and the income statement or equity 310,300."},{"Start":"10:59.575 ","End":"11:05.236","Text":"Now notice that, that 301,900 and the 310,300,"},{"Start":"11:05.236 ","End":"11:10.655","Text":"that is simply the impact on the cash and profit and loss respectively."},{"Start":"11:10.655 ","End":"11:12.920","Text":"These are not balances, and the reason is we didn\u0027t"},{"Start":"11:12.920 ","End":"11:16.220","Text":"know what the opening balances were for those."},{"Start":"11:16.220 ","End":"11:18.935","Text":"However for the accounts receivable,"},{"Start":"11:18.935 ","End":"11:20.495","Text":"the allowance for bad debts,"},{"Start":"11:20.495 ","End":"11:23.600","Text":"and the advances,"},{"Start":"11:23.600 ","End":"11:25.170","Text":"we had the opening balances,"},{"Start":"11:25.170 ","End":"11:29.360","Text":"so therefore we\u0027ve been able to calculate those closing balances."},{"Start":"11:29.360 ","End":"11:31.953","Text":"In terms of this question;"},{"Start":"11:31.953 ","End":"11:35.415","Text":"professional service firm, there were 4 parts and let\u0027s just recap."},{"Start":"11:35.415 ","End":"11:39.320","Text":"Part 1 was we had to calculate the allowance for bad debt closing balance that was the"},{"Start":"11:39.320 ","End":"11:45.600","Text":"16,800 that you see here and Part 2 we had to work out what the bad debt expense was."},{"Start":"11:45.600 ","End":"11:49.262","Text":"Well, that was the reduction in the allowance of"},{"Start":"11:49.262 ","End":"11:53.470","Text":"bad debts that was then recognized as a bad debt expense."},{"Start":"11:53.470 ","End":"11:55.880","Text":"That\u0027s the bad debt expense here."},{"Start":"11:55.880 ","End":"11:58.790","Text":"Then Part 3, we had to calculate the total cash"},{"Start":"11:58.790 ","End":"12:03.155","Text":"received and that\u0027s this total cash received during the year."},{"Start":"12:03.155 ","End":"12:05.450","Text":"Then Part 4, we had to work out"},{"Start":"12:05.450 ","End":"12:12.050","Text":"the total cash received"},{"Start":"12:12.050 ","End":"12:16.100","Text":"from customers for revenue already recognized,"},{"Start":"12:16.100 ","End":"12:18.800","Text":"and that is the 293,400."},{"Start":"12:18.800 ","End":"12:22.910","Text":"It differs from this 301,900 because we were"},{"Start":"12:22.910 ","End":"12:27.895","Text":"asked for the total cash received from customers for revenue already recognized."},{"Start":"12:27.895 ","End":"12:32.241","Text":"The fees that I put in here of 319,000,"},{"Start":"12:32.241 ","End":"12:34.710","Text":"that revenue has already been recognized."},{"Start":"12:34.710 ","End":"12:39.589","Text":"This 8 and 1/2 thousand here is cash that was received,"},{"Start":"12:39.589 ","End":"12:41.840","Text":"but not for revenue that has been recognized."},{"Start":"12:41.840 ","End":"12:44.960","Text":"This was cash received in advance,"},{"Start":"12:44.960 ","End":"12:50.550","Text":"so it was recognized as a liability not as revenue."},{"Start":"12:50.550 ","End":"12:52.310","Text":"Just to recap then,"},{"Start":"12:52.310 ","End":"12:55.910","Text":"the total cash received from customers for revenue already"},{"Start":"12:55.910 ","End":"13:01.180","Text":"recognized that\u0027s the one you\u0027ll find in your accounts receivable account or column."},{"Start":"13:01.180 ","End":"13:03.870","Text":"That\u0027s the 293,400."},{"Start":"13:03.870 ","End":"13:06.535","Text":"But if we go back to Part 3,"},{"Start":"13:06.535 ","End":"13:09.260","Text":"the total cash received includes not only that"},{"Start":"13:09.260 ","End":"13:12.290","Text":"293,400 that you see"},{"Start":"13:12.290 ","End":"13:15.620","Text":"coming out of your accounts receivable to reduce how much they owe you,"},{"Start":"13:15.620 ","End":"13:17.870","Text":"it also includes the 8 and 1/2 thousand that was"},{"Start":"13:17.870 ","End":"13:22.740","Text":"received in advance so it was recognized as a liability."}],"ID":27493},{"Watched":false,"Name":"Sales returns","Duration":"29m 9s","ChapterTopicVideoID":26656,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.835","Text":"In this video, we will focus on the accounting for sales returns."},{"Start":"00:05.835 ","End":"00:08.310","Text":"You are no data where the customers buying"},{"Start":"00:08.310 ","End":"00:11.985","Text":"goods are entitled in many countries to return the goods,"},{"Start":"00:11.985 ","End":"00:14.805","Text":"and to receive a refund if they\u0027re paid in cash,"},{"Start":"00:14.805 ","End":"00:20.580","Text":"or to be removed from receivables if those goods were in fact purchased on credit."},{"Start":"00:20.580 ","End":"00:25.440","Text":"Therefore, the selling entity needs to take into account the possibility that"},{"Start":"00:25.440 ","End":"00:30.765","Text":"certain amounts of both cash and credit sales will need to be reversed,"},{"Start":"00:30.765 ","End":"00:36.165","Text":"and past experience can help in making the estimates required for this."},{"Start":"00:36.165 ","End":"00:39.220","Text":"Now recognizing expected return of goods"},{"Start":"00:39.220 ","End":"00:43.415","Text":"involves reducing the sales in the current period."},{"Start":"00:43.415 ","End":"00:46.520","Text":"Reduction of the sales in the current period will involve"},{"Start":"00:46.520 ","End":"00:50.255","Text":"a debit entry to the sales account."},{"Start":"00:50.255 ","End":"00:52.755","Text":"At the same time creating,"},{"Start":"00:52.755 ","End":"00:57.370","Text":"respective credit sales an allowance for sales returns."},{"Start":"00:57.370 ","End":"01:03.110","Text":"That allowance for sales returns is a contra or negative asset account,"},{"Start":"01:03.110 ","End":"01:05.270","Text":"much the same way as the allowance for"},{"Start":"01:05.270 ","End":"01:09.380","Text":"doubtful debts is a negative or contra-asset account."},{"Start":"01:09.380 ","End":"01:12.985","Text":"This will be a credit to that particular account."},{"Start":"01:12.985 ","End":"01:15.435","Text":"In respect of cash sales,"},{"Start":"01:15.435 ","End":"01:23.610","Text":"a credit to a account called a refund liability, as a credit."},{"Start":"01:23.610 ","End":"01:25.980","Text":"At the same time,"},{"Start":"01:25.980 ","End":"01:31.220","Text":"clearly the entity needs to anticipate the return of the merchandise that will"},{"Start":"01:31.220 ","End":"01:37.010","Text":"be returned by the customer when these goods are ultimately returned."},{"Start":"01:37.010 ","End":"01:41.450","Text":"This involves creating a right of return asset,"},{"Start":"01:41.450 ","End":"01:43.400","Text":"which is going to be debited,"},{"Start":"01:43.400 ","End":"01:46.535","Text":"and at the same time in the current period,"},{"Start":"01:46.535 ","End":"01:50.525","Text":"reducing the cost of sales with the credit."},{"Start":"01:50.525 ","End":"01:52.190","Text":"Note in the current period,"},{"Start":"01:52.190 ","End":"01:56.280","Text":"the sales account is being debited to reduce it,"},{"Start":"01:56.280 ","End":"02:03.635","Text":"and the cost of sales account is being credited to also reduce the cost of sales."},{"Start":"02:03.635 ","End":"02:05.870","Text":"The cost of sales is a debit entry,"},{"Start":"02:05.870 ","End":"02:07.790","Text":"or debit account, so therefore,"},{"Start":"02:07.790 ","End":"02:12.965","Text":"putting a credit against the account also reduces the cost of sales."},{"Start":"02:12.965 ","End":"02:18.860","Text":"The large British clothing retailer Next does create such an asset,"},{"Start":"02:18.860 ","End":"02:22.915","Text":"which recalls a right of return asset."},{"Start":"02:22.915 ","End":"02:26.495","Text":"He has an extract from the groups accounting policies."},{"Start":"02:26.495 ","End":"02:30.560","Text":"It says \"It is the group\u0027s policy to sell its products to"},{"Start":"02:30.560 ","End":"02:35.615","Text":"the retail customer with a right to return within 14 days.\""},{"Start":"02:35.615 ","End":"02:38.210","Text":"Goes on to say, \"A separate right of"},{"Start":"02:38.210 ","End":"02:41.555","Text":"return asset is created on the face of the balance sheet,"},{"Start":"02:41.555 ","End":"02:46.780","Text":"which represents the right to recover that product from the customer."},{"Start":"02:46.780 ","End":"02:50.690","Text":"The refund liability due to customers"},{"Start":"02:50.690 ","End":"02:54.515","Text":"on return of their goods is recognized either,\" and they go on to say,"},{"Start":"02:54.515 ","End":"03:00.235","Text":"\"as a component of trade payables and other liabilities for cash payments.\""},{"Start":"03:00.235 ","End":"03:03.675","Text":"There would be, in fact the refund liability,"},{"Start":"03:03.675 ","End":"03:07.025","Text":"or as a deduction from customer receivables."},{"Start":"03:07.025 ","End":"03:11.920","Text":"That in fact will be the allowance for sales returns."},{"Start":"03:11.920 ","End":"03:16.080","Text":"Take a look at an example, illustrate this."},{"Start":"03:16.080 ","End":"03:18.870","Text":"On its 2020 balance sheet,"},{"Start":"03:18.870 ","End":"03:26.195","Text":"Next estimates at 55.3 million of sales will be returned by customers."},{"Start":"03:26.195 ","End":"03:30.825","Text":"It\u0027s quite a large number. Of that 55.3 million,"},{"Start":"03:30.825 ","End":"03:36.155","Text":"49.9 million relates to credit sales within accounts receivable."},{"Start":"03:36.155 ","End":"03:38.750","Text":"Just note this down here."},{"Start":"03:38.750 ","End":"03:45.695","Text":"There is an estimation of 55.3 million of sales to be returned."},{"Start":"03:45.695 ","End":"03:53.459","Text":"Of that, 49.9 million relates to credit sales."},{"Start":"03:54.050 ","End":"03:56.490","Text":"Therefore the balance,"},{"Start":"03:56.490 ","End":"04:03.360","Text":"which is 5.4 million must relate to the cash sales."},{"Start":"04:03.560 ","End":"04:07.670","Text":"You\u0027re told the company also estimates that the cost of"},{"Start":"04:07.670 ","End":"04:12.125","Text":"merchandise to be returned is 24.2 million."},{"Start":"04:12.125 ","End":"04:13.895","Text":"That is a number we will use,"},{"Start":"04:13.895 ","End":"04:15.500","Text":"you will see in the next slide,"},{"Start":"04:15.500 ","End":"04:18.305","Text":"to create the right of return asset."},{"Start":"04:18.305 ","End":"04:25.195","Text":"It is 1.455.5 million in gross accounts receivable."},{"Start":"04:25.195 ","End":"04:27.855","Text":"The question we have been asked to consider here,"},{"Start":"04:27.855 ","End":"04:33.245","Text":"is how Next should record these expected sales returns."},{"Start":"04:33.245 ","End":"04:37.700","Text":"Looking now at recording these transactions,"},{"Start":"04:37.700 ","End":"04:41.035","Text":"expected sales returns on the worksheet."},{"Start":"04:41.035 ","End":"04:45.395","Text":"I\u0027ve repeated here the information from the question so we can have a look at it."},{"Start":"04:45.395 ","End":"04:52.910","Text":"We know that 55.3 million worth of sales is expected to be returned by customers."},{"Start":"04:52.910 ","End":"04:56.180","Text":"Therefore, on the current period, other words,"},{"Start":"04:56.180 ","End":"05:00.685","Text":"the period ending for their 2020 financial year,"},{"Start":"05:00.685 ","End":"05:04.565","Text":"we need to process a debit to sales."},{"Start":"05:04.565 ","End":"05:07.910","Text":"A debit to sales, a reduction in the sales of the total"},{"Start":"05:07.910 ","End":"05:12.170","Text":"expected returns of 55.3 million."},{"Start":"05:12.170 ","End":"05:13.820","Text":"That\u0027ll be remember,"},{"Start":"05:13.820 ","End":"05:17.325","Text":"a debit to sales of that we told"},{"Start":"05:17.325 ","End":"05:24.440","Text":"49.9 million relates to credit sales."},{"Start":"05:24.440 ","End":"05:28.250","Text":"For that we need to create an allowance for sales returns."},{"Start":"05:28.250 ","End":"05:31.805","Text":"Lands for sales returns as a credit and negative asset."},{"Start":"05:31.805 ","End":"05:38.210","Text":"We can create a credit of 49.9 million."},{"Start":"05:38.210 ","End":"05:42.050","Text":"That\u0027s a credit to the allowance for sales returns account."},{"Start":"05:42.050 ","End":"05:50.740","Text":"The balance of 5.4 goes to the refund liability clearly also as a credit."},{"Start":"05:50.740 ","End":"05:57.680","Text":"At the same time, we need to account for the expected cost of the returned merchandise."},{"Start":"05:57.680 ","End":"06:03.050","Text":"We are told in the question that the estimation of"},{"Start":"06:03.050 ","End":"06:10.090","Text":"the cost of that inventory which will be returned, there\u0027s 24.2 million."},{"Start":"06:10.090 ","End":"06:17.440","Text":"We therefore create an asset called a right of return asset for 24.2 million,"},{"Start":"06:17.440 ","End":"06:20.130","Text":"which will clearly be a debit."},{"Start":"06:20.130 ","End":"06:22.235","Text":"At the same time,"},{"Start":"06:22.235 ","End":"06:28.895","Text":"we will credit the cost of sales for 24.2 million."},{"Start":"06:28.895 ","End":"06:30.890","Text":"That\u0027ll be a credit to cost of sales."},{"Start":"06:30.890 ","End":"06:34.985","Text":"Therefore clearly reducing the cost of sales amount."},{"Start":"06:34.985 ","End":"06:40.670","Text":"Looking at the balances which will appear at the end of the 2020 financial year,"},{"Start":"06:40.670 ","End":"06:46.490","Text":"there\u0027ll clearly be a right of return asset of 24.2 million."},{"Start":"06:46.490 ","End":"06:48.980","Text":"I\u0027m just going to enter the amount for"},{"Start":"06:48.980 ","End":"06:53.130","Text":"the receivable because we will need this for the next example."},{"Start":"06:53.260 ","End":"06:58.835","Text":"1,455.5 million in accounts receivable."},{"Start":"06:58.835 ","End":"07:02.240","Text":"The allowance for sales returns will be the amount we"},{"Start":"07:02.240 ","End":"07:06.215","Text":"have entered in here at 49.9 million,"},{"Start":"07:06.215 ","End":"07:08.495","Text":"clearly as a negative asset."},{"Start":"07:08.495 ","End":"07:14.210","Text":"The refund liability will be shown at the amount of 5.4 million,"},{"Start":"07:14.210 ","End":"07:22.440","Text":"and the reduction in gross profit caused by the reduction in sales,"},{"Start":"07:22.440 ","End":"07:25.095","Text":"and the reduction in cost of sales,"},{"Start":"07:25.095 ","End":"07:30.817","Text":"is a net amount here of 31.1 million."},{"Start":"07:30.817 ","End":"07:39.475","Text":"Looking at the published financial statements of Next for the 2020 financial year,"},{"Start":"07:39.475 ","End":"07:45.760","Text":"you will see what they refer to as a refund liability."},{"Start":"07:45.760 ","End":"07:50.050","Text":"Now they referred to here as a refund liability,"},{"Start":"07:50.050 ","End":"07:54.415","Text":"is in fact the allowance for sales returns,"},{"Start":"07:54.415 ","End":"07:59.170","Text":"it\u0027s offset against the customer\u0027s receivables against"},{"Start":"07:59.170 ","End":"08:04.945","Text":"the asset accounts receivable as the negative asset interest."},{"Start":"08:04.945 ","End":"08:06.940","Text":"Note that below that,"},{"Start":"08:06.940 ","End":"08:12.175","Text":"Next shows an allowance for expected credit losses,"},{"Start":"08:12.175 ","End":"08:14.725","Text":"that is the allowance for doubtful debts,"},{"Start":"08:14.725 ","End":"08:22.195","Text":"which we have seen in earlier examples and earlier slides."},{"Start":"08:22.195 ","End":"08:26.770","Text":"This thing of 1,234.1"},{"Start":"08:26.770 ","End":"08:31.120","Text":"million is the amount that will be sitting on the balance sheet of Next."},{"Start":"08:31.120 ","End":"08:32.290","Text":"In other words,"},{"Start":"08:32.290 ","End":"08:35.290","Text":"the gross receivables of this amount here of"},{"Start":"08:35.290 ","End":"08:41.770","Text":"1,455.5 less the allowance for sales returns called here"},{"Start":"08:41.770 ","End":"08:47.440","Text":"refund liability of 49.9 and also this"},{"Start":"08:47.440 ","End":"08:53.335","Text":"the allowance of credit losses or the allowance for doubtful debts of 171.5,"},{"Start":"08:53.335 ","End":"09:00.040","Text":"giving the net amount on the balance sheet of 1,234.1."},{"Start":"09:00.040 ","End":"09:03.835","Text":"As part of the trade payables and other liabilities,"},{"Start":"09:03.835 ","End":"09:11.680","Text":"you will see that Next records a refund liability and this in fact is liability in"},{"Start":"09:11.680 ","End":"09:16.000","Text":"respective cash sales and that is the 5.4"},{"Start":"09:16.000 ","End":"09:21.955","Text":"which we saw on our working in a previous slide."},{"Start":"09:21.955 ","End":"09:29.005","Text":"Now that you\u0027ve seen how to record the allowance for sales returns and refund liability,"},{"Start":"09:29.005 ","End":"09:33.100","Text":"we need to consider what happens in later years."},{"Start":"09:33.100 ","End":"09:37.030","Text":"The actual amount of returns is going"},{"Start":"09:37.030 ","End":"09:41.800","Text":"to inevitably differ from the expected amount of return."},{"Start":"09:41.800 ","End":"09:44.435","Text":"Now similar to bad debts expense,"},{"Start":"09:44.435 ","End":"09:48.540","Text":"that difference is shown on the income statement in"},{"Start":"09:48.540 ","End":"09:53.400","Text":"that subsequent year when uncertainty and the amount is resolved."},{"Start":"09:53.400 ","End":"09:56.825","Text":"The following examples will clarify this."},{"Start":"09:56.825 ","End":"10:00.925","Text":"This example follows on from the previous example,"},{"Start":"10:00.925 ","End":"10:04.000","Text":"taking the ending balances of Next at"},{"Start":"10:04.000 ","End":"10:07.510","Text":"the end of the 2020 financial year and then"},{"Start":"10:07.510 ","End":"10:12.910","Text":"considers transactions in the 2021 financial year."},{"Start":"10:12.910 ","End":"10:20.320","Text":"You should recognize the ending balances from the end of 2020 from the previous example."},{"Start":"10:20.320 ","End":"10:27.535","Text":"Remember, we had a right of return asset at 24.2,"},{"Start":"10:27.535 ","End":"10:30.910","Text":"we had the allowance for sales returns,"},{"Start":"10:30.910 ","End":"10:34.765","Text":"the negative asset at 49.9,"},{"Start":"10:34.765 ","End":"10:37.675","Text":"and we had a refund liability of"},{"Start":"10:37.675 ","End":"10:43.345","Text":"5.4 as being the relevant numbers to bear in mind at this point."},{"Start":"10:43.345 ","End":"10:46.105","Text":"Now take a look at the information given."},{"Start":"10:46.105 ","End":"10:49.255","Text":"There were 3 points; 1, 2, 3."},{"Start":"10:49.255 ","End":"10:51.235","Text":"In point number 1,"},{"Start":"10:51.235 ","End":"10:57.310","Text":"we are given information relating to the year 2021 and"},{"Start":"10:57.310 ","End":"11:04.705","Text":"the amount of credit customers and cash customers who returned their purchases."},{"Start":"11:04.705 ","End":"11:07.150","Text":"In point number 2,"},{"Start":"11:07.150 ","End":"11:15.190","Text":"we have a look at the cash received and the credit sales in that 2021 year."},{"Start":"11:15.190 ","End":"11:17.365","Text":"Then point number 3,"},{"Start":"11:17.365 ","End":"11:20.740","Text":"we looked at the estimation in relation to"},{"Start":"11:20.740 ","End":"11:26.995","Text":"the expected returns based on the numbers at the end of 2021,"},{"Start":"11:26.995 ","End":"11:32.785","Text":"in other words, the returns that Next expect in the 2022 year,"},{"Start":"11:32.785 ","End":"11:38.815","Text":"and we will see how to account for that in relation to the opening balances."},{"Start":"11:38.815 ","End":"11:42.520","Text":"We will now consider each of the points 1,"},{"Start":"11:42.520 ","End":"11:44.515","Text":"2, 3 in turn,"},{"Start":"11:44.515 ","End":"11:46.120","Text":"but before we do so,"},{"Start":"11:46.120 ","End":"11:50.910","Text":"we need to enter the opening balances for the 2021 year."},{"Start":"11:50.910 ","End":"11:55.265","Text":"In other words, those closing balances from the end of 2020."},{"Start":"11:55.265 ","End":"12:03.110","Text":"You will recall that the right of return assets had a balance of 24.2,"},{"Start":"12:03.180 ","End":"12:11.200","Text":"the accounts receivable balance of 1,455.5,"},{"Start":"12:11.200 ","End":"12:12.715","Text":"the negative asset,"},{"Start":"12:12.715 ","End":"12:14.875","Text":"the allowance for sales returns,"},{"Start":"12:14.875 ","End":"12:17.960","Text":"had a balance of 49.9,"},{"Start":"12:18.060 ","End":"12:24.610","Text":"and the refund liability had a balance of 5.4."},{"Start":"12:24.610 ","End":"12:28.315","Text":"Turning now to point number 1 and we\u0027ll look at"},{"Start":"12:28.315 ","End":"12:33.595","Text":"each piece of information in point number 1 in turn."},{"Start":"12:33.595 ","End":"12:37.630","Text":"The first piece of information we need to consider from point number"},{"Start":"12:37.630 ","End":"12:41.830","Text":"1 is that it says in 2021,"},{"Start":"12:41.830 ","End":"12:49.630","Text":"48.2 million of credit customers return the goods purchased."},{"Start":"12:49.630 ","End":"12:52.045","Text":"If customers are returning goods,"},{"Start":"12:52.045 ","End":"12:55.194","Text":"the amount they owe the entity must decrease,"},{"Start":"12:55.194 ","End":"12:58.510","Text":"and therefore we need to decrease the accounts receivable."},{"Start":"12:58.510 ","End":"13:03.910","Text":"We will put a decrease against the accounts receivable of 48.2."},{"Start":"13:03.910 ","End":"13:07.300","Text":"Remember to decrease the accounts receivable requires"},{"Start":"13:07.300 ","End":"13:12.535","Text":"a credit entry because receivables are an asset with debit balances."},{"Start":"13:12.535 ","End":"13:19.070","Text":"The other side of the entry will go against that allowance for sales returns."},{"Start":"13:19.260 ","End":"13:24.010","Text":"Remember, it\u0027s a negative asset with a 49.9"},{"Start":"13:24.010 ","End":"13:30.650","Text":"balance and therefore we need to enter an amount of the 48.2,"},{"Start":"13:30.750 ","End":"13:34.390","Text":"and this will clearly be a debit to"},{"Start":"13:34.390 ","End":"13:38.875","Text":"this particular account because we are reducing that negative asset,"},{"Start":"13:38.875 ","End":"13:41.920","Text":"reducing the credit balance."},{"Start":"13:41.920 ","End":"13:47.110","Text":"Therefore, to sum up, the entry to take into account the actual returns of"},{"Start":"13:47.110 ","End":"13:52.750","Text":"48.2 million as a debit to the allowance for sales returns account,"},{"Start":"13:52.750 ","End":"13:56.665","Text":"the negative asset account debit of 48.2,"},{"Start":"13:56.665 ","End":"14:04.165","Text":"and a credit to reduce the amount of the accounts receivable of the same, clearly 48.2."},{"Start":"14:04.165 ","End":"14:06.715","Text":"Then also in point number 1,"},{"Start":"14:06.715 ","End":"14:13.420","Text":"we\u0027re told that 3.9 million of cash customers returned their purchases."},{"Start":"14:13.420 ","End":"14:19.390","Text":"Therefore, the entity has to pay out 3.9 million in cash, therefore,"},{"Start":"14:19.390 ","End":"14:22.135","Text":"there\u0027ll be a reduction in the asset cash,"},{"Start":"14:22.135 ","End":"14:27.145","Text":"so we have to put a negative 3.9 against the cash balance and remember,"},{"Start":"14:27.145 ","End":"14:30.910","Text":"that has to be a credit because we are paying out cash."},{"Start":"14:30.910 ","End":"14:33.730","Text":"Now the refund liability,"},{"Start":"14:33.730 ","End":"14:39.025","Text":"the credit balance is reducing because of the fact that"},{"Start":"14:39.025 ","End":"14:44.515","Text":"the goods have not been returned by the customers,"},{"Start":"14:44.515 ","End":"14:50.080","Text":"so 3.9 would go against the refund liability and that"},{"Start":"14:50.080 ","End":"14:56.485","Text":"clearly is going to be a debit to the refund liability account."},{"Start":"14:56.485 ","End":"14:58.870","Text":"Therefore, the accounting entry,"},{"Start":"14:58.870 ","End":"15:02.290","Text":"just to sum up will be a debit to the refund liability of"},{"Start":"15:02.290 ","End":"15:06.070","Text":"3.9 to reduce that liability because the goods have now been"},{"Start":"15:06.070 ","End":"15:08.890","Text":"returned by the customers and a credit to"},{"Start":"15:08.890 ","End":"15:13.765","Text":"cash because cash is being paid out to those customers."},{"Start":"15:13.765 ","End":"15:18.655","Text":"The last piece of information that we\u0027re told in point number 1,"},{"Start":"15:18.655 ","End":"15:25.150","Text":"is that the cost of the merchandise return was 22 million pounds."},{"Start":"15:25.150 ","End":"15:32.410","Text":"Therefore, the asset inventory has to increase by 22 million,"},{"Start":"15:32.410 ","End":"15:36.730","Text":"that will clearly be a debit increase the asset inventory and"},{"Start":"15:36.730 ","End":"15:42.730","Text":"the right of return asset needs to reduce because the goods have now been returned,"},{"Start":"15:42.730 ","End":"15:46.330","Text":"so we have to reduce the right return asset by"},{"Start":"15:46.330 ","End":"15:52.495","Text":"22.0 and that clearly is going to be a credit to that particular account."},{"Start":"15:52.495 ","End":"15:58.090","Text":"To sum up that last entry for the cost of the merchandise returned,"},{"Start":"15:58.090 ","End":"16:02.605","Text":"a debit to the asset account inventory for 22.0 million,"},{"Start":"16:02.605 ","End":"16:07.645","Text":"and a credit to the asset account right of return asset for the same amount,"},{"Start":"16:07.645 ","End":"16:10.930","Text":"clearly of 22 million pounds."},{"Start":"16:10.930 ","End":"16:17.530","Text":"These 3 separate transactions all in point number 1 had been recorded."},{"Start":"16:17.530 ","End":"16:21.280","Text":"You will see on 1 line in the accounting worksheet,"},{"Start":"16:21.280 ","End":"16:25.420","Text":"in there, they are 3 separate transactions."},{"Start":"16:25.420 ","End":"16:26.920","Text":"You could\u0027ve, if you wished,"},{"Start":"16:26.920 ","End":"16:30.025","Text":"done them on 3 separate lines."},{"Start":"16:30.025 ","End":"16:34.330","Text":"Point number 2 is relatively straightforward and"},{"Start":"16:34.330 ","End":"16:39.025","Text":"point number 2 looks at the cash received from credit customers,"},{"Start":"16:39.025 ","End":"16:47.305","Text":"other words, customers paying the amount that they owe and the credit sales of 1,275.4."},{"Start":"16:47.305 ","End":"16:49.885","Text":"Let\u0027s process those entries."},{"Start":"16:49.885 ","End":"16:55.000","Text":"Cash received from customers of 1,407.3,"},{"Start":"16:55.000 ","End":"16:59.130","Text":"that will simply be recorded as an increase in cash,"},{"Start":"16:59.410 ","End":"17:06.695","Text":"1407.3 clearly is a debit into cash."},{"Start":"17:06.695 ","End":"17:09.335","Text":"Because its customers paying us,"},{"Start":"17:09.335 ","End":"17:14.429","Text":"that will clearly be a reduction in the asset accounts receivable,"},{"Start":"17:15.630 ","End":"17:21.435","Text":"1407.3 which must be a credit to accounts receivable."},{"Start":"17:21.435 ","End":"17:26.560","Text":"Then the credit sales of 1,275.4,"},{"Start":"17:26.560 ","End":"17:30.980","Text":"these recorded clearly as an increase to accounts receivable,"},{"Start":"17:30.980 ","End":"17:34.821","Text":"so increase here of 1,275.4."},{"Start":"17:34.821 ","End":"17:40.120","Text":"Let\u0027s clear debit now to increase the asset accounts receivable,"},{"Start":"17:40.120 ","End":"17:45.670","Text":"and the credit entry goes into the sales as part of the income statement"},{"Start":"17:45.670 ","End":"17:54.685","Text":"1,275.4 that\u0027s clearly a credit entry representing the income earned in the period."},{"Start":"17:54.685 ","End":"17:58.885","Text":"In order to properly understand the point Number 3,"},{"Start":"17:58.885 ","End":"18:03.010","Text":"I\u0027ve created an extract from the worksheet focusing on"},{"Start":"18:03.010 ","End":"18:07.885","Text":"the specific accounts being the right return asset,"},{"Start":"18:07.885 ","End":"18:10.795","Text":"the allowance for sales returns,"},{"Start":"18:10.795 ","End":"18:13.480","Text":"and the refund liability."},{"Start":"18:13.480 ","End":"18:15.730","Text":"Before we start with the details,"},{"Start":"18:15.730 ","End":"18:18.970","Text":"we need to just populate the worksheet with"},{"Start":"18:18.970 ","End":"18:22.795","Text":"the opening balances that you\u0027re already familiar with."},{"Start":"18:22.795 ","End":"18:29.900","Text":"Remember the right return asset had an opening balance of 24.2."},{"Start":"18:30.540 ","End":"18:35.365","Text":"The allowance for sales returns had an opening balance,"},{"Start":"18:35.365 ","End":"18:38.950","Text":"a negative asset of 49.9,"},{"Start":"18:38.950 ","End":"18:41.545","Text":"and the refund liability,"},{"Start":"18:41.545 ","End":"18:45.835","Text":"an opening balance, a liability of 5.4."},{"Start":"18:45.835 ","End":"18:49.990","Text":"It\u0027ll be useful to insert the relevant debits or credits against"},{"Start":"18:49.990 ","End":"18:55.300","Text":"these accounts as this will help us understand the transactions that followed."},{"Start":"18:55.300 ","End":"18:59.665","Text":"Remember the right return asset as an asset has a debit balance."},{"Start":"18:59.665 ","End":"19:05.590","Text":"The allowance for sales returns as a negative asset has a credit balance and"},{"Start":"19:05.590 ","End":"19:11.875","Text":"the refund liability as a liability has a credit balance as well."},{"Start":"19:11.875 ","End":"19:17.320","Text":"We now need to also populate the actual returns,"},{"Start":"19:17.320 ","End":"19:22.615","Text":"which we accounted for when we looked at point Number 1 in a few moments ago."},{"Start":"19:22.615 ","End":"19:25.285","Text":"Remember from point Number 1,"},{"Start":"19:25.285 ","End":"19:31.060","Text":"there was 48.2 million of credit customers who return goods."},{"Start":"19:31.060 ","End":"19:39.265","Text":"The 48.2 million was reversed from the allowance for sales returns 48.2."},{"Start":"19:39.265 ","End":"19:42.715","Text":"Also remember, there was the 3.9"},{"Start":"19:42.715 ","End":"19:48.000","Text":"of cash customers returning their goods and we therefore had to remove"},{"Start":"19:48.000 ","End":"19:58.235","Text":"3.9 from the refund liability and the cost of return merchandise was 22."},{"Start":"19:58.235 ","End":"20:04.765","Text":"Therefore, we had to remove 22 from the right of return asset."},{"Start":"20:04.765 ","End":"20:08.935","Text":"Note, I haven\u0027t looked at the other side all these 3 entries."},{"Start":"20:08.935 ","End":"20:11.725","Text":"I haven\u0027t looked at the impact on the imagery account,"},{"Start":"20:11.725 ","End":"20:15.910","Text":"the accounts receivable account or the cash account."},{"Start":"20:15.910 ","End":"20:20.665","Text":"I\u0027m simply focusing on these 3 relevant columns over here."},{"Start":"20:20.665 ","End":"20:24.505","Text":"Again to put it in the debit or credit, which can be useful."},{"Start":"20:24.505 ","End":"20:29.650","Text":"The 22 reduction in the right return asset would have been a credit."},{"Start":"20:29.650 ","End":"20:34.960","Text":"The 48.2 reduction in the allowance for sales returns would have been"},{"Start":"20:34.960 ","End":"20:42.295","Text":"a debit and a 3.9 reduction and refund liability would also have been a debit."},{"Start":"20:42.295 ","End":"20:45.085","Text":"Now to the information and point Number 3,"},{"Start":"20:45.085 ","End":"20:47.080","Text":"at the end of 2021,"},{"Start":"20:47.080 ","End":"20:53.125","Text":"next estimated 58.6 million of sales will be returned by customers."},{"Start":"20:53.125 ","End":"20:55.195","Text":"The total is not so important."},{"Start":"20:55.195 ","End":"21:02.035","Text":"What is important is the amount of the credit sales and the cash sales of 58.6."},{"Start":"21:02.035 ","End":"21:05.935","Text":"Looking firstly at the credit sales,"},{"Start":"21:05.935 ","End":"21:15.040","Text":"we\u0027re told that 51.8 million of that 58.6 relates to expected returns of credit sale."},{"Start":"21:15.040 ","End":"21:20.924","Text":"Note importantly, the 51.8 is the balance we want at the end of the period."},{"Start":"21:20.924 ","End":"21:27.085","Text":"Therefore, if I put in here a closing balance at the end of the period,"},{"Start":"21:27.085 ","End":"21:31.000","Text":"the amounts the balance we want in the allowance for sales returns"},{"Start":"21:31.000 ","End":"21:35.125","Text":"account is going to be and because it\u0027s a negative asset,"},{"Start":"21:35.125 ","End":"21:38.950","Text":"we want a balance of 51.8,"},{"Start":"21:38.950 ","End":"21:41.575","Text":"remember, as a credit balance."},{"Start":"21:41.575 ","End":"21:45.606","Text":"Now what is the balance in the account at this point in time?"},{"Start":"21:45.606 ","End":"21:51.250","Text":"We had to just draw an interim balance in the allowance for sales returns account,"},{"Start":"21:51.250 ","End":"21:55.090","Text":"you\u0027ll see there was a 49.9 credit."},{"Start":"21:55.090 ","End":"22:00.010","Text":"We process a 48.2 debit with the actual return."},{"Start":"22:00.010 ","End":"22:06.715","Text":"The interim balance in this account is 1.7 as a credit balance."},{"Start":"22:06.715 ","End":"22:16.225","Text":"Now if 1.7 is a credit balance and the balance we want is 51.8 credit balance."},{"Start":"22:16.225 ","End":"22:18.565","Text":"Therefore, we need to process"},{"Start":"22:18.565 ","End":"22:24.355","Text":"an adjustment to the allowance for sales returns to increase it."},{"Start":"22:24.355 ","End":"22:33.370","Text":"We increase it by the amount of 50.1 credit is the amount we"},{"Start":"22:33.370 ","End":"22:42.250","Text":"need to move the balance from a 1.7 credit balance to a 51.8 credit balance,"},{"Start":"22:42.250 ","End":"22:45.695","Text":"therefore, an increase of 50.1."},{"Start":"22:45.695 ","End":"22:49.440","Text":"Looking at the expected returns of cash sales,"},{"Start":"22:49.440 ","End":"22:52.395","Text":"these are 6.8 million."},{"Start":"22:52.395 ","End":"23:01.090","Text":"We want a 6.8 million as a credit balance in the refund liability account."},{"Start":"23:01.090 ","End":"23:06.010","Text":"Now again, look at the balance at this point in time in this account,"},{"Start":"23:06.010 ","End":"23:09.715","Text":"there was a 5.4 credit as the opening balance."},{"Start":"23:09.715 ","End":"23:17.515","Text":"We processed a 3.9 debit when we accounted for the actual returns of cash sales."},{"Start":"23:17.515 ","End":"23:19.465","Text":"Therefore, the balance in this account,"},{"Start":"23:19.465 ","End":"23:21.040","Text":"at this point in time,"},{"Start":"23:21.040 ","End":"23:24.010","Text":"is a 1.5 credit."},{"Start":"23:24.010 ","End":"23:30.985","Text":"Now, if the balance is the 1.5 credit and we require a balance of 6.8 credit,"},{"Start":"23:30.985 ","End":"23:39.340","Text":"particularly needs to be a movement of 5.3 as a further credit into this account."},{"Start":"23:39.340 ","End":"23:43.600","Text":"Therefore, the effect on the income statement and the reduction in"},{"Start":"23:43.600 ","End":"23:50.230","Text":"sales must be a debit of the total of these 2 amounts."},{"Start":"23:50.230 ","End":"23:57.775","Text":"The total of the 50.1 and the 5.3 must be a debit gain sales in the amount"},{"Start":"23:57.775 ","End":"24:05.814","Text":"of 55.4 debit going against the sales."},{"Start":"24:05.814 ","End":"24:12.280","Text":"Let\u0027s just sum up that entry because might be and might look quite complicated."},{"Start":"24:12.280 ","End":"24:18.475","Text":"We are processing a debit to sale of 55.4."},{"Start":"24:18.475 ","End":"24:23.350","Text":"We\u0027re processing a credit to the allowance account,"},{"Start":"24:23.350 ","End":"24:29.005","Text":"is the allowance for sales returns of 50.1"},{"Start":"24:29.005 ","End":"24:35.125","Text":"and we are processing a credit to the refund liability."},{"Start":"24:35.125 ","End":"24:37.765","Text":"This allowance was the negative asset remember,"},{"Start":"24:37.765 ","End":"24:43.390","Text":"a credit to the refund liability of 5.3."},{"Start":"24:43.390 ","End":"24:45.580","Text":"Finally, your point Number 3,"},{"Start":"24:45.580 ","End":"24:54.625","Text":"we are told that the estimate of the cost of imagery to be returned is 24.3 million."},{"Start":"24:54.625 ","End":"24:57.640","Text":"In the same way as we did this for the allowance for"},{"Start":"24:57.640 ","End":"25:00.385","Text":"sales returns and the refund liability,"},{"Start":"25:00.385 ","End":"25:06.505","Text":"we know we want a closing balance of 24.3 million"},{"Start":"25:06.505 ","End":"25:14.725","Text":"as a right return asset clearly a debit balance in the right return asset account."},{"Start":"25:14.725 ","End":"25:17.770","Text":"What\u0027s the balance this point in time?"},{"Start":"25:17.770 ","End":"25:21.355","Text":"Well, there was a 24.2 balanced to begin with,"},{"Start":"25:21.355 ","End":"25:25.045","Text":"we subtracted 22 with the actual returns."},{"Start":"25:25.045 ","End":"25:26.620","Text":"The balance in this account,"},{"Start":"25:26.620 ","End":"25:32.290","Text":"in this point in time is 2.2 with a debit balance."},{"Start":"25:32.290 ","End":"25:34.540","Text":"Again, we look at the account,"},{"Start":"25:34.540 ","End":"25:36.760","Text":"there\u0027s a 2.2 debit balance."},{"Start":"25:36.760 ","End":"25:41.260","Text":"We want a 24.2 debit balance."},{"Start":"25:41.260 ","End":"25:45.880","Text":"Therefore, the movement in the account is going to have to be"},{"Start":"25:45.880 ","End":"25:50.860","Text":"a 22.1 debit balance to increase it."},{"Start":"25:50.860 ","End":"25:54.985","Text":"That we know of set against the cost of sales."},{"Start":"25:54.985 ","End":"25:56.950","Text":"In the income statement column,"},{"Start":"25:56.950 ","End":"26:06.400","Text":"the cost of sales as an expense is being reduced to 22.1 with a credit entry rather."},{"Start":"26:06.400 ","End":"26:12.295","Text":"The sum up this last entry relating to the right of return assets."},{"Start":"26:12.295 ","End":"26:18.415","Text":"We process a debit to that right of return asset account."},{"Start":"26:18.415 ","End":"26:20.545","Text":"Right return as an asset,"},{"Start":"26:20.545 ","End":"26:23.350","Text":"a debit of 22.1,"},{"Start":"26:23.350 ","End":"26:30.835","Text":"and the credit goes to cost of sales of the same amount clearly of 22.1."},{"Start":"26:30.835 ","End":"26:32.875","Text":"Now, as I\u0027ve said,"},{"Start":"26:32.875 ","End":"26:36.340","Text":"this particular slide is focused purely on"},{"Start":"26:36.340 ","End":"26:43.804","Text":"the 3 accounts or columns relating to the accounting for the sales returns."},{"Start":"26:43.804 ","End":"26:45.360","Text":"In the last slide,"},{"Start":"26:45.360 ","End":"26:51.394","Text":"I will go back and just recap the full solution for this particular example."},{"Start":"26:51.394 ","End":"26:53.980","Text":"This slide shows the complete solution,"},{"Start":"26:53.980 ","End":"26:56.470","Text":"of the current example."},{"Start":"26:56.470 ","End":"27:01.584","Text":"You\u0027ll remember that in point Number 1 from the question,"},{"Start":"27:01.584 ","End":"27:06.205","Text":"we looked at the actual returns in the current period."},{"Start":"27:06.205 ","End":"27:08.410","Text":"In point Number 2 of the questions,"},{"Start":"27:08.410 ","End":"27:14.365","Text":"we looked at the cash collections and the credit sales for the current period."},{"Start":"27:14.365 ","End":"27:16.975","Text":"In point Number 3 of the question,"},{"Start":"27:16.975 ","End":"27:19.480","Text":"we looked at the estimation of"},{"Start":"27:19.480 ","End":"27:22.090","Text":"the expected sales returns and"},{"Start":"27:22.090 ","End":"27:26.815","Text":"the expected cost of returned inventory for the following period."},{"Start":"27:26.815 ","End":"27:30.070","Text":"To sum up each of the relevant accounts in turn,"},{"Start":"27:30.070 ","End":"27:35.710","Text":"and looking first at the right of return asset account."},{"Start":"27:35.710 ","End":"27:40.495","Text":"Remember the opening balance as an asset is a debit."},{"Start":"27:40.495 ","End":"27:42.400","Text":"I\u0027m going to use arrows now just"},{"Start":"27:42.400 ","End":"27:49.525","Text":"indicate increases and decreases rather than debits and credits."},{"Start":"27:49.525 ","End":"27:53.895","Text":"The actual returns in the current period"},{"Start":"27:53.895 ","End":"27:59.080","Text":"was a decrease to the right returns asset account and"},{"Start":"27:59.080 ","End":"28:04.600","Text":"then the expected cost of the goods to be returned in the following period was"},{"Start":"28:04.600 ","End":"28:11.960","Text":"an increase to the right returns asset account lemurs again with a debit balance."},{"Start":"28:11.960 ","End":"28:16.815","Text":"Looking at the allowance for the sales return,"},{"Start":"28:16.815 ","End":"28:21.965","Text":"the negative asset, that account has a credit balance to begin with."},{"Start":"28:21.965 ","End":"28:27.610","Text":"It was reduced by the actual returns in the current period."},{"Start":"28:27.610 ","End":"28:34.270","Text":"It was increased by the expected credit returns for the following period,"},{"Start":"28:34.270 ","End":"28:39.880","Text":"and lands up again with a credit balance at the end of the current period."},{"Start":"28:39.880 ","End":"28:43.990","Text":"Looking at the refund liability for cash refunds,"},{"Start":"28:43.990 ","End":"28:49.045","Text":"it started off again with a credit balance 5.4,"},{"Start":"28:49.045 ","End":"28:55.165","Text":"that got reduced by 3.9 for the actual cash returns in the current period."},{"Start":"28:55.165 ","End":"29:01.870","Text":"It got increased by 5.3 to taken account the expected cash refunds for"},{"Start":"29:01.870 ","End":"29:04.555","Text":"the following period and ended up with"},{"Start":"29:04.555 ","End":"29:10.700","Text":"a credit balance of 6.8 at the end of the current period."}],"ID":27494},{"Watched":false,"Name":"Exercise 5 - part 1","Duration":"1m 53s","ChapterTopicVideoID":26465,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.690","Text":"Today\u0027s exercise is called Tanx."},{"Start":"00:03.690 ","End":"00:06.810","Text":"On it\u0027s January 20X1 balance sheet date,"},{"Start":"00:06.810 ","End":"00:12.855","Text":"Tanx Inc estimates that 20.4 currency units worth of sales will be returned by customers."},{"Start":"00:12.855 ","End":"00:14.667","Text":"Of this amount,"},{"Start":"00:14.667 ","End":"00:19.665","Text":"15.1 currency units relates to credit sales reflected with an accounts receivable."},{"Start":"00:19.665 ","End":"00:22.650","Text":"That means that the difference between the 20.4 currency units"},{"Start":"00:22.650 ","End":"00:25.620","Text":"and the 15.1 currency units"},{"Start":"00:25.620 ","End":"00:28.530","Text":"that relate to credit sales must have been"},{"Start":"00:28.530 ","End":"00:32.250","Text":"sales to customers who have already paid in cash."},{"Start":"00:32.250 ","End":"00:36.000","Text":"Tanx also estimates that the cost of merchandise to be"},{"Start":"00:36.000 ","End":"00:40.680","Text":"returned is in the order of 14.2 currency units."},{"Start":"00:40.680 ","End":"00:44.070","Text":"Gross receivables before accounting for the above,"},{"Start":"00:44.070 ","End":"00:47.805","Text":"is 1,300 currency units."},{"Start":"00:47.805 ","End":"00:53.010","Text":"This is the first time that customers have been allowed to make returns."},{"Start":"00:53.010 ","End":"00:54.975","Text":"Let\u0027s look at the required."},{"Start":"00:54.975 ","End":"00:58.800","Text":"Using the transactions worksheet provided on the next slide,"},{"Start":"00:58.800 ","End":"01:01.755","Text":"show how Tanx should record the sales returns."},{"Start":"01:01.755 ","End":"01:04.890","Text":"Then calculate the amount of receivables Tanx would"},{"Start":"01:04.890 ","End":"01:08.055","Text":"report on the January 21 balance sheet."},{"Start":"01:08.055 ","End":"01:11.055","Text":"Here is the worksheet that we\u0027re going to use."},{"Start":"01:11.055 ","End":"01:14.355","Text":"We have a line for the balance before adjustment."},{"Start":"01:14.355 ","End":"01:17.775","Text":"Then we\u0027re going to account for the expected sales returns,"},{"Start":"01:17.775 ","End":"01:21.945","Text":"then we\u0027ll account for the expected cost of the returned merchandise."},{"Start":"01:21.945 ","End":"01:25.275","Text":"Then we\u0027re going to calculate the balance after the adjustment."},{"Start":"01:25.275 ","End":"01:29.655","Text":"We\u0027re going to need columns for a right of return assets,"},{"Start":"01:29.655 ","End":"01:32.685","Text":"the accounts receivable in terms of the gross amount."},{"Start":"01:32.685 ","End":"01:35.760","Text":"Then this is the negative asset relating to accounts"},{"Start":"01:35.760 ","End":"01:39.075","Text":"receivable called the allowance for sales returns."},{"Start":"01:39.075 ","End":"01:41.055","Text":"Then we have a refund liability,"},{"Start":"01:41.055 ","End":"01:43.110","Text":"and then we have the items going through"},{"Start":"01:43.110 ","End":"01:46.185","Text":"the income statement which obviously affects equity."},{"Start":"01:46.185 ","End":"01:47.415","Text":"In the comments column,"},{"Start":"01:47.415 ","End":"01:54.160","Text":"we\u0027re going to indicate which account affecting the equity column is affected."}],"ID":27495},{"Watched":false,"Name":"Exercise 5 - part 2","Duration":"7m 9s","ChapterTopicVideoID":26450,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.290 ","End":"00:03.975","Text":"This attempt the solution to Tanx."},{"Start":"00:03.975 ","End":"00:08.010","Text":"This is the worksheet we are asked to complete."},{"Start":"00:08.010 ","End":"00:11.520","Text":"As you can see, we have a right of return asset,"},{"Start":"00:11.520 ","End":"00:15.360","Text":"then we have accounts receivable being the gross amount,"},{"Start":"00:15.360 ","End":"00:17.685","Text":"and then we have the allowance for sales returns."},{"Start":"00:17.685 ","End":"00:19.845","Text":"These 2 accounts go hand in hand."},{"Start":"00:19.845 ","End":"00:25.345","Text":"We call this a negative asset account because it helps us measure this asset account."},{"Start":"00:25.345 ","End":"00:29.150","Text":"Then we have a refund liability account,"},{"Start":"00:29.150 ","End":"00:31.100","Text":"and then we have income statement column,"},{"Start":"00:31.100 ","End":"00:34.790","Text":"and that\u0027s for your income and expense items which obviously,"},{"Start":"00:34.790 ","End":"00:36.664","Text":"have an impact on equity."},{"Start":"00:36.664 ","End":"00:40.670","Text":"The common column, we\u0027re going to simply indicate which account"},{"Start":"00:40.670 ","End":"00:45.665","Text":"in the equity column or income statement column is going to be affected."},{"Start":"00:45.665 ","End":"00:49.880","Text":"Let\u0027s start with the line item balance before adjustments."},{"Start":"00:49.880 ","End":"00:52.790","Text":"We were told that the balance before adjustments was"},{"Start":"00:52.790 ","End":"00:56.855","Text":"1,300 in terms of the gross accounts receivable,"},{"Start":"00:56.855 ","End":"01:00.950","Text":"we weren\u0027t told outright any of the other opening balances."},{"Start":"01:00.950 ","End":"01:03.710","Text":"However, we know that the right of return assets"},{"Start":"01:03.710 ","End":"01:06.905","Text":"allowance for sales returns and the refund liability are all 0,"},{"Start":"01:06.905 ","End":"01:12.290","Text":"and the reason is the returns had not previously been allowed."},{"Start":"01:12.290 ","End":"01:16.540","Text":"Therefore, there were no stock items going to be returned,"},{"Start":"01:16.540 ","End":"01:18.245","Text":"or expected to be returned."},{"Start":"01:18.245 ","End":"01:23.000","Text":"There were no sales returns from customers who have bought on credit and"},{"Start":"01:23.000 ","End":"01:27.955","Text":"there were no sales returns expected from customers who had already paid in cash."},{"Start":"01:27.955 ","End":"01:30.995","Text":"The next line item is expected sales returns."},{"Start":"01:30.995 ","End":"01:36.455","Text":"We were told that we were expecting sales returns to the value of 20.4."},{"Start":"01:36.455 ","End":"01:40.445","Text":"Now, this reduces the sales account amount."},{"Start":"01:40.445 ","End":"01:45.410","Text":"We were also told that the 15.1 currency units within that"},{"Start":"01:45.410 ","End":"01:53.825","Text":"20.4 was from customers who still owed us for the sales that we had made to them,"},{"Start":"01:53.825 ","End":"01:59.795","Text":"that those 15.1 currency units was still sitting within accounts receivable."},{"Start":"01:59.795 ","End":"02:04.160","Text":"That is why we put the credit through the allowance for"},{"Start":"02:04.160 ","End":"02:09.290","Text":"sales returns because the allowance for sales returns reduces this account,"},{"Start":"02:09.290 ","End":"02:11.015","Text":"the gross accounts receivable."},{"Start":"02:11.015 ","End":"02:12.770","Text":"Now the difference between"},{"Start":"02:12.770 ","End":"02:17.180","Text":"the total sales returns we\u0027re expecting and the portion thereof"},{"Start":"02:17.180 ","End":"02:24.455","Text":"that relates to sales made to customers who haven\u0027t yet paid is an amount of 5.3."},{"Start":"02:24.455 ","End":"02:31.940","Text":"Now this 5.3 relates to customers who have already paid for their purchases in cash."},{"Start":"02:31.940 ","End":"02:38.340","Text":"So we\u0027re not going to credit that 5.3 to the allowance for sales returns account,"},{"Start":"02:38.340 ","End":"02:41.660","Text":"instead, we\u0027re going to credit it to the liability accounts."},{"Start":"02:41.660 ","End":"02:43.895","Text":"You see the liability is getting bigger."},{"Start":"02:43.895 ","End":"02:47.900","Text":"The reason why we\u0027re going to credit it to the liability account is because that"},{"Start":"02:47.900 ","End":"02:51.770","Text":"5.3 is not in the accounts receivable column."},{"Start":"02:51.770 ","End":"02:55.579","Text":"That 5.3 is going to be if they are returned,"},{"Start":"02:55.579 ","End":"02:58.190","Text":"going to have to be paid out in cash."},{"Start":"02:58.190 ","End":"03:05.210","Text":"Now, if you look at these 3 items and are wondering what the journal entry ought to be,"},{"Start":"03:05.210 ","End":"03:08.570","Text":"that 20.4 is going to be a debit to the sales account."},{"Start":"03:08.570 ","End":"03:09.650","Text":"In other words, the sales,"},{"Start":"03:09.650 ","End":"03:12.500","Text":"as you can see here, is getting smaller."},{"Start":"03:12.500 ","End":"03:14.135","Text":"We\u0027re reducing the sales."},{"Start":"03:14.135 ","End":"03:16.100","Text":"So we\u0027re debiting the sales because sales is"},{"Start":"03:16.100 ","End":"03:18.710","Text":"an income and income normally has a credit balance."},{"Start":"03:18.710 ","End":"03:21.515","Text":"So by debiting it, we are reducing it."},{"Start":"03:21.515 ","End":"03:24.769","Text":"Then, under the allowance for sales returns,"},{"Start":"03:24.769 ","End":"03:28.990","Text":"we\u0027ve got a 15.1 in brackets that is being credited."},{"Start":"03:28.990 ","End":"03:32.270","Text":"So the allowance for returns is being credited,"},{"Start":"03:32.270 ","End":"03:35.180","Text":"and that is going to reduce the accounts receivable."},{"Start":"03:35.180 ","End":"03:38.380","Text":"So this is a negative asset account."},{"Start":"03:38.380 ","End":"03:44.510","Text":"Then finally, that 5.3 is a credit to the refund liability."},{"Start":"03:44.510 ","End":"03:46.775","Text":"So here, we are increasing the liability,"},{"Start":"03:46.775 ","End":"03:50.360","Text":"15.1 effectively reduces your asset."},{"Start":"03:50.360 ","End":"03:52.730","Text":"It\u0027s a credit that we\u0027re processing."},{"Start":"03:52.730 ","End":"03:56.570","Text":"This 5.3 increases your liabilities."},{"Start":"03:56.570 ","End":"03:58.860","Text":"That\u0027s also a credit."},{"Start":"03:59.000 ","End":"04:03.425","Text":"This 20.4 is a debit."},{"Start":"04:03.425 ","End":"04:08.450","Text":"It\u0027s reducing our income or reducing our equity."},{"Start":"04:08.450 ","End":"04:10.820","Text":"So have a look there."},{"Start":"04:10.820 ","End":"04:15.800","Text":"We\u0027ve got 1 debit of 20.4 and we\u0027ve got 2 credits;"},{"Start":"04:15.800 ","End":"04:18.965","Text":"1 is 15.1 and the other is 5.3,"},{"Start":"04:18.965 ","End":"04:21.235","Text":"and that makes up the 20.4."},{"Start":"04:21.235 ","End":"04:23.450","Text":"Let\u0027s look at the next line item,"},{"Start":"04:23.450 ","End":"04:26.460","Text":"the expected cost of the returned merchandise."},{"Start":"04:26.460 ","End":"04:30.020","Text":"So we\u0027re told that 14.2 currency"},{"Start":"04:30.020 ","End":"04:34.205","Text":"units is the value of the goods that we are expecting to be returned."},{"Start":"04:34.205 ","End":"04:38.945","Text":"So we have to record that as something that we\u0027re expecting to receive. It\u0027s an asset."},{"Start":"04:38.945 ","End":"04:40.385","Text":"At the same time,"},{"Start":"04:40.385 ","End":"04:45.395","Text":"we must also recognize that if that asset is received back into stock,"},{"Start":"04:45.395 ","End":"04:48.605","Text":"it means that our cost of sales needs to be decreased."},{"Start":"04:48.605 ","End":"04:50.420","Text":"So in our income statement column,"},{"Start":"04:50.420 ","End":"04:53.180","Text":"you can see the equity is being increased."},{"Start":"04:53.180 ","End":"04:56.290","Text":"Remember the 20.4 decreased our equity,"},{"Start":"04:56.290 ","End":"04:58.790","Text":"the 14.2 is increasing our equity."},{"Start":"04:58.790 ","End":"05:00.575","Text":"How is it increasing our equity?"},{"Start":"05:00.575 ","End":"05:03.035","Text":"By reducing our cost of sales expense."},{"Start":"05:03.035 ","End":"05:06.095","Text":"Remember as your expenses gets smaller,"},{"Start":"05:06.095 ","End":"05:08.690","Text":"your profits, and thus your equity, gets bigger."},{"Start":"05:08.690 ","End":"05:12.860","Text":"So if we have a look at those 2 items and ask ourselves,"},{"Start":"05:12.860 ","End":"05:14.915","Text":"what would the journal entry be?"},{"Start":"05:14.915 ","End":"05:22.040","Text":"Well, this 14.2 would be a debit to the right of return assets, 14.2."},{"Start":"05:22.040 ","End":"05:26.315","Text":"This 14.2 is a credit to our cost of sales."},{"Start":"05:26.315 ","End":"05:28.940","Text":"So this is creating an asset because remember,"},{"Start":"05:28.940 ","End":"05:31.660","Text":"assets get bigger on the debit side."},{"Start":"05:31.660 ","End":"05:33.845","Text":"So the assets are getting bigger."},{"Start":"05:33.845 ","End":"05:37.438","Text":"Here, our cost of sales, our expenses,"},{"Start":"05:37.438 ","End":"05:40.160","Text":"are getting smaller because we\u0027re crediting"},{"Start":"05:40.160 ","End":"05:43.205","Text":"the expense and an expense normally has a debit balance."},{"Start":"05:43.205 ","End":"05:45.935","Text":"So that\u0027s why we credited in order to decrease it."},{"Start":"05:45.935 ","End":"05:48.574","Text":"When an expense gets smaller,"},{"Start":"05:48.574 ","End":"05:51.660","Text":"remember your equity gets bigger,"},{"Start":"05:51.660 ","End":"05:54.275","Text":"I\u0027ll just show you the step before."},{"Start":"05:54.275 ","End":"05:56.375","Text":"If you expense gets smaller,"},{"Start":"05:56.375 ","End":"05:58.460","Text":"your profit gets bigger,"},{"Start":"05:58.460 ","End":"06:00.005","Text":"and if your profit gets bigger,"},{"Start":"06:00.005 ","End":"06:02.665","Text":"your equity will get bigger."},{"Start":"06:02.665 ","End":"06:04.760","Text":"So your accounting equation,"},{"Start":"06:04.760 ","End":"06:08.705","Text":"assets minus liabilities is equal to equity."},{"Start":"06:08.705 ","End":"06:13.530","Text":"Well, our asset went up by 14.2."},{"Start":"06:13.530 ","End":"06:17.270","Text":"No effect on our liabilities and our equity because the expense gets"},{"Start":"06:17.270 ","End":"06:22.015","Text":"smaller and profit bigger equity went up by 14.2."},{"Start":"06:22.015 ","End":"06:25.640","Text":"In total then if we add up a right of return assets,"},{"Start":"06:25.640 ","End":"06:27.260","Text":"we can work out the balances."},{"Start":"06:27.260 ","End":"06:32.060","Text":"The reason I can\u0027t work at us because we have opening balances for all of these columns."},{"Start":"06:32.060 ","End":"06:35.190","Text":"Those are all our closing balances."},{"Start":"06:35.190 ","End":"06:37.520","Text":"Then in the income statement,"},{"Start":"06:37.520 ","End":"06:40.445","Text":"we\u0027ve got a net effect of 6.2."},{"Start":"06:40.445 ","End":"06:42.890","Text":"That is the impact on the profit or loss."},{"Start":"06:42.890 ","End":"06:44.630","Text":"It is not the profit or loss there,"},{"Start":"06:44.630 ","End":"06:47.335","Text":"it\u0027s just the impact on the profit or loss."},{"Start":"06:47.335 ","End":"06:50.150","Text":"So part 2 of this question"},{"Start":"06:50.150 ","End":"06:53.390","Text":"asks us to calculate the receivables balance in the balance sheet,"},{"Start":"06:53.390 ","End":"06:58.255","Text":"well, remember the receivables balance will be the net of these 2 items."},{"Start":"06:58.255 ","End":"06:59.850","Text":"Part 1, if you recall,"},{"Start":"06:59.850 ","End":"07:02.629","Text":"were simply to show how we would record"},{"Start":"07:02.629 ","End":"07:09.090","Text":"the expected sales returns and the expected cost of returned merchandise."}],"ID":27496},{"Watched":false,"Name":"Sales paid by credit card","Duration":"3m 15s","ChapterTopicVideoID":26657,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.050 ","End":"00:03.555","Text":"Hello and welcome to another video presentation,"},{"Start":"00:03.555 ","End":"00:07.770","Text":"in the series on accounts receivable brought to you by Proprep."},{"Start":"00:07.770 ","End":"00:13.770","Text":"In this video, we will focus on sales paid by a credit card."},{"Start":"00:13.770 ","End":"00:18.300","Text":"As you all know data where customers often pay for goods and"},{"Start":"00:18.300 ","End":"00:22.417","Text":"services by handing over a credit card,"},{"Start":"00:22.417 ","End":"00:25.260","Text":"there are clearly advantages to the seller,"},{"Start":"00:25.260 ","End":"00:27.670","Text":"in that the credit card company,"},{"Start":"00:27.670 ","End":"00:31.370","Text":"will almost immediately transfer the cash to the seller."},{"Start":"00:31.370 ","End":"00:38.435","Text":"The credit card company will therefore also assume any risks of the customer not paying,"},{"Start":"00:38.435 ","End":"00:41.270","Text":"in other words, risks of bad debts."},{"Start":"00:41.270 ","End":"00:45.650","Text":"The small disadvantage to the seller is that there is"},{"Start":"00:45.650 ","End":"00:50.495","Text":"a fee which the seller has to pay to the credit card company."},{"Start":"00:50.495 ","End":"00:52.550","Text":"Looking at an example,"},{"Start":"00:52.550 ","End":"00:54.530","Text":"this company Smoke and Mirrors,"},{"Start":"00:54.530 ","End":"00:56.990","Text":"accepts a range of credit cards."},{"Start":"00:56.990 ","End":"00:59.600","Text":"You were told that during the 20X1 year,"},{"Start":"00:59.600 ","End":"01:03.785","Text":"there are sales of 10,000 currency units,"},{"Start":"01:03.785 ","End":"01:07.430","Text":"which were paid by customers using the credit cards."},{"Start":"01:07.430 ","End":"01:13.325","Text":"The credit card company charges a 3 percent fee or commission."},{"Start":"01:13.325 ","End":"01:17.494","Text":"Let us now see how these transactions will be recorded."},{"Start":"01:17.494 ","End":"01:19.700","Text":"Looking at the sales first,"},{"Start":"01:19.700 ","End":"01:23.900","Text":"and because it is a credit card sale,"},{"Start":"01:23.900 ","End":"01:30.620","Text":"the selling entity is going to receive cash immediately from the credit card company."},{"Start":"01:30.620 ","End":"01:34.430","Text":"Therefore, the asset cash is increased by an amount of"},{"Start":"01:34.430 ","End":"01:39.925","Text":"10,000 and the company records a revenue from sales,"},{"Start":"01:39.925 ","End":"01:44.005","Text":"also in the amount of 10,000."},{"Start":"01:44.005 ","End":"01:47.530","Text":"Now remember cash is an asset increases with a debit."},{"Start":"01:47.530 ","End":"01:49.620","Text":"The accounting entry is the debit,"},{"Start":"01:49.620 ","End":"01:51.380","Text":"to the asset cash,"},{"Start":"01:51.380 ","End":"01:57.005","Text":"and therefore a credit to the income adds and revenues or sales revenue."},{"Start":"01:57.005 ","End":"01:59.630","Text":"The fees paid to the credit card company,"},{"Start":"01:59.630 ","End":"02:02.570","Text":"are regarded as a financing cost."},{"Start":"02:02.570 ","End":"02:05.025","Text":"Assuming the fees are paid in cash,"},{"Start":"02:05.025 ","End":"02:10.330","Text":"there will be a decrease in the asset cash in this case of the non-given of 300,"},{"Start":"02:10.330 ","End":"02:14.390","Text":"and an expense recognized in the income statement,"},{"Start":"02:14.390 ","End":"02:17.180","Text":"also in the amount clearly of 300."},{"Start":"02:17.180 ","End":"02:22.835","Text":"The accounting entry, because the cash is decreasing,"},{"Start":"02:22.835 ","End":"02:26.870","Text":"it would be a credit going into the cash this time and"},{"Start":"02:26.870 ","End":"02:32.619","Text":"a debit to record the expense on the income statement."},{"Start":"02:32.619 ","End":"02:36.170","Text":"Note, as well over here, that there is"},{"Start":"02:36.170 ","End":"02:40.565","Text":"nothing recorded in the accounts receivable column."},{"Start":"02:40.565 ","End":"02:46.820","Text":"This is because the sales were not on credit from the perspective of the selling entity."},{"Start":"02:46.820 ","End":"02:51.580","Text":"The selling entity received cash from the credit card company."},{"Start":"02:51.580 ","End":"02:54.274","Text":"Also looking at these journal entries,"},{"Start":"02:54.274 ","End":"02:58.924","Text":"remember income increases owner\u0027s equity."},{"Start":"02:58.924 ","End":"03:04.235","Text":"Remember expenses decrease owner\u0027s equity."},{"Start":"03:04.235 ","End":"03:08.000","Text":"That\u0027s reason why we have a credit to increase"},{"Start":"03:08.000 ","End":"03:14.940","Text":"owner\u0027s equity and a debit for the expense to reduce owner\u0027s equity."}],"ID":27497},{"Watched":false,"Name":"Exercise 6 - part 1","Duration":"50s","ChapterTopicVideoID":26451,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.385","Text":"Today\u0027s exercise is Magog."},{"Start":"00:02.385 ","End":"00:05.490","Text":"Consider the following information pertaining to Magog."},{"Start":"00:05.490 ","End":"00:10.095","Text":"We\u0027re provided balances and also activity during 20X2."},{"Start":"00:10.095 ","End":"00:11.805","Text":"In terms of the balances,"},{"Start":"00:11.805 ","End":"00:14.445","Text":"we\u0027re given accounts receivable, the gross,"},{"Start":"00:14.445 ","End":"00:17.595","Text":"allowance for returns, a refund liability,"},{"Start":"00:17.595 ","End":"00:19.455","Text":"and a right to return asset."},{"Start":"00:19.455 ","End":"00:24.990","Text":"This is given to us at the end of 20X1 and also the end of 20X2."},{"Start":"00:24.990 ","End":"00:28.785","Text":"We\u0027re also given the sales balance for 20X2."},{"Start":"00:28.785 ","End":"00:31.545","Text":"Then we have the activity during 20X2,"},{"Start":"00:31.545 ","End":"00:34.875","Text":"cash collections from the 20X1 customers,"},{"Start":"00:34.875 ","End":"00:38.220","Text":"then the actual returns, cash refunded,"},{"Start":"00:38.220 ","End":"00:42.294","Text":"and also the actual returns where we\u0027ve credited accounts receivable."},{"Start":"00:42.294 ","End":"00:44.795","Text":"We\u0027re also given the gross profit margin."},{"Start":"00:44.795 ","End":"00:51.480","Text":"The required is to calculate the effect of the sales returns on the 20X2 profit."}],"ID":27498},{"Watched":false,"Name":"Exercise 6 - part 2","Duration":"17m 45s","ChapterTopicVideoID":26452,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.760","Text":"Let\u0027s look at the solution to Magog."},{"Start":"00:02.760 ","End":"00:04.980","Text":"Here is our worksheet, and we\u0027ve created"},{"Start":"00:04.980 ","End":"00:07.965","Text":"a few columns based on the information that we\u0027ve been given,"},{"Start":"00:07.965 ","End":"00:11.520","Text":"is put in the information regarding the opening balances"},{"Start":"00:11.520 ","End":"00:15.480","Text":"which are the end of 20X1 balances."},{"Start":"00:15.480 ","End":"00:17.025","Text":"Looking at the question,"},{"Start":"00:17.025 ","End":"00:22.380","Text":"we\u0027re given figures for the end of 20X1 1,000,100,"},{"Start":"00:22.380 ","End":"00:25.095","Text":"50 and 75 for the accounts receivable-gross,"},{"Start":"00:25.095 ","End":"00:27.630","Text":"allowance for returns, the refund liability,"},{"Start":"00:27.630 ","End":"00:30.360","Text":"and the right to return asset respectively."},{"Start":"00:30.360 ","End":"00:33.075","Text":"Let\u0027s put that information to the solution."},{"Start":"00:33.075 ","End":"00:34.810","Text":"There\u0027s the 1,000,"},{"Start":"00:34.810 ","End":"00:36.110","Text":"there is an allowance for returns,"},{"Start":"00:36.110 ","End":"00:39.110","Text":"remember it\u0027s a negative assets has got"},{"Start":"00:39.110 ","End":"00:42.680","Text":"a negative sign there to indicate that it is being reduced by the 100."},{"Start":"00:42.680 ","End":"00:44.690","Text":"There\u0027s a refund liability,"},{"Start":"00:44.690 ","End":"00:47.725","Text":"and the right to return asset of 75."},{"Start":"00:47.725 ","End":"00:51.315","Text":"Then it\u0027s put the end of 20X2 balances in."},{"Start":"00:51.315 ","End":"00:56.848","Text":"Back to the question we can see the 20X2 figures,1100,"},{"Start":"00:56.848 ","End":"00:59.715","Text":"90, 60, and 75."},{"Start":"00:59.715 ","End":"01:02.145","Text":"There it is, 1,100,"},{"Start":"01:02.145 ","End":"01:04.245","Text":"90 being the negative asset,"},{"Start":"01:04.245 ","End":"01:06.595","Text":"60, and 75."},{"Start":"01:06.595 ","End":"01:08.390","Text":"Going back to the question,"},{"Start":"01:08.390 ","End":"01:14.240","Text":"the next piece of information we\u0027re given is the sales balance between 20X2 of 3,000."},{"Start":"01:14.240 ","End":"01:16.460","Text":"We put that into our worksheet sales,"},{"Start":"01:16.460 ","End":"01:19.010","Text":"and we put it into the income statement column"},{"Start":"01:19.010 ","End":"01:22.610","Text":"because obviously sales income is going to increase our equity."},{"Start":"01:22.610 ","End":"01:26.900","Text":"However, they don\u0027t tell us whether these were cash sales or credit sales,"},{"Start":"01:26.900 ","End":"01:28.670","Text":"so we\u0027re not sure quite what to put under"},{"Start":"01:28.670 ","End":"01:32.240","Text":"the cash column or the gross accounts receivable column."},{"Start":"01:32.240 ","End":"01:36.500","Text":"That actually isn\u0027t going to matter at all because we\u0027re actually being"},{"Start":"01:36.500 ","End":"01:41.105","Text":"asked to calculate the impact of the returns on the profit or loss,"},{"Start":"01:41.105 ","End":"01:45.040","Text":"and sales is not a return, sales are sales."},{"Start":"01:45.040 ","End":"01:49.250","Text":"I\u0027ve put it into the worksheet purely for completeness at this point,"},{"Start":"01:49.250 ","End":"01:51.260","Text":"and so we\u0027re just going to carry on,"},{"Start":"01:51.260 ","End":"01:52.865","Text":"move on with the question."},{"Start":"01:52.865 ","End":"01:54.890","Text":"Activity during 20X2,"},{"Start":"01:54.890 ","End":"01:59.665","Text":"the cash collections from 20X1 customers 890."},{"Start":"01:59.665 ","End":"02:04.560","Text":"These are the customers who had purchased from us in the prior year 20X1,"},{"Start":"02:04.560 ","End":"02:06.300","Text":"and who are paying us this year."},{"Start":"02:06.300 ","End":"02:10.070","Text":"That 890 had been included in the gross accounts"},{"Start":"02:10.070 ","End":"02:16.315","Text":"receivable balance at the end of 20X1 or beginning of 20X2."},{"Start":"02:16.315 ","End":"02:18.330","Text":"We\u0027re going to reduce this balance."},{"Start":"02:18.330 ","End":"02:21.855","Text":"The accounts receivable- gross balance of 1,000 the end of 20X1,"},{"Start":"02:21.855 ","End":"02:25.520","Text":"they\u0027re telling us that 890 of those customers have not paid us."},{"Start":"02:25.520 ","End":"02:30.695","Text":"We reduce that balance and we record the fact that the 890 is now on our cash."},{"Start":"02:30.695 ","End":"02:34.705","Text":"Then we have actual returns that happened during 20X2,"},{"Start":"02:34.705 ","End":"02:37.055","Text":"and we\u0027ve split them into 2 different kinds."},{"Start":"02:37.055 ","End":"02:39.305","Text":"Let\u0027s first deal with the cash refunds."},{"Start":"02:39.305 ","End":"02:42.260","Text":"These are the customers who have come to return goods,"},{"Start":"02:42.260 ","End":"02:47.150","Text":"and these are the customers who had actually already paid for the goods previously."},{"Start":"02:47.150 ","End":"02:48.740","Text":"When they return the goods,"},{"Start":"02:48.740 ","End":"02:50.345","Text":"we need to give them cash."},{"Start":"02:50.345 ","End":"02:55.260","Text":"This 70 is going to reduce our bank account, or cash and bank."},{"Start":"02:55.260 ","End":"02:56.910","Text":"Here we\u0027ve got the actual returns,"},{"Start":"02:56.910 ","End":"02:59.770","Text":"the cash refunds is reducing our cash,"},{"Start":"02:59.770 ","End":"03:03.079","Text":"and we\u0027re going to reduce our refund liability."},{"Start":"03:03.079 ","End":"03:06.620","Text":"Remember, the refund liability is the obligation that"},{"Start":"03:06.620 ","End":"03:11.610","Text":"we recognize for expected cash refunds."},{"Start":"03:11.610 ","End":"03:13.350","Text":"We only predicted,"},{"Start":"03:13.350 ","End":"03:19.430","Text":"we estimated at the end of 20X1 that we would have to refund 15 cash,"},{"Start":"03:19.430 ","End":"03:22.610","Text":"but we actually refunded 17 cash."},{"Start":"03:22.610 ","End":"03:27.110","Text":"Now, when we process this original entry of 50,"},{"Start":"03:27.110 ","End":"03:31.940","Text":"what we would have done is we would have credited the refund liability with"},{"Start":"03:31.940 ","End":"03:37.225","Text":"50 and we would have debited our sales with 50."},{"Start":"03:37.225 ","End":"03:39.675","Text":"That happened in 20X1."},{"Start":"03:39.675 ","End":"03:46.130","Text":"We have underestimated the impact on our sales in 20X1 by an amount of 20,"},{"Start":"03:46.130 ","End":"03:48.530","Text":"but that\u0027s going to come out in the wash when we process"},{"Start":"03:48.530 ","End":"03:51.995","Text":"an entry to ensure that our closing balance is 60."},{"Start":"03:51.995 ","End":"03:53.780","Text":"Not to worry about that at the moment."},{"Start":"03:53.780 ","End":"03:55.745","Text":"All you need to remember is that when you do"},{"Start":"03:55.745 ","End":"03:59.510","Text":"a cash refund remember to decrease your cash,"},{"Start":"03:59.510 ","End":"04:02.510","Text":"and decrease the refund liability."},{"Start":"04:02.510 ","End":"04:10.830","Text":"This entry here in 20X2 is actually debit the refund liability with 70,"},{"Start":"04:10.830 ","End":"04:14.130","Text":"and credit cash with 17."},{"Start":"04:14.130 ","End":"04:17.315","Text":"That\u0027s our 20X2 entry."},{"Start":"04:17.315 ","End":"04:20.030","Text":"Let\u0027s move onto the next return."},{"Start":"04:20.030 ","End":"04:24.875","Text":"The question tells us that we also had accounts receivable returns."},{"Start":"04:24.875 ","End":"04:27.770","Text":"In other words, where we\u0027re going to credit the accounts receivable."},{"Start":"04:27.770 ","End":"04:31.190","Text":"Now, we credit the accounts receivable for a return"},{"Start":"04:31.190 ","End":"04:34.825","Text":"where the customer had not yet paid us for those goods,"},{"Start":"04:34.825 ","End":"04:37.655","Text":"and are now returning those goods."},{"Start":"04:37.655 ","End":"04:40.535","Text":"We have customers who had bought on credit,"},{"Start":"04:40.535 ","End":"04:44.780","Text":"had not yet paid for the goods to the extent of a 110,"},{"Start":"04:44.780 ","End":"04:46.715","Text":"and have now returned those goods."},{"Start":"04:46.715 ","End":"04:48.795","Text":"Here are the actual returns,"},{"Start":"04:48.795 ","End":"04:52.100","Text":"and we need to reduce the allowance for returns."},{"Start":"04:52.100 ","End":"04:54.500","Text":"Now remember, this had a credit balance,"},{"Start":"04:54.500 ","End":"04:56.290","Text":"and what we\u0027re doing here is debiting it."},{"Start":"04:56.290 ","End":"05:04.740","Text":"This entry if you\u0027re interested is debit the allowance for returns 110,"},{"Start":"05:04.740 ","End":"05:10.200","Text":"and we\u0027re crediting the gross accounts"},{"Start":"05:10.200 ","End":"05:14.325","Text":"receivable with 110 to reduce the accounts receivable."},{"Start":"05:14.325 ","End":"05:19.310","Text":"The question we\u0027ve been told that the gross profit margin is 50 percent."},{"Start":"05:19.310 ","End":"05:23.255","Text":"That means we can actually work out the cost of the goods that are being returned."},{"Start":"05:23.255 ","End":"05:29.750","Text":"Let\u0027s process into our transaction worksheet the actual cost of the returned merchandise."},{"Start":"05:29.750 ","End":"05:31.430","Text":"What if we refunded?"},{"Start":"05:31.430 ","End":"05:33.200","Text":"In terms of sales value,"},{"Start":"05:33.200 ","End":"05:39.605","Text":"we have refunded 17 cash accepted returns or refunded 110 on credit."},{"Start":"05:39.605 ","End":"05:43.145","Text":"We\u0027ve reduced the accounts receivable balance."},{"Start":"05:43.145 ","End":"05:51.965","Text":"In total, we have accepted returns with a value in terms of sales value of 180,"},{"Start":"05:51.965 ","End":"05:54.545","Text":"the 70 plus 110."},{"Start":"05:54.545 ","End":"06:00.860","Text":"We\u0027re told that the gross profit margin is 50 percent which means that"},{"Start":"06:00.860 ","End":"06:04.550","Text":"the gross profit is 90 included that 180"},{"Start":"06:04.550 ","End":"06:08.795","Text":"which therefore means that the cost must have been 90."},{"Start":"06:08.795 ","End":"06:10.430","Text":"The gross profit is 90,"},{"Start":"06:10.430 ","End":"06:13.975","Text":"so therefore the cost of the sale must have been"},{"Start":"06:13.975 ","End":"06:19.940","Text":"sales 180 minus the gross profit gives us the cost of sales."},{"Start":"06:19.940 ","End":"06:21.800","Text":"If those goods have been returned,"},{"Start":"06:21.800 ","End":"06:24.535","Text":"it means our inventory is gone up by 90."},{"Start":"06:24.535 ","End":"06:26.860","Text":"Now at the end of 20X1,"},{"Start":"06:26.860 ","End":"06:31.235","Text":"we estimated the cost of the goods that were going to be returned,"},{"Start":"06:31.235 ","End":"06:35.015","Text":"and that is the right to return assets."},{"Start":"06:35.015 ","End":"06:40.760","Text":"We only estimated that we would receive back into stock an amount of 75,"},{"Start":"06:40.760 ","End":"06:45.045","Text":"and we\u0027ve now actually received 90 into our stock."},{"Start":"06:45.045 ","End":"06:48.500","Text":"We underestimated the stock that would be returned to us."},{"Start":"06:48.500 ","End":"06:52.580","Text":"Once again we\u0027re not going to worry about the fact that there was a bit of a difference,"},{"Start":"06:52.580 ","End":"06:56.480","Text":"because that\u0027s going to come out in the wash when we make sure that our right to return"},{"Start":"06:56.480 ","End":"07:01.630","Text":"asset reflects an appropriate closing balance to the end of 20X2."},{"Start":"07:01.630 ","End":"07:03.860","Text":"What is the other side of the entry?"},{"Start":"07:03.860 ","End":"07:06.965","Text":"We have debited our inventory with 90,"},{"Start":"07:06.965 ","End":"07:09.590","Text":"where is the other side going to go?"},{"Start":"07:09.590 ","End":"07:12.980","Text":"Well, it\u0027s obviously going to go to our right to return assets."},{"Start":"07:12.980 ","End":"07:16.760","Text":"Remember we had expected 75 to come into stock,"},{"Start":"07:16.760 ","End":"07:21.810","Text":"and what we\u0027re going to do is now we credit that entry,"},{"Start":"07:21.810 ","End":"07:24.150","Text":"and put it into inventory."},{"Start":"07:24.150 ","End":"07:28.430","Text":"What we were doing at the end of 20X1 is we were saying we\u0027re expecting"},{"Start":"07:28.430 ","End":"07:32.795","Text":"75 of our inventory to come back into stock,"},{"Start":"07:32.795 ","End":"07:35.150","Text":"but we didn\u0027t put it into inventory directly."},{"Start":"07:35.150 ","End":"07:37.085","Text":"We put it into a right to return assets."},{"Start":"07:37.085 ","End":"07:38.495","Text":"These are 2 assets."},{"Start":"07:38.495 ","End":"07:43.100","Text":"This is 1 step away from becoming inventory."},{"Start":"07:43.100 ","End":"07:47.150","Text":"We were saying we expect to have an extra amount of 75 in"},{"Start":"07:47.150 ","End":"07:51.905","Text":"inventory very shortly when our customers return these goods."},{"Start":"07:51.905 ","End":"07:57.030","Text":"However, what has happened is we\u0027ve actually received 90 into our inventory."},{"Start":"07:57.030 ","End":"08:00.230","Text":"We\u0027re going to take 90 out of the right to return asset,"},{"Start":"08:00.230 ","End":"08:03.850","Text":"and put that into the inventory account."},{"Start":"08:03.850 ","End":"08:08.450","Text":"Now, let\u0027s look at the allowance for returns and refund liability columns."},{"Start":"08:08.450 ","End":"08:11.570","Text":"If you look carefully, you can see we\u0027ve got an allowance for returns"},{"Start":"08:11.570 ","End":"08:14.710","Text":"which has a credit balance of 100."},{"Start":"08:14.710 ","End":"08:18.020","Text":"Because remember this is an asset with a negative amount,"},{"Start":"08:18.020 ","End":"08:19.730","Text":"which means it must be a credit."},{"Start":"08:19.730 ","End":"08:22.535","Text":"We\u0027ve got a debit of 110."},{"Start":"08:22.535 ","End":"08:25.954","Text":"Now if you take those 2 figures together,"},{"Start":"08:25.954 ","End":"08:31.205","Text":"that means we\u0027ve got a subtotal here of 10 on the debit side,"},{"Start":"08:31.205 ","End":"08:32.780","Text":"but yet at the end of the year,"},{"Start":"08:32.780 ","End":"08:37.670","Text":"we\u0027ve been told that we need a 90 on the credit side."},{"Start":"08:37.670 ","End":"08:40.385","Text":"Now let\u0027s look at the refund liability."},{"Start":"08:40.385 ","End":"08:43.570","Text":"We\u0027ve got a refund liability of 50."},{"Start":"08:43.570 ","End":"08:45.675","Text":"That\u0027s a credit."},{"Start":"08:45.675 ","End":"08:49.940","Text":"We\u0027ve debited it because it\u0027s a negative with 70,"},{"Start":"08:49.940 ","End":"08:54.695","Text":"and our closing balance needs to be a credit of 60."},{"Start":"08:54.695 ","End":"08:57.920","Text":"But if we\u0027ve got an opening balance of 50 in the credit side,"},{"Start":"08:57.920 ","End":"08:59.915","Text":"and we\u0027ve debited it with 70,"},{"Start":"08:59.915 ","End":"09:04.745","Text":"it means we have a subtotal of 20 on the debit side."},{"Start":"09:04.745 ","End":"09:07.190","Text":"Now, this going back to the allowance for the returns."},{"Start":"09:07.190 ","End":"09:09.590","Text":"If we\u0027ve got a subtotal of 10 on the debit side,"},{"Start":"09:09.590 ","End":"09:13.370","Text":"and we need to get to 90 on the credit side,"},{"Start":"09:13.370 ","End":"09:17.800","Text":"it means we need to credit the account with 100."},{"Start":"09:17.800 ","End":"09:21.005","Text":"Similarly, with the refund liability,"},{"Start":"09:21.005 ","End":"09:24.440","Text":"if we\u0027ve got a subtotal of 20 on the debit side,"},{"Start":"09:24.440 ","End":"09:27.305","Text":"but we need to get to 60 on the credit side,"},{"Start":"09:27.305 ","End":"09:30.735","Text":"it means we must credit it with 80."},{"Start":"09:30.735 ","End":"09:32.225","Text":"Those are the 2 missing figures,"},{"Start":"09:32.225 ","End":"09:34.610","Text":"and those are the expected sales"},{"Start":"09:34.610 ","End":"09:39.455","Text":"return adjustments that we need to process at the end of 20X2."},{"Start":"09:39.455 ","End":"09:42.185","Text":"There\u0027s 100, the credit,"},{"Start":"09:42.185 ","End":"09:44.990","Text":"and the 80 which is actually a credit,"},{"Start":"09:44.990 ","End":"09:50.345","Text":"the counter entry is going to be a debit to our income statement."},{"Start":"09:50.345 ","End":"09:53.435","Text":"It\u0027s an expense or a negative income."},{"Start":"09:53.435 ","End":"09:57.080","Text":"This is going to reduce our sales."},{"Start":"09:57.080 ","End":"10:02.195","Text":"We can debit it directly to a sales returns account."},{"Start":"10:02.195 ","End":"10:05.540","Text":"Then we have the expected cost of the return merchandise."},{"Start":"10:05.540 ","End":"10:11.390","Text":"If we\u0027re expecting sales to be returned in the next year of a 180,"},{"Start":"10:11.390 ","End":"10:14.615","Text":"it also means it\u0027s going to be an impact on our cost of sales"},{"Start":"10:14.615 ","End":"10:19.660","Text":"at 50 percent because our gross profit margin is 50 percent."},{"Start":"10:19.660 ","End":"10:24.100","Text":"The sales of 180 at 50 percent,"},{"Start":"10:24.100 ","End":"10:26.920","Text":"it\u0027s going to give us an amount of 90."},{"Start":"10:26.920 ","End":"10:30.355","Text":"That\u0027s the expected impact on our cost of sales."},{"Start":"10:30.355 ","End":"10:33.985","Text":"Our cost of sales is going to be reduced by 90."},{"Start":"10:33.985 ","End":"10:39.145","Text":"The other side of the entry is we\u0027re going to recognize that as a right to return asset."},{"Start":"10:39.145 ","End":"10:42.714","Text":"We\u0027re increasing our right to asset by 90,"},{"Start":"10:42.714 ","End":"10:47.170","Text":"and we\u0027re our crediting cost of sales with 90."},{"Start":"10:47.170 ","End":"10:50.860","Text":"Reducing our cost of sales and increasing"},{"Start":"10:50.860 ","End":"10:54.789","Text":"our asset by the amount that we expect will be returned."},{"Start":"10:54.789 ","End":"10:57.595","Text":"Now let\u0027s look at the right to return asset column."},{"Start":"10:57.595 ","End":"11:02.230","Text":"The right to return asset column has got an opening balance of 75 on the debit side."},{"Start":"11:02.230 ","End":"11:05.110","Text":"It has a credit of 90 that was"},{"Start":"11:05.110 ","End":"11:08.755","Text":"processed during the year for goods that were actually returned."},{"Start":"11:08.755 ","End":"11:14.095","Text":"That gives us a subtotal of 15 on the credit side,"},{"Start":"11:14.095 ","End":"11:18.940","Text":"but we need it to have a debit balance of 75 on the debit side."},{"Start":"11:18.940 ","End":"11:26.135","Text":"What is the adjustment that we need to process in order to get a 15 credit to a 75 debit?"},{"Start":"11:26.135 ","End":"11:30.814","Text":"We obviously need to debit it with a further 90."},{"Start":"11:30.814 ","End":"11:35.690","Text":"There is the debit of the 90 in the right return asset column and"},{"Start":"11:35.690 ","End":"11:41.065","Text":"the country entry is going to be a 90 to your cost of sales."},{"Start":"11:41.065 ","End":"11:47.245","Text":"The country entry is going to be a credit to the cost of sales of 90."},{"Start":"11:47.245 ","End":"11:50.680","Text":"Now let\u0027s look at the accounts receivable gross column."},{"Start":"11:50.680 ","End":"11:52.840","Text":"There is a missing amount here as well."},{"Start":"11:52.840 ","End":"11:58.525","Text":"If you recall, we had been told that the sales during 20x2 or 3,000,"},{"Start":"11:58.525 ","End":"12:01.945","Text":"but we weren\u0027t told whether they were on credit or cash."},{"Start":"12:01.945 ","End":"12:03.655","Text":"We didn\u0027t know the split."},{"Start":"12:03.655 ","End":"12:08.980","Text":"Now we can work out the credit portion of the 3,000 by working backwards."},{"Start":"12:08.980 ","End":"12:14.155","Text":"We have a debit of 1,000 as our opening balance."},{"Start":"12:14.155 ","End":"12:18.505","Text":"We created to this account with 890 being the cash received."},{"Start":"12:18.505 ","End":"12:23.005","Text":"We credited the account with 110 being the returns during the year."},{"Start":"12:23.005 ","End":"12:24.460","Text":"That amount comes to,"},{"Start":"12:24.460 ","End":"12:26.320","Text":"if we take those 2 credits is a"},{"Start":"12:26.320 ","End":"12:30.820","Text":"1,000 and yet our balance at the end of the year must be 1,100."},{"Start":"12:30.820 ","End":"12:32.440","Text":"You\u0027ve got an opening balance of a 1,000."},{"Start":"12:32.440 ","End":"12:36.085","Text":"We\u0027ve got 2 credits which add up coincidentally to a 1,000,"},{"Start":"12:36.085 ","End":"12:38.165","Text":"which means that the balance should be 0,"},{"Start":"12:38.165 ","End":"12:40.180","Text":"but it isn\u0027t, it\u0027s 1,100."},{"Start":"12:40.180 ","End":"12:43.300","Text":"That means this must be 1,100."},{"Start":"12:43.300 ","End":"12:45.580","Text":"If that is 1,100,"},{"Start":"12:45.580 ","End":"12:49.195","Text":"then it means that the 3,000 sales,"},{"Start":"12:49.195 ","End":"12:51.340","Text":"which is a credit to sales,"},{"Start":"12:51.340 ","End":"12:54.550","Text":"less the 1,100 being on credit,"},{"Start":"12:54.550 ","End":"12:59.910","Text":"means that this must have been 1,900 debit."},{"Start":"12:59.910 ","End":"13:02.980","Text":"1,100, 3000,"},{"Start":"13:02.980 ","End":"13:07.360","Text":"this 1,100 gives you the 1,900."},{"Start":"13:07.360 ","End":"13:11.769","Text":"Now, the opening balances of cash and inventory"},{"Start":"13:11.769 ","End":"13:17.425","Text":"and the income statement profit before all of these entries had not been given to us."},{"Start":"13:17.425 ","End":"13:19.930","Text":"That means that the closing balances that we\u0027ve put into"},{"Start":"13:19.930 ","End":"13:23.480","Text":"these columns cannot be the closing balances so much as the impacts on those accounts."},{"Start":"13:26.400 ","End":"13:31.720","Text":"That can only be the impacts on these accounts."},{"Start":"13:31.720 ","End":"13:34.450","Text":"They are not the closing balances because we have not got"},{"Start":"13:34.450 ","End":"13:38.980","Text":"the opening balances in this transaction worksheet."},{"Start":"13:38.980 ","End":"13:42.025","Text":"However, looking at the income statement column,"},{"Start":"13:42.025 ","End":"13:47.170","Text":"we don\u0027t know what the opening balance was and that\u0027s fair enough."},{"Start":"13:47.170 ","End":"13:50.335","Text":"So we know that that is not the profit for the year."},{"Start":"13:50.335 ","End":"13:54.475","Text":"It\u0027s just that 2,910 is the impact on profit."},{"Start":"13:54.475 ","End":"13:58.435","Text":"However, the 2,910 is not the answer to our solution."},{"Start":"13:58.435 ","End":"14:01.540","Text":"That\u0027s because the 3,000 and the 0 in"},{"Start":"14:01.540 ","End":"14:05.964","Text":"this column relate to the sales and cash collections from customers."},{"Start":"14:05.964 ","End":"14:08.440","Text":"If you recall, if you go back to the question,"},{"Start":"14:08.440 ","End":"14:14.515","Text":"we were asked for the impact that the returns had on our profit during 20X2."},{"Start":"14:14.515 ","End":"14:15.940","Text":"These are not returns."},{"Start":"14:15.940 ","End":"14:18.910","Text":"This is sales and those are cash collections."},{"Start":"14:18.910 ","End":"14:20.620","Text":"What are the returns?"},{"Start":"14:20.620 ","End":"14:22.375","Text":"The returns of these,"},{"Start":"14:22.375 ","End":"14:25.840","Text":"the cash that we had to refund as a result of return,"},{"Start":"14:25.840 ","End":"14:29.110","Text":"the accounts receivable that we had to credit as a result of the return,"},{"Start":"14:29.110 ","End":"14:36.130","Text":"the cost of merchandise that we had to recognize as a result of the returns."},{"Start":"14:36.130 ","End":"14:39.310","Text":"We\u0027ve got expected sales returns adjustments and"},{"Start":"14:39.310 ","End":"14:43.990","Text":"the expected costs of returns goods adjustments as well."},{"Start":"14:43.990 ","End":"14:47.710","Text":"The 2 that affected our income statement was simply the last 2,"},{"Start":"14:47.710 ","End":"14:53.005","Text":"the expected sales returns and expected cost of return merchandise, of180 and 90."},{"Start":"14:53.005 ","End":"14:58.090","Text":"Refund cash, remember you\u0027re decreasing your cash and you are decreasing"},{"Start":"14:58.090 ","End":"15:03.676","Text":"the refund liability when you except a return and reduce the customer\u0027s account,"},{"Start":"15:03.676 ","End":"15:08.932","Text":"you simply reduce the customer\u0027s account and you reduce the allowance for returns."},{"Start":"15:08.932 ","End":"15:13.269","Text":"When you receive the actual goods back into your stock and put it into a warehouse,"},{"Start":"15:13.269 ","End":"15:14.860","Text":"what\u0027s happening is you\u0027re increasing"},{"Start":"15:14.860 ","End":"15:17.380","Text":"our asset account inventory and you\u0027re"},{"Start":"15:17.380 ","End":"15:20.680","Text":"decreasing the other asset account being the right to return asset,"},{"Start":"15:20.680 ","End":"15:23.710","Text":"which was an estimate that you processed at the end of last year."},{"Start":"15:23.710 ","End":"15:26.390","Text":"The only transactions that affected your income statement were"},{"Start":"15:26.390 ","End":"15:31.145","Text":"the expected sales returns and expected cost of return goods,"},{"Start":"15:31.145 ","End":"15:33.060","Text":"a 180 and 90."},{"Start":"15:33.060 ","End":"15:36.105","Text":"The sales returns a 180."},{"Start":"15:36.105 ","End":"15:41.380","Text":"That decreased your profits so that decrease your sales by a 180,"},{"Start":"15:41.380 ","End":"15:42.940","Text":"so it decreased your profit."},{"Start":"15:42.940 ","End":"15:47.980","Text":"The 90 is the cost of the goods that we expect to be returned."},{"Start":"15:47.980 ","End":"15:52.379","Text":"That is a decrease in your cost of sales and if your cost of sales decreases,"},{"Start":"15:52.379 ","End":"15:54.640","Text":"bearing around your cost of sales as an expense,"},{"Start":"15:54.640 ","End":"15:56.965","Text":"that would increase your profit."},{"Start":"15:56.965 ","End":"16:00.265","Text":"The impact on your profit is 90."},{"Start":"16:00.265 ","End":"16:03.460","Text":"Decrease of profit by 90 because"},{"Start":"16:03.460 ","End":"16:08.995","Text":"your sales decrease by a 180 and your cost of sales decreased by 90."},{"Start":"16:08.995 ","End":"16:13.540","Text":"Remember in this question, a lot of irrelevant information was provided too."},{"Start":"16:13.540 ","End":"16:15.760","Text":"A list to see what we actually needed."},{"Start":"16:15.760 ","End":"16:18.250","Text":"In order to get to that a 180,"},{"Start":"16:18.250 ","End":"16:22.180","Text":"we needed to work out that 80 and 110."},{"Start":"16:22.180 ","End":"16:24.280","Text":"In order to do that,"},{"Start":"16:24.280 ","End":"16:27.520","Text":"we needed the opening balance for the refund liability,"},{"Start":"16:27.520 ","End":"16:28.825","Text":"and allowance for returns."},{"Start":"16:28.825 ","End":"16:32.935","Text":"We needed the closing balance and the closing balance for each of those as well."},{"Start":"16:32.935 ","End":"16:35.680","Text":"We needed to know how much was refunded in"},{"Start":"16:35.680 ","End":"16:39.745","Text":"cash and we needed to know how much is refunded on credit."},{"Start":"16:39.745 ","End":"16:44.230","Text":"In that way we were able to balance to these 2 figures and"},{"Start":"16:44.230 ","End":"16:49.030","Text":"thus determine the impact on sales 20X2."},{"Start":"16:49.030 ","End":"16:52.180","Text":"Similarly to get to this 90,"},{"Start":"16:52.180 ","End":"16:54.400","Text":"which was the adjustment to customer sales,"},{"Start":"16:54.400 ","End":"16:59.290","Text":"what we needed was to have the opening balance for the right to return asset."},{"Start":"16:59.290 ","End":"17:02.065","Text":"We needed to know what our closing balance had to be,"},{"Start":"17:02.065 ","End":"17:05.200","Text":"and we needed to know how much was actually returned in"},{"Start":"17:05.200 ","End":"17:08.770","Text":"terms of the cost of the goods coming back into our stock."},{"Start":"17:08.770 ","End":"17:10.225","Text":"In order to do that,"},{"Start":"17:10.225 ","End":"17:12.790","Text":"we needed to know the sales value of"},{"Start":"17:12.790 ","End":"17:16.705","Text":"the returns and we needed to know the gross profit margin,"},{"Start":"17:16.705 ","End":"17:18.235","Text":"which was 50 percent."},{"Start":"17:18.235 ","End":"17:22.870","Text":"In that way we were able to calculate that the cost of the goods"},{"Start":"17:22.870 ","End":"17:27.970","Text":"that were actually returned and received back into our inventory was 90."},{"Start":"17:27.970 ","End":"17:31.780","Text":"By doing that, we were then able to balance to this figure,"},{"Start":"17:31.780 ","End":"17:35.530","Text":"the 90 being the adjustment to the right to return asset."},{"Start":"17:35.530 ","End":"17:40.330","Text":"That\u0027s how we got to that figure because that\u0027s the impact on our cost of our sales."},{"Start":"17:40.330 ","End":"17:45.170","Text":"Everything else we were given was actually irrelevant."}],"ID":27499},{"Watched":false,"Name":"Factoring","Duration":"5m 50s","ChapterTopicVideoID":26658,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:04.140","Text":"Hello and welcome to another video presentation in"},{"Start":"00:04.140 ","End":"00:08.535","Text":"the series on accounts receivable brought to you by Proprep."},{"Start":"00:08.535 ","End":"00:12.480","Text":"In this video, we will focus on factoring."},{"Start":"00:12.480 ","End":"00:18.150","Text":"It often happens that a company needs cash immediately and cannot"},{"Start":"00:18.150 ","End":"00:24.060","Text":"wait until the customers or the receivables pay the amounts earned by them."},{"Start":"00:24.060 ","End":"00:28.200","Text":"It may then sell the receivables, in other words,"},{"Start":"00:28.200 ","End":"00:33.975","Text":"sell the right to collect the cash to another company this is what we call"},{"Start":"00:33.975 ","End":"00:37.830","Text":"factoring and there are many financial firms"},{"Start":"00:37.830 ","End":"00:41.950","Text":"that specialize in offering the service of factoring."},{"Start":"00:41.950 ","End":"00:46.325","Text":"The factoring company assesses the fair value of the receivables,"},{"Start":"00:46.325 ","End":"00:49.865","Text":"looking at the amount of credit risk,"},{"Start":"00:49.865 ","End":"00:54.005","Text":"and also time to maturity, in other words,"},{"Start":"00:54.005 ","End":"00:59.090","Text":"how long the customers are expected to take to pay the amounts owing."},{"Start":"00:59.090 ","End":"01:05.629","Text":"Clearly, the factoring company will charge a fee for this factoring service."},{"Start":"01:05.629 ","End":"01:07.820","Text":"Looking again at an example,"},{"Start":"01:07.820 ","End":"01:12.110","Text":"you\u0027re told on the 31st of December of the 20th X2 year,"},{"Start":"01:12.110 ","End":"01:13.760","Text":"the company Smoke and Mirrors,"},{"Start":"01:13.760 ","End":"01:17.510","Text":"has a balance of 10,000 currency units"},{"Start":"01:17.510 ","End":"01:21.500","Text":"in its trade or accounts receivable and in addition,"},{"Start":"01:21.500 ","End":"01:28.910","Text":"at that date, there is an allowance for doubtful debts in the amount of 500."},{"Start":"01:28.910 ","End":"01:34.280","Text":"You are told further the company needs cash to pay salaries and it agrees, therefore,"},{"Start":"01:34.280 ","End":"01:37.700","Text":"with the company London Factoring Incorporated to"},{"Start":"01:37.700 ","End":"01:42.530","Text":"solve the receivables for an amount of 9,100."},{"Start":"01:42.530 ","End":"01:45.860","Text":"Now before we look at the solution,"},{"Start":"01:45.860 ","End":"01:49.220","Text":"just take a note that the amount on the accounts receivable is"},{"Start":"01:49.220 ","End":"01:55.140","Text":"10,000 and the amount on the allowance for doubtful debts is 500 so"},{"Start":"01:55.140 ","End":"01:59.660","Text":"what we have is an accounts receivable with a balance of"},{"Start":"01:59.660 ","End":"02:06.245","Text":"10,000 and an allowance for doubtful debts with an amount of 500,"},{"Start":"02:06.245 ","End":"02:10.610","Text":"which I\u0027m going to subtract from the accounts receivable because remember,"},{"Start":"02:10.610 ","End":"02:15.590","Text":"the allowance is an amount which the company expects it possibly will"},{"Start":"02:15.590 ","End":"02:21.290","Text":"not receive from its debtors or receivables and therefore,"},{"Start":"02:21.290 ","End":"02:30.930","Text":"the expected cash flow that Smoke and Mirrors expect from our customers is in fact 9,500."},{"Start":"02:30.930 ","End":"02:35.020","Text":"As the balance sheet would show, this 9,500,"},{"Start":"02:35.020 ","End":"02:40.085","Text":"would appear on the face of the balance sheet."},{"Start":"02:40.085 ","End":"02:50.360","Text":"Now, if these debtors for 9,500 are sold to the factoring company for 9,100,"},{"Start":"02:50.360 ","End":"02:53.180","Text":"is clearly going to be a cost."},{"Start":"02:53.180 ","End":"03:00.245","Text":"The financing cost, which will be incurred by Smoke and Mirrors in an amount of 400."},{"Start":"03:00.245 ","End":"03:04.145","Text":"We will see on the next slide how this is recorded."},{"Start":"03:04.145 ","End":"03:08.450","Text":"As a starting point, we\u0027ll enter the balances so the balance in"},{"Start":"03:08.450 ","End":"03:12.800","Text":"accounts receivable is 10,000 and the balance in"},{"Start":"03:12.800 ","End":"03:15.500","Text":"the allowance for doubtful debts remember as"},{"Start":"03:15.500 ","End":"03:21.145","Text":"a negative or contra asset is the amount you see of 500."},{"Start":"03:21.145 ","End":"03:23.070","Text":"To put in the debits and credits,"},{"Start":"03:23.070 ","End":"03:25.010","Text":"this has a debit balance,"},{"Start":"03:25.010 ","End":"03:29.600","Text":"and this as a contra asset account has a credit balance."},{"Start":"03:29.600 ","End":"03:33.560","Text":"Now, what is happening in the factoring process?"},{"Start":"03:33.560 ","End":"03:39.604","Text":"The company is selling its receivables to the factoring company."},{"Start":"03:39.604 ","End":"03:44.030","Text":"Therefore, the company can no longer report the amount for accounts"},{"Start":"03:44.030 ","End":"03:49.765","Text":"receivable or the amount of the allowance for doubtful debts on its balance sheet,"},{"Start":"03:49.765 ","End":"03:54.860","Text":"it therefore, has to remove the full amount of the accounts receivable."},{"Start":"03:54.860 ","End":"03:58.820","Text":"It will clearly be a credit because the balance was originally"},{"Start":"03:58.820 ","End":"04:05.645","Text":"a debit and it has to remove the full amount of the allowance for doubtful debts,"},{"Start":"04:05.645 ","End":"04:10.565","Text":"which will be a debit to that account because the balance was in credit."},{"Start":"04:10.565 ","End":"04:13.430","Text":"Now, as you saw on the previous slide,"},{"Start":"04:13.430 ","End":"04:15.695","Text":"and I\u0027ll just make a note of it over here,"},{"Start":"04:15.695 ","End":"04:25.815","Text":"the net book value or accounting value of these receivables is the 10,000 less the 500,"},{"Start":"04:25.815 ","End":"04:31.185","Text":"which we know is 9,500 so just remember that number."},{"Start":"04:31.185 ","End":"04:35.405","Text":"Now, how much cash do the company receive?"},{"Start":"04:35.405 ","End":"04:39.235","Text":"We\u0027re told the company received 9,100,"},{"Start":"04:39.235 ","End":"04:41.615","Text":"so an increase in the asset cash,"},{"Start":"04:41.615 ","End":"04:43.550","Text":"which must therefore be a debit."},{"Start":"04:43.550 ","End":"04:46.910","Text":"How will this a transaction balance?"},{"Start":"04:46.910 ","End":"04:50.720","Text":"We have an increase in cash for 9,100,"},{"Start":"04:50.720 ","End":"04:53.105","Text":"which is the debit,"},{"Start":"04:53.105 ","End":"04:56.100","Text":"we have a decrease in accounts receivable,"},{"Start":"04:56.100 ","End":"04:57.995","Text":"a credit of 10,000,"},{"Start":"04:57.995 ","End":"05:01.669","Text":"we have a reversal or decrease in the allowance,"},{"Start":"05:01.669 ","End":"05:03.380","Text":"a debit of 500,"},{"Start":"05:03.380 ","End":"05:08.809","Text":"and the balancing number over here must clearly be a debit to the income statement,"},{"Start":"05:08.809 ","End":"05:11.645","Text":"in the amount of 400,"},{"Start":"05:11.645 ","End":"05:15.260","Text":"which represents the financing cost."},{"Start":"05:15.260 ","End":"05:20.705","Text":"We could write out the journal entry as follows looking at the table above,"},{"Start":"05:20.705 ","End":"05:25.340","Text":"it will be a debit to cash of 9,100."},{"Start":"05:25.340 ","End":"05:31.945","Text":"It\u0027ll be a credit to accounts receivable of 10,000."},{"Start":"05:31.945 ","End":"05:36.575","Text":"It will be a debit to the allowance and I\u0027ll put here dd,"},{"Start":"05:36.575 ","End":"05:39.260","Text":"doubtful debts of 500,"},{"Start":"05:39.260 ","End":"05:46.965","Text":"and it will be a debit to the financing cost in an amount of 400."},{"Start":"05:46.965 ","End":"05:51.430","Text":"Note the till entry clearly balances."}],"ID":27500},{"Watched":false,"Name":"Exercise 7 - part 1","Duration":"1m 12s","ChapterTopicVideoID":26453,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.585","Text":"Today\u0027s exercise is entitled Sparks."},{"Start":"00:03.585 ","End":"00:08.819","Text":"During 20X2, Sparks recorded 10,000 currency units in sales."},{"Start":"00:08.819 ","End":"00:11.955","Text":"The composition of these sales is provided below."},{"Start":"00:11.955 ","End":"00:13.785","Text":"We have cash sales,"},{"Start":"00:13.785 ","End":"00:17.145","Text":"credit sales recorded in the accounts receivable and what you paid,"},{"Start":"00:17.145 ","End":"00:18.795","Text":"and credit card sales,"},{"Start":"00:18.795 ","End":"00:23.640","Text":"making up a total sales of 10,000. Credit card companies"},{"Start":"00:23.640 ","End":"00:29.355","Text":"transfer the sales amount less a 2 percent fee in cash within 48 hours."},{"Start":"00:29.355 ","End":"00:32.010","Text":"As at 31/12/20X2,"},{"Start":"00:32.010 ","End":"00:37.455","Text":"credit card companies still owe Sparks in respect of sales of 500."},{"Start":"00:37.455 ","End":"00:40.905","Text":"Cost of sales is 60 percent of the sales amount."},{"Start":"00:40.905 ","End":"00:42.230","Text":"Close to year-end,"},{"Start":"00:42.230 ","End":"00:46.175","Text":"Sparks sold 2,000 of its accounts receivable"},{"Start":"00:46.175 ","End":"00:51.670","Text":"for 1,900 currency units in cash to a factoring company."},{"Start":"00:51.670 ","End":"00:53.765","Text":"Let\u0027s look at the required."},{"Start":"00:53.765 ","End":"00:56.615","Text":"Assuming that during 20X2,"},{"Start":"00:56.615 ","End":"01:00.635","Text":"the beginning balance for accounts receivable was fully paid in cash,"},{"Start":"01:00.635 ","End":"01:06.620","Text":"calculate A, the ending balance of accounts receivable,"},{"Start":"01:06.620 ","End":"01:09.035","Text":"and B, the profit for the year."},{"Start":"01:09.035 ","End":"01:12.300","Text":"Let\u0027s use the following worksheet."}],"ID":27501},{"Watched":false,"Name":"Exercise 7 - part 2","Duration":"7m 53s","ChapterTopicVideoID":26454,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.400","Text":"Let\u0027s attempt the solution to Sparks."},{"Start":"00:02.400 ","End":"00:05.925","Text":"This is the worksheet we were asked to complete."},{"Start":"00:05.925 ","End":"00:08.400","Text":"Let\u0027s start with the first item we were given."},{"Start":"00:08.400 ","End":"00:10.335","Text":"Cash sales of 2,000."},{"Start":"00:10.335 ","End":"00:13.065","Text":"Let\u0027s see how to record that in our worksheet."},{"Start":"00:13.065 ","End":"00:15.840","Text":"Cash sales obviously affect the cash column,"},{"Start":"00:15.840 ","End":"00:18.240","Text":"so we put 2,000 in the cash column."},{"Start":"00:18.240 ","End":"00:20.325","Text":"Then obviously because it\u0027s a sale,"},{"Start":"00:20.325 ","End":"00:24.120","Text":"we put the 2,000 under the income statement column because"},{"Start":"00:24.120 ","End":"00:28.200","Text":"the income statement shows income and expenses and sales is an income."},{"Start":"00:28.200 ","End":"00:30.075","Text":"If we look at those two amounts,"},{"Start":"00:30.075 ","End":"00:32.040","Text":"what would the journal entry be?"},{"Start":"00:32.040 ","End":"00:33.690","Text":"Well, our cash is going up,"},{"Start":"00:33.690 ","End":"00:38.760","Text":"so we debit the cash because assets go up on the debit side, cash is an asset,"},{"Start":"00:38.760 ","End":"00:43.070","Text":"and then the 2,000 to sales is a credit to"},{"Start":"00:43.070 ","End":"00:47.330","Text":"sales because sales is an income and income goes up on the credit side."},{"Start":"00:47.330 ","End":"00:49.670","Text":"Let\u0027s look at the next item in the question."},{"Start":"00:49.670 ","End":"00:54.530","Text":"The next item in the question was credit sales of 3,000. Credit sales,"},{"Start":"00:54.530 ","End":"00:56.600","Text":"we\u0027re obviously going to put the 3,000 in"},{"Start":"00:56.600 ","End":"01:00.380","Text":"the income statement column because that\u0027s sales income."},{"Start":"01:00.380 ","End":"01:03.410","Text":"Because it hasn\u0027t yet been received in cash,"},{"Start":"01:03.410 ","End":"01:04.440","Text":"it\u0027s a credit sale,"},{"Start":"01:04.440 ","End":"01:07.220","Text":"it goes into the accounts receivable column."},{"Start":"01:07.220 ","End":"01:09.229","Text":"We\u0027ll look at those two accounts."},{"Start":"01:09.229 ","End":"01:10.984","Text":"What are the journal entries?"},{"Start":"01:10.984 ","End":"01:16.190","Text":"Well, sales is income and income gets bigger on the credit side,"},{"Start":"01:16.190 ","End":"01:18.020","Text":"so we\u0027re crediting sales."},{"Start":"01:18.020 ","End":"01:21.650","Text":"In this 3,000 is a debit to receivables."},{"Start":"01:21.650 ","End":"01:23.240","Text":"Receivables is an asset,"},{"Start":"01:23.240 ","End":"01:27.425","Text":"it\u0027s going up so we debited because assets get bigger on the debit side."},{"Start":"01:27.425 ","End":"01:29.450","Text":"Then in the question, the third item,"},{"Start":"01:29.450 ","End":"01:32.660","Text":"whereas the credit card sales of 5,000."},{"Start":"01:32.660 ","End":"01:35.570","Text":"Now credit card sales are almost cash."},{"Start":"01:35.570 ","End":"01:39.710","Text":"Here we\u0027re told that the credit card companies transfer the sales amount less"},{"Start":"01:39.710 ","End":"01:43.725","Text":"a 2% fee in cash within 48 hours,"},{"Start":"01:43.725 ","End":"01:47.434","Text":"so it\u0027s almost received in cash immediately."},{"Start":"01:47.434 ","End":"01:49.580","Text":"It\u0027s not quite immediate,"},{"Start":"01:49.580 ","End":"01:50.750","Text":"it takes 48 hours,"},{"Start":"01:50.750 ","End":"01:53.945","Text":"and there\u0027s a cost involved to us, the business."},{"Start":"01:53.945 ","End":"01:57.180","Text":"Then as at 31st December 20X2,"},{"Start":"01:57.180 ","End":"02:03.230","Text":"our current year, credit card companies still owe Sparks in respect to sales of 500."},{"Start":"02:03.230 ","End":"02:05.210","Text":"Let\u0027s see how to record this."},{"Start":"02:05.210 ","End":"02:09.029","Text":"Well, we\u0027re told that we have credit card sales and the total amount of the sales,"},{"Start":"02:09.029 ","End":"02:10.640","Text":"plural, of 5,000."},{"Start":"02:10.640 ","End":"02:14.450","Text":"We\u0027re told that these sales cost us 2%."},{"Start":"02:14.450 ","End":"02:17.135","Text":"2% of 5,000 is 100,"},{"Start":"02:17.135 ","End":"02:21.100","Text":"and we\u0027re going to record that as a separate expense called the finance cost."},{"Start":"02:21.100 ","End":"02:25.130","Text":"We don\u0027t recognize the net amount as ourselves,"},{"Start":"02:25.130 ","End":"02:29.765","Text":"we recognize the full 5,000 as sales and we recognize the 100,"},{"Start":"02:29.765 ","End":"02:33.125","Text":"2% cost, as a separate finance cost."},{"Start":"02:33.125 ","End":"02:35.810","Text":"Now we have a column for other receivables."},{"Start":"02:35.810 ","End":"02:39.110","Text":"Now this indicates not a customer owing us,"},{"Start":"02:39.110 ","End":"02:41.030","Text":"but the bank owing us."},{"Start":"02:41.030 ","End":"02:43.760","Text":"We separate it from the normal accounts receivable and we"},{"Start":"02:43.760 ","End":"02:46.805","Text":"have another column for other receivables."},{"Start":"02:46.805 ","End":"02:49.670","Text":"Now, we\u0027re told that the bank still owes us with"},{"Start":"02:49.670 ","End":"02:54.439","Text":"a credit card companies still owe us in terms of sales of 500."},{"Start":"02:54.439 ","End":"02:56.570","Text":"But they\u0027re not going to pay us 500,"},{"Start":"02:56.570 ","End":"02:59.020","Text":"they\u0027re going to pay us 98%."},{"Start":"02:59.020 ","End":"03:01.620","Text":"In other words, less the 2% fee."},{"Start":"03:01.620 ","End":"03:05.670","Text":"They\u0027re going to pay us 98% less the 2% fee of the 500,"},{"Start":"03:05.670 ","End":"03:07.785","Text":"so they\u0027re going to pay us 490."},{"Start":"03:07.785 ","End":"03:11.560","Text":"That then means they must have paid us, let\u0027s work it out."},{"Start":"03:11.570 ","End":"03:15.995","Text":"The total sales of 5,000 less of fees the bank,"},{"Start":"03:15.995 ","End":"03:18.965","Text":"or should I say the credit card company is going to take,"},{"Start":"03:18.965 ","End":"03:21.310","Text":"less the amount they still owe us,"},{"Start":"03:21.310 ","End":"03:24.165","Text":"490, that\u0027s less their fee."},{"Start":"03:24.165 ","End":"03:27.315","Text":"That gives us an amount of 4,410,"},{"Start":"03:27.315 ","End":"03:31.550","Text":"so that must be what they\u0027ve paid us in cash so far."},{"Start":"03:31.550 ","End":"03:34.730","Text":"Now let\u0027s look at all of those entries and see how we"},{"Start":"03:34.730 ","End":"03:37.520","Text":"would record them in terms of a journal entry."},{"Start":"03:37.520 ","End":"03:39.570","Text":"Well, the 5,000 is income,"},{"Start":"03:39.570 ","End":"03:43.550","Text":"so we\u0027re going to credit sales because income gets bigger on the credit side."},{"Start":"03:43.550 ","End":"03:45.590","Text":"We created that with 5,000."},{"Start":"03:45.590 ","End":"03:50.450","Text":"Then the 100 finance cost is an expense to us,"},{"Start":"03:50.450 ","End":"03:52.670","Text":"and expenses get bigger on the debit side,"},{"Start":"03:52.670 ","End":"03:55.745","Text":"so we\u0027re going to debit the finance cost with the 100."},{"Start":"03:55.745 ","End":"04:01.620","Text":"Then we\u0027re owed 490 net from the credit card company,"},{"Start":"04:01.620 ","End":"04:03.210","Text":"so we\u0027re going to debit receivables,"},{"Start":"04:03.210 ","End":"04:04.500","Text":"this is 490,"},{"Start":"04:04.500 ","End":"04:11.285","Text":"and then the cash is going to be debited with the balancing amount of 4,410."},{"Start":"04:11.285 ","End":"04:16.200","Text":"You can see here we\u0027ve got 3 debits: the cash of 4,410,"},{"Start":"04:16.200 ","End":"04:18.420","Text":"the receivable of 490,"},{"Start":"04:18.420 ","End":"04:20.115","Text":"and the finance cost of 100."},{"Start":"04:20.115 ","End":"04:21.950","Text":"If you add up those three debits,"},{"Start":"04:21.950 ","End":"04:25.040","Text":"you should get the credit entry of 5,000,"},{"Start":"04:25.040 ","End":"04:27.660","Text":"so generally entry balances."},{"Start":"04:28.120 ","End":"04:30.620","Text":"Then our cost of sales."},{"Start":"04:30.620 ","End":"04:36.800","Text":"We were told that the cost of the goods were equivalent to 60% of the selling price."},{"Start":"04:36.800 ","End":"04:44.995","Text":"We can tell here that our total sales is 10,000 and 60% of that is 6,000."},{"Start":"04:44.995 ","End":"04:48.350","Text":"Thus, our cost of sales is 6,000."},{"Start":"04:48.350 ","End":"04:51.290","Text":"We obviously need to take that 6,000 out of"},{"Start":"04:51.290 ","End":"04:54.770","Text":"our inventory asset to indicate that we\u0027ve sold those goods."},{"Start":"04:54.770 ","End":"04:57.709","Text":"If we look at those 2 items,"},{"Start":"04:57.709 ","End":"04:59.955","Text":"so this amount of 6,000,"},{"Start":"04:59.955 ","End":"05:04.445","Text":"shown in the income statement in brackets because it\u0027s decreasing our equity,"},{"Start":"05:04.445 ","End":"05:09.275","Text":"and it\u0027s decreasing our equity because it\u0027s an expense, is being debited."},{"Start":"05:09.275 ","End":"05:15.770","Text":"We would debit the cost of sales expense and we would credit the inventory asset,"},{"Start":"05:15.770 ","End":"05:21.190","Text":"so our asset is going down and our cost of sales expense,"},{"Start":"05:21.190 ","End":"05:24.635","Text":"means that our expenses are going up,"},{"Start":"05:24.635 ","End":"05:28.220","Text":"which means our equity is going down."},{"Start":"05:28.220 ","End":"05:30.304","Text":"If you look at your accounting equation,"},{"Start":"05:30.304 ","End":"05:33.890","Text":"assets - liabilities = equity,"},{"Start":"05:33.890 ","End":"05:37.165","Text":"our assets are going down by 6,000,"},{"Start":"05:37.165 ","End":"05:39.485","Text":"our liabilities remain unchanged,"},{"Start":"05:39.485 ","End":"05:42.755","Text":"and our equity is going down by 6,000,"},{"Start":"05:42.755 ","End":"05:45.620","Text":"so our accounting equation balances."},{"Start":"05:45.620 ","End":"05:47.465","Text":"Then we have factoring."},{"Start":"05:47.465 ","End":"05:51.470","Text":"Now, this is where we sell accounts receivable to raise cash."},{"Start":"05:51.470 ","End":"05:55.175","Text":"We\u0027ve sold accounts receivable to the value of 2,000 to somebody"},{"Start":"05:55.175 ","End":"05:59.150","Text":"else who\u0027s happy to recover those receivables."},{"Start":"05:59.150 ","End":"06:02.920","Text":"We sold it for 1,900."},{"Start":"06:02.920 ","End":"06:06.080","Text":"That means we\u0027ve lost out an amount of 100,"},{"Start":"06:06.080 ","End":"06:08.150","Text":"which we call a finance cost."},{"Start":"06:08.150 ","End":"06:10.790","Text":"If we look at those three entries there,"},{"Start":"06:10.790 ","End":"06:12.710","Text":"what is the journal entry?"},{"Start":"06:12.710 ","End":"06:15.770","Text":"The 2,000 is coming out of our receivables."},{"Start":"06:15.770 ","End":"06:17.570","Text":"Now remember that is an asset,"},{"Start":"06:17.570 ","End":"06:21.260","Text":"so our receivables is an asset which goes down,"},{"Start":"06:21.260 ","End":"06:23.090","Text":"so therefore we are crediting it,"},{"Start":"06:23.090 ","End":"06:25.655","Text":"and then we\u0027re debiting our cash."},{"Start":"06:25.655 ","End":"06:32.480","Text":"Our cash is an asset which is going up and then we have the 100 being the finance cost,"},{"Start":"06:32.480 ","End":"06:36.720","Text":"and this is an expense which is going up,"},{"Start":"06:36.720 ","End":"06:39.800","Text":"Which means that our profit is going down,"},{"Start":"06:39.800 ","End":"06:44.050","Text":"which means our equity is going down."},{"Start":"06:44.050 ","End":"06:46.680","Text":"We have here two debits,"},{"Start":"06:46.680 ","End":"06:51.845","Text":"the debit to the cash of 1,900 and the debit to the finance cost of 100,"},{"Start":"06:51.845 ","End":"06:56.105","Text":"and those two debits add up to the credit of 2,000."},{"Start":"06:56.105 ","End":"07:02.030","Text":"We add up all of those columns and it shows the impact on those accounts."},{"Start":"07:02.030 ","End":"07:06.020","Text":"Now, I say it\u0027s the impact because I haven\u0027t got the opening balances in here,"},{"Start":"07:06.020 ","End":"07:12.020","Text":"so we can\u0027t presuppose that those totals are the closing balances."},{"Start":"07:12.020 ","End":"07:16.070","Text":"However, we were asked for the impact on profit or loss."},{"Start":"07:16.070 ","End":"07:22.944","Text":"The profit or loss has increased by 3,800 and the receivables balance,"},{"Start":"07:22.944 ","End":"07:24.360","Text":"well, what is that?"},{"Start":"07:24.360 ","End":"07:26.880","Text":"We know the impact is 1,000,"},{"Start":"07:26.880 ","End":"07:29.705","Text":"so the increase in the receivables was 1,000,"},{"Start":"07:29.705 ","End":"07:33.050","Text":"but we were told that the opening balance was 0."},{"Start":"07:33.050 ","End":"07:35.345","Text":"I hadn\u0027t bothered to put that in here."},{"Start":"07:35.345 ","End":"07:38.570","Text":"You might have wanted to put the opening balance of 0 into"},{"Start":"07:38.570 ","End":"07:42.065","Text":"the accounts receivable column. I hadn\u0027t done it."},{"Start":"07:42.065 ","End":"07:43.820","Text":"But I, therefore,"},{"Start":"07:43.820 ","End":"07:47.990","Text":"have simply explained that the opening balance was 0 and therefore,"},{"Start":"07:47.990 ","End":"07:53.070","Text":"the receivable\u0027s closing balance is 1,000."}],"ID":27502},{"Watched":false,"Name":"Notes receivables","Duration":"6m 10s","ChapterTopicVideoID":26659,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.420","Text":"Hello, and welcome to another video presentation in"},{"Start":"00:03.420 ","End":"00:08.160","Text":"the series on accounts receivable brought to you by Proprep."},{"Start":"00:08.160 ","End":"00:12.600","Text":"In this video, we will focus on notes receivable."},{"Start":"00:12.600 ","End":"00:15.990","Text":"Accounts receivable in the normal course of business,"},{"Start":"00:15.990 ","End":"00:17.580","Text":"typically do not carry"},{"Start":"00:17.580 ","End":"00:21.030","Text":"an explicit interest charge as long as"},{"Start":"00:21.030 ","End":"00:24.853","Text":"the payment takes place within the agreed credit period,"},{"Start":"00:24.853 ","End":"00:26.835","Text":"for example, of 15 days,"},{"Start":"00:26.835 ","End":"00:29.025","Text":"30 days, or 60 days."},{"Start":"00:29.025 ","End":"00:31.590","Text":"Now, there may be situations,"},{"Start":"00:31.590 ","End":"00:35.845","Text":"and these situations arise not in the scenario"},{"Start":"00:35.845 ","End":"00:40.503","Text":"of a individual customer like you and me buying goods and credit,"},{"Start":"00:40.503 ","End":"00:46.760","Text":"but in some countries where a business entity buys goods or services from"},{"Start":"00:46.760 ","End":"00:54.650","Text":"another business entity and the buying entity needs longer to repay the amount owing,"},{"Start":"00:54.650 ","End":"00:58.070","Text":"in these situations, the customer may issue"},{"Start":"00:58.070 ","End":"01:02.945","Text":"the seller with a note receivable which carries interest."},{"Start":"01:02.945 ","End":"01:05.400","Text":"What this means is the accounts receivable,"},{"Start":"01:05.400 ","End":"01:10.429","Text":"the debtors are converted to another type of financial instrument."},{"Start":"01:10.429 ","End":"01:15.065","Text":"Another type of receivable called a notes receivable,"},{"Start":"01:15.065 ","End":"01:21.598","Text":"which enables or which allows the customer a longer period to pay,"},{"Start":"01:21.598 ","End":"01:26.315","Text":"clearly, in agreement with the provider of the credit."},{"Start":"01:26.315 ","End":"01:30.830","Text":"The interest on the note is calculated based on"},{"Start":"01:30.830 ","End":"01:35.485","Text":"the passage of time and is normally expressed at an annual rate."},{"Start":"01:35.485 ","End":"01:37.348","Text":"As with other assets,"},{"Start":"01:37.348 ","End":"01:42.905","Text":"a note receivable that is payable within 1 year is classified as a current asset,"},{"Start":"01:42.905 ","End":"01:47.540","Text":"otherwise, it will be classified as a non-current asset."},{"Start":"01:47.540 ","End":"01:49.265","Text":"Looking at an example,"},{"Start":"01:49.265 ","End":"01:54.500","Text":"you are told on the 31st of December of the 20X2 year, again,"},{"Start":"01:54.500 ","End":"01:58.310","Text":"Smoke and Mirrors reports a balance of this time again,"},{"Start":"01:58.310 ","End":"02:03.155","Text":"10,000 currency units in its trade or accounts receivables."},{"Start":"02:03.155 ","End":"02:07.895","Text":"This is owed by a company called the Medrano Circus Company."},{"Start":"02:07.895 ","End":"02:10.396","Text":"There\u0027s no interest in the credit term,"},{"Start":"02:10.396 ","End":"02:17.930","Text":"but the amount is owing by Medrano in full on the 1st of January of 20X3."},{"Start":"02:17.930 ","End":"02:21.755","Text":"In other words, the day after the balance sheet date."},{"Start":"02:21.755 ","End":"02:29.215","Text":"Medrano agrees with S\u0026M that it will issue a 6-month note receivable."},{"Start":"02:29.215 ","End":"02:30.920","Text":"Because it\u0027s 6 months,"},{"Start":"02:30.920 ","End":"02:34.385","Text":"it\u0027ll be payable on the 30th of June 20X3,"},{"Start":"02:34.385 ","End":"02:37.925","Text":"and the agreed interest rate is 5%."},{"Start":"02:37.925 ","End":"02:41.650","Text":"Then on that date that you do in 20X3,"},{"Start":"02:41.650 ","End":"02:46.010","Text":"Medrano pays the full amount to settle the note receivable."},{"Start":"02:46.010 ","End":"02:50.855","Text":"Let\u0027s take a look how this event or these events are recorded."},{"Start":"02:50.855 ","End":"02:52.880","Text":"Well firstly, put in the balance."},{"Start":"02:52.880 ","End":"02:57.860","Text":"This time the balance is on accounts receivable of 10,000,"},{"Start":"02:57.860 ","End":"03:01.115","Text":"a debit balance as it\u0027s an asset."},{"Start":"03:01.115 ","End":"03:04.370","Text":"A note, unlike the previous example,"},{"Start":"03:04.370 ","End":"03:09.650","Text":"there is no allowance for doubtful debts in this particular scenario."},{"Start":"03:09.650 ","End":"03:14.450","Text":"Then when the note receivable is issued,"},{"Start":"03:14.450 ","End":"03:21.466","Text":"S\u0026M needs to reduce the asset accounts receivable, 10,000."},{"Start":"03:21.466 ","End":"03:23.235","Text":"Because the asset is being reduced,"},{"Start":"03:23.235 ","End":"03:28.190","Text":"that\u0027ll be a credit to accounts receivable and S\u0026M will increase"},{"Start":"03:28.190 ","End":"03:34.820","Text":"another asset called notes receivable by that same amount of 10,000."},{"Start":"03:34.820 ","End":"03:36.380","Text":"Because it\u0027s an asset,"},{"Start":"03:36.380 ","End":"03:40.100","Text":"it will [inaudible] increase with a debit balance."},{"Start":"03:40.100 ","End":"03:43.504","Text":"Before we look at the entries for the settlement,"},{"Start":"03:43.504 ","End":"03:47.990","Text":"let\u0027s take a look at the calculation of the interest income."},{"Start":"03:47.990 ","End":"03:52.595","Text":"We know the note receivable is an amount of 10,000."},{"Start":"03:52.595 ","End":"03:56.420","Text":"We are told the interest rate is 5% per annum."},{"Start":"03:56.420 ","End":"04:01.175","Text":"The note has been outstanding from 1 January until 30 June."},{"Start":"04:01.175 ","End":"04:04.268","Text":"Other words, for 6 months of the."},{"Start":"04:04.268 ","End":"04:09.365","Text":"Those gives us an amount of interest of 250."},{"Start":"04:09.365 ","End":"04:15.020","Text":"Therefore, the cash that will be received by S\u0026M is"},{"Start":"04:15.020 ","End":"04:20.435","Text":"an amount of 10,250 increase in the asset cash,"},{"Start":"04:20.435 ","End":"04:22.345","Text":"and therefore a debit."},{"Start":"04:22.345 ","End":"04:27.650","Text":"The notes receivable no longer exists."},{"Start":"04:27.650 ","End":"04:30.985","Text":"That needs to be reduced down to zero,"},{"Start":"04:30.985 ","End":"04:33.680","Text":"and because it\u0027s an asset, therefore,"},{"Start":"04:33.680 ","End":"04:37.145","Text":"there is a credit to notes receivable of 10,000."},{"Start":"04:37.145 ","End":"04:39.770","Text":"To make this entry balance,"},{"Start":"04:39.770 ","End":"04:45.125","Text":"there will be interest income recorded in an amount of 250,"},{"Start":"04:45.125 ","End":"04:50.240","Text":"which would clearly be a credit to the interest income account."},{"Start":"04:50.240 ","End":"04:56.278","Text":"Writing out the journal entry for these 2 transactions,"},{"Start":"04:56.278 ","End":"04:58.920","Text":"let\u0027s label this transaction number 1,"},{"Start":"04:58.920 ","End":"05:03.470","Text":"which is the issuing of the note receivable."},{"Start":"05:03.470 ","End":"05:11.760","Text":"There will be a debit to the notes receivable to increase it in an amount of 10,000,"},{"Start":"05:11.760 ","End":"05:15.645","Text":"and a credit to the accounts receivable,"},{"Start":"05:15.645 ","End":"05:19.895","Text":"which reduces it for 10,000 as well."},{"Start":"05:19.895 ","End":"05:21.950","Text":"Looking at the second entry,"},{"Start":"05:21.950 ","End":"05:23.675","Text":"that\u0027s the second entry,"},{"Start":"05:23.675 ","End":"05:26.840","Text":"we know there\u0027s an increase in asset cash,"},{"Start":"05:26.840 ","End":"05:34.795","Text":"a debit to cash to increase it by the amount of 10,250,"},{"Start":"05:34.795 ","End":"05:38.720","Text":"a credit to the notes receivable,"},{"Start":"05:38.720 ","End":"05:42.740","Text":"which is now being reduced,"},{"Start":"05:42.740 ","End":"05:46.055","Text":"so we reduce it with a credit for 10,000,"},{"Start":"05:46.055 ","End":"05:52.505","Text":"and a credit to recognize the interest income which is being earned."},{"Start":"05:52.505 ","End":"05:54.965","Text":"Remember, income increases with the credit,"},{"Start":"05:54.965 ","End":"05:59.615","Text":"so we credit interest income for the amount of 250."},{"Start":"05:59.615 ","End":"06:01.925","Text":"Remember, as we said before,"},{"Start":"06:01.925 ","End":"06:09.930","Text":"we credit the interest income because income increases owner\u0027s equity."}],"ID":27503},{"Watched":false,"Name":"Exercise 8 - part 1","Duration":"57s","ChapterTopicVideoID":26455,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.625","Text":"Today\u0027s exercise is Brandon."},{"Start":"00:02.625 ","End":"00:07.305","Text":"On 30th, September 20X1 Marlon purchased from Brandon,"},{"Start":"00:07.305 ","End":"00:10.665","Text":"inventory marked a 30,000 currency units."},{"Start":"00:10.665 ","End":"00:15.105","Text":"The normal credit terms Brandon extends to its customers is 90 days."},{"Start":"00:15.105 ","End":"00:20.190","Text":"On 31st December 20X1 Marlon who could not make the payment issued"},{"Start":"00:20.190 ","End":"00:25.500","Text":"a 30,000 currency note to Brandon at an interest rate of 5%,"},{"Start":"00:25.500 ","End":"00:30.120","Text":"due in half a year on 30th of June, 20X2."},{"Start":"00:30.120 ","End":"00:32.670","Text":"On 30th of June 20X2,"},{"Start":"00:32.670 ","End":"00:37.300","Text":"Marlon could only pay 50% of the principal amount and accrued interest."},{"Start":"00:37.300 ","End":"00:38.930","Text":"It committed to Brandon,"},{"Start":"00:38.930 ","End":"00:41.090","Text":"it will pay the balance in the future."},{"Start":"00:41.090 ","End":"00:45.880","Text":"However, Brandon believes it should impair the remaining balance by 50%."},{"Start":"00:45.880 ","End":"00:49.245","Text":"Brandon\u0027s financial year-end is 31st December."},{"Start":"00:49.245 ","End":"00:52.715","Text":"Required, pass the necessary entries for Brandon"},{"Start":"00:52.715 ","End":"00:57.540","Text":"using the transaction worksheet to reflect these events."}],"ID":27504},{"Watched":false,"Name":"Exercise 8 - part 2","Duration":"11m 59s","ChapterTopicVideoID":26456,"CourseChapterTopicPlaylistID":255637,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.010","Text":"The solution to Brandon."},{"Start":"00:02.010 ","End":"00:05.835","Text":"Here we have a transaction worksheet with a number of columns."},{"Start":"00:05.835 ","End":"00:08.640","Text":"Now the titles of each of these columns would only be"},{"Start":"00:08.640 ","End":"00:11.789","Text":"known as you work through this solution."},{"Start":"00:11.789 ","End":"00:14.970","Text":"Let\u0027s look at the first piece of information that we were give them."},{"Start":"00:14.970 ","End":"00:18.765","Text":"The first piece of information was on 30th of September 20X1,"},{"Start":"00:18.765 ","End":"00:21.285","Text":"Marlon purchased from Brandon,"},{"Start":"00:21.285 ","End":"00:23.820","Text":"inventory marked at 30,000."},{"Start":"00:23.820 ","End":"00:25.650","Text":"Marlon is our customer,"},{"Start":"00:25.650 ","End":"00:27.135","Text":"and we are Brandon."},{"Start":"00:27.135 ","End":"00:32.865","Text":"Marlon purchased from us inventory that we had marked at 30,000."},{"Start":"00:32.865 ","End":"00:36.225","Text":"That means the 30,000 is the selling price."},{"Start":"00:36.225 ","End":"00:38.745","Text":"On the 30th September 20X1,"},{"Start":"00:38.745 ","End":"00:42.735","Text":"we need to record this credit sale to Marlon."},{"Start":"00:42.735 ","End":"00:44.510","Text":"In the income statement,"},{"Start":"00:44.510 ","End":"00:48.680","Text":"we\u0027re going to increase our equity by 30,000,"},{"Start":"00:48.680 ","End":"00:52.640","Text":"and the specific account that we would be increasing is sales."},{"Start":"00:52.640 ","End":"00:56.150","Text":"The other side of the entry would be to accounts receivable,"},{"Start":"00:56.150 ","End":"00:58.965","Text":"and this is because we were not paid."},{"Start":"00:58.965 ","End":"01:00.405","Text":"For your interest,"},{"Start":"01:00.405 ","End":"01:02.465","Text":"the journal entry would be here,"},{"Start":"01:02.465 ","End":"01:08.330","Text":"credit our sales because sales is income and sales gets bigger on the credit side."},{"Start":"01:08.330 ","End":"01:12.005","Text":"We would credit our sales with 30,000 to increase the income,"},{"Start":"01:12.005 ","End":"01:19.350","Text":"and that 30,000 is a debit to the accounts receivable with 30,000."},{"Start":"01:19.350 ","End":"01:24.540","Text":"Accounts receivable is an asset and assets get bigger on the debit side."},{"Start":"01:24.540 ","End":"01:27.460","Text":"Now let\u0027s look at the second piece of information."},{"Start":"01:27.460 ","End":"01:32.590","Text":"The normal credit terms Brandon extends to its customers is 90 days."},{"Start":"01:32.590 ","End":"01:39.730","Text":"This simply proves that we hadn\u0027t received the amount of 30,000 in terms of that sale."},{"Start":"01:39.730 ","End":"01:43.670","Text":"We\u0027ve sold to him on credit."},{"Start":"01:43.920 ","End":"01:49.690","Text":"The third piece of information was on 31 December 20X1,"},{"Start":"01:49.690 ","End":"01:53.335","Text":"in other words, 3 months later or 90 days later, Marlon,"},{"Start":"01:53.335 ","End":"01:55.075","Text":"who could not make the payment,"},{"Start":"01:55.075 ","End":"01:59.640","Text":"issued a 30,000 currency unit note to Brandon at"},{"Start":"01:59.640 ","End":"02:04.830","Text":"5 percent due in half a year on the 30th of June 20X2."},{"Start":"02:04.830 ","End":"02:10.820","Text":"Now, we were supposed to receive the cash by the 31st December,"},{"Start":"02:10.820 ","End":"02:13.120","Text":"but we\u0027re told that he could not make the payment,"},{"Start":"02:13.120 ","End":"02:16.000","Text":"and instead he\u0027s issued us a note."},{"Start":"02:16.000 ","End":"02:23.315","Text":"It\u0027s a promise to pay the 30,000+5 percent in 6 months from now."},{"Start":"02:23.315 ","End":"02:25.400","Text":"What we need to do then,"},{"Start":"02:25.400 ","End":"02:29.270","Text":"is to take the amount out of accounts receivable and recognize"},{"Start":"02:29.270 ","End":"02:33.520","Text":"it as a separate receivable called notes receivable."},{"Start":"02:33.520 ","End":"02:35.710","Text":"On 31 December 20X1,"},{"Start":"02:35.710 ","End":"02:39.130","Text":"we have the note that was issued by Marlon to give to us."},{"Start":"02:39.130 ","End":"02:42.830","Text":"We\u0027re taking it out of the accounts receivable and recognizing it"},{"Start":"02:42.830 ","End":"02:46.535","Text":"as a separate receivable called notes receivable."},{"Start":"02:46.535 ","End":"02:48.110","Text":"Let\u0027s go back to the question."},{"Start":"02:48.110 ","End":"02:50.805","Text":"On 30th of June 20X2,"},{"Start":"02:50.805 ","End":"02:54.675","Text":"Marlon could only pay 50 percent of the principal amount, and the accrued interest."},{"Start":"02:54.675 ","End":"03:01.610","Text":"This is 6 months after they had given us a note promising to pay on the 30th of June."},{"Start":"03:01.610 ","End":"03:03.215","Text":"Now on the 30th of June,"},{"Start":"03:03.215 ","End":"03:05.690","Text":"they could only pay half of"},{"Start":"03:05.690 ","End":"03:10.175","Text":"the principal amount and the interest that had accrued to that date."},{"Start":"03:10.175 ","End":"03:15.365","Text":"Let\u0027s work out the interest that was earned to the 30th of June 20X2."},{"Start":"03:15.365 ","End":"03:21.110","Text":"That\u0027s a 6-month period from the 1st of January 20X2 to the 30th of June 20X2."},{"Start":"03:21.110 ","End":"03:22.445","Text":"Calculation of interest."},{"Start":"03:22.445 ","End":"03:24.760","Text":"The 30,000 is the principal sum,"},{"Start":"03:24.760 ","End":"03:26.400","Text":"multiplied by the 5 percent,"},{"Start":"03:26.400 ","End":"03:28.085","Text":"that\u0027s the interest rate per annum."},{"Start":"03:28.085 ","End":"03:30.140","Text":"But, this is for a 6-month period,"},{"Start":"03:30.140 ","End":"03:32.780","Text":"so we apportion it by multiplying by 6 months,"},{"Start":"03:32.780 ","End":"03:34.295","Text":"divided by 12 months,"},{"Start":"03:34.295 ","End":"03:36.770","Text":"and that gives us 750."},{"Start":"03:36.770 ","End":"03:39.575","Text":"That\u0027s the interest that Marlon owes us."},{"Start":"03:39.575 ","End":"03:42.740","Text":"We increase the note receivable by the 750."},{"Start":"03:42.740 ","End":"03:46.055","Text":"Now he owes, not only the principal sum of 30,000,"},{"Start":"03:46.055 ","End":"03:50.285","Text":"but also the interest of 750 for the 6-month period."},{"Start":"03:50.285 ","End":"03:55.835","Text":"The other side to this entry of 750 being added to the notes receivable,"},{"Start":"03:55.835 ","End":"04:00.305","Text":"is to put the 750 in the income statement as interest income."},{"Start":"04:00.305 ","End":"04:03.545","Text":"The journal entry for this transaction, if you\u0027re interested,"},{"Start":"04:03.545 ","End":"04:05.030","Text":"is that\u0027s income,"},{"Start":"04:05.030 ","End":"04:10.030","Text":"so we would credit the interest income 750."},{"Start":"04:10.030 ","End":"04:19.655","Text":"This part of the entry is to debit the notes receivable with 750."},{"Start":"04:19.655 ","End":"04:23.870","Text":"That\u0027s the journal entry for that part of the transaction."},{"Start":"04:23.870 ","End":"04:28.460","Text":"Now we are told that Marlon paid half of the principal,"},{"Start":"04:28.460 ","End":"04:31.430","Text":"and interest that had accrued to that date."},{"Start":"04:31.430 ","End":"04:36.765","Text":"Here\u0027s our principle of 30,000 and there\u0027s the interest of 750."},{"Start":"04:36.765 ","End":"04:38.585","Text":"He\u0027s paid half of that."},{"Start":"04:38.585 ","End":"04:43.260","Text":"First we deal with that partial payment on the 30th of June 20X2,"},{"Start":"04:43.260 ","End":"04:47.020","Text":"and then we\u0027re going to account for the transfer of the balance that"},{"Start":"04:47.020 ","End":"04:50.840","Text":"he hasn\u0027t yet paid to the accounts receivable account."},{"Start":"04:50.840 ","End":"04:55.785","Text":"Because the notes receivable has expired on the 30th of June 20X2,"},{"Start":"04:55.785 ","End":"04:59.555","Text":"we\u0027re going to transfer that remaining portion that he hasn\u0027t paid."},{"Start":"04:59.555 ","End":"05:02.350","Text":"We\u0027re going to transfer that to accounts receivable."},{"Start":"05:02.350 ","End":"05:04.055","Text":"Let\u0027s do it in the 2 steps."},{"Start":"05:04.055 ","End":"05:07.775","Text":"First, we receive half of what he owes us."},{"Start":"05:07.775 ","End":"05:12.035","Text":"Half of what he owes us is 15,375."},{"Start":"05:12.035 ","End":"05:13.520","Text":"Where did I get that from?"},{"Start":"05:13.520 ","End":"05:15.320","Text":"Well, it\u0027s the principal sum of"},{"Start":"05:15.320 ","End":"05:19.790","Text":"30,000 plus the interest that is accrued for the 6-month period,"},{"Start":"05:19.790 ","End":"05:23.675","Text":"and that we\u0027re going to divide by 2 or multiply by 50 percent"},{"Start":"05:23.675 ","End":"05:28.385","Text":"and that gives us the amount that he paid us 15,375."},{"Start":"05:28.385 ","End":"05:32.985","Text":"You can see our notes receivable decreases by 15,375,"},{"Start":"05:32.985 ","End":"05:37.155","Text":"and our cash increases by 15,375."},{"Start":"05:37.155 ","End":"05:42.080","Text":"The journal entry then is debit the cash and the other side of the entry"},{"Start":"05:42.080 ","End":"05:47.705","Text":"is credit the notes receivable, 750, 750."},{"Start":"05:47.705 ","End":"05:49.700","Text":"The next step is to say, well,"},{"Start":"05:49.700 ","End":"05:53.690","Text":"he\u0027s paid half, but what do we do with the risk that he hasn\u0027t paid us."},{"Start":"05:53.690 ","End":"05:56.180","Text":"Well, the balance that he hasn\u0027t paid us,"},{"Start":"05:56.180 ","End":"06:00.455","Text":"we\u0027ll need to take out of notes receivable and transfer to accounts receivable."},{"Start":"06:00.455 ","End":"06:04.900","Text":"The reason for that is the notes receivable has expired."},{"Start":"06:04.900 ","End":"06:07.545","Text":"How much does he still owe us?"},{"Start":"06:07.545 ","End":"06:13.260","Text":"Well obviously, he owed us the 30,000 plus the 750."},{"Start":"06:13.260 ","End":"06:17.950","Text":"He\u0027s now paid us the 15,375,"},{"Start":"06:17.950 ","End":"06:23.335","Text":"and that obviously gives us a remaining balance of 15,375."},{"Start":"06:23.335 ","End":"06:26.060","Text":"We\u0027re going to take that out of the notes receivable."},{"Start":"06:26.060 ","End":"06:28.880","Text":"We\u0027re going to be crediting the notes receivable in order to"},{"Start":"06:28.880 ","End":"06:32.325","Text":"reduce this asset, notes receivable."},{"Start":"06:32.325 ","End":"06:35.550","Text":"We credit the notes receivable with"},{"Start":"06:35.550 ","End":"06:41.885","Text":"15,375 and we\u0027re going to debit the accounts receivable."},{"Start":"06:41.885 ","End":"06:43.940","Text":"We putting it back into the accounts"},{"Start":"06:43.940 ","End":"06:49.400","Text":"receivable account and it\u0027s because the notes receivable has expired,"},{"Start":"06:49.400 ","End":"06:52.430","Text":"so not just a normal accounts receivable, again."},{"Start":"06:52.430 ","End":"06:53.809","Text":"Going back to the question,"},{"Start":"06:53.809 ","End":"06:58.490","Text":"we are told that Marlon committed to Brandon that it will pay the balance in the future,"},{"Start":"06:58.490 ","End":"07:03.305","Text":"but that Brandon believes that should impair the remaining balance by 50 percent."},{"Start":"07:03.305 ","End":"07:09.440","Text":"This means that if we\u0027re looking at the amount that Marlon still owes us,"},{"Start":"07:09.440 ","End":"07:12.815","Text":"we have to work out what half of that is,"},{"Start":"07:12.815 ","End":"07:16.040","Text":"and write that off as a bad debt."},{"Start":"07:16.040 ","End":"07:20.575","Text":"So far, Marlon owes us 15,375."},{"Start":"07:20.575 ","End":"07:22.845","Text":"There\u0027s the 30,000 that we entered,"},{"Start":"07:22.845 ","End":"07:24.525","Text":"the 30,000 that came out,"},{"Start":"07:24.525 ","End":"07:26.870","Text":"and we put 15,375 back in."},{"Start":"07:26.870 ","End":"07:28.325","Text":"That\u0027s how much he owes us."},{"Start":"07:28.325 ","End":"07:30.805","Text":"How much do we expect to go bad?"},{"Start":"07:30.805 ","End":"07:34.185","Text":"Well, it\u0027s 7,687.5,"},{"Start":"07:34.185 ","End":"07:41.100","Text":"that is 15,375 multiply it by the 50 percent,"},{"Start":"07:41.100 ","End":"07:44.340","Text":"that Brandon believes is going to go bad."},{"Start":"07:44.340 ","End":"07:50.610","Text":"So 7,687.5 is what we expect to go bad."},{"Start":"07:50.610 ","End":"07:53.300","Text":"We need to take that out of the accounts receivable."},{"Start":"07:53.300 ","End":"07:55.355","Text":"However, it hasn\u0027t yet gone bad so we don\u0027t"},{"Start":"07:55.355 ","End":"07:58.167","Text":"take it out of the accounts receivable directly,"},{"Start":"07:58.167 ","End":"08:02.030","Text":"instead we take it out of accounts receivable indirectly,"},{"Start":"08:02.030 ","End":"08:05.195","Text":"by crediting the allowance for the bad debt."},{"Start":"08:05.195 ","End":"08:06.835","Text":"This is in fact,"},{"Start":"08:06.835 ","End":"08:09.250","Text":"I like to call it a negative asset,"},{"Start":"08:09.250 ","End":"08:11.480","Text":"because this account and this account,"},{"Start":"08:11.480 ","End":"08:13.220","Text":"these 2 work together,"},{"Start":"08:13.220 ","End":"08:17.570","Text":"and the allowance is operating as a measurement account."},{"Start":"08:17.570 ","End":"08:22.130","Text":"In other words, it\u0027s used to reduce the value sitting in accounts receivable,"},{"Start":"08:22.130 ","End":"08:27.455","Text":"wherever we think that there was a portion that may not be received in the future."},{"Start":"08:27.455 ","End":"08:32.120","Text":"We credit the allowance for bad debts. Let\u0027s put that in here."},{"Start":"08:32.120 ","End":"08:39.755","Text":"Credit allowance for bad debts of 7,687.5."},{"Start":"08:39.755 ","End":"08:42.620","Text":"We do not credit accounts receivable directly"},{"Start":"08:42.620 ","End":"08:45.755","Text":"because this is just an estimate of what may go bad."},{"Start":"08:45.755 ","End":"08:51.155","Text":"Then we debit the bad debts or doubtful debts, if you like,"},{"Start":"08:51.155 ","End":"08:56.705","Text":"7,687.5, and that\u0027s this entry here."},{"Start":"08:56.705 ","End":"09:01.115","Text":"We\u0027re debiting it in the income statement as an expense,"},{"Start":"09:01.115 ","End":"09:03.050","Text":"that is this entry here."},{"Start":"09:03.050 ","End":"09:05.345","Text":"We\u0027re debiting the bad debt expense."},{"Start":"09:05.345 ","End":"09:10.615","Text":"You could see it\u0027s in brackets because it\u0027s reducing our income statement equity."},{"Start":"09:10.615 ","End":"09:13.455","Text":"That E stands for equity."},{"Start":"09:13.455 ","End":"09:19.830","Text":"It\u0027s reducing that equity because this here is the bad debt expense."},{"Start":"09:19.830 ","End":"09:22.390","Text":"Expenses reduce equity."},{"Start":"09:22.390 ","End":"09:25.175","Text":"Then the last step is to total it all."},{"Start":"09:25.175 ","End":"09:26.840","Text":"This is the impact on our cash."},{"Start":"09:26.840 ","End":"09:29.245","Text":"Our cash went up by 15,375."},{"Start":"09:29.245 ","End":"09:31.550","Text":"Our notes receivable were created during"},{"Start":"09:31.550 ","End":"09:34.250","Text":"the period and they disappeared, by the end of the year."},{"Start":"09:34.250 ","End":"09:38.945","Text":"Our accounts receivable, we had 30,000 at the 30th of September,"},{"Start":"09:38.945 ","End":"09:40.580","Text":"but by the 31st of December,"},{"Start":"09:40.580 ","End":"09:42.455","Text":"accounts receivable disappeared,"},{"Start":"09:42.455 ","End":"09:45.750","Text":"and then it reappeared half of it anyway,"},{"Start":"09:45.750 ","End":"09:49.210","Text":"15,375 and that was what was still owed,"},{"Start":"09:49.210 ","End":"09:53.445","Text":"at the end of 30th of June 20X2."},{"Start":"09:53.445 ","End":"09:57.570","Text":"Our allowance for the bad debt has been created now,"},{"Start":"09:57.570 ","End":"10:00.110","Text":"7,687.5, so that is going to"},{"Start":"10:00.110 ","End":"10:02.930","Text":"reduce our accounts receivable balance in our balance sheet."},{"Start":"10:02.930 ","End":"10:13.190","Text":"Our income statement has been impacted so far by this customer by an amount of 23,062.5."},{"Start":"10:13.190 ","End":"10:20.960","Text":"However, if we had been asked to calculate the impact on the profit for the period 1st"},{"Start":"10:20.960 ","End":"10:28.945","Text":"of January 20X2 to the 31st of December 20X2."},{"Start":"10:28.945 ","End":"10:37.285","Text":"If this was all that had occurred in relation to Marlon to the 31st of December 20X2,"},{"Start":"10:37.285 ","End":"10:39.210","Text":"the impact on our profit,"},{"Start":"10:39.210 ","End":"10:42.788","Text":"or loss would not be 23,062.5,"},{"Start":"10:42.788 ","End":"10:49.045","Text":"because that 30,000 happened on the 30th September 20X1,"},{"Start":"10:49.045 ","End":"10:51.800","Text":"which was last year."},{"Start":"10:51.800 ","End":"10:54.880","Text":"The year ended 31 December 20X1,"},{"Start":"10:54.880 ","End":"10:57.555","Text":"and this 7687.5,"},{"Start":"10:57.555 ","End":"11:02.685","Text":"those 2 occurred during the period 20X2."},{"Start":"11:02.685 ","End":"11:10.770","Text":"That\u0027s 30,000 happened in the year ended 31 December X1,"},{"Start":"11:10.770 ","End":"11:18.340","Text":"and these 2 occurred during the year ended 31st of December X2."},{"Start":"11:18.340 ","End":"11:21.705","Text":"The effect on profit in 20X2,"},{"Start":"11:21.705 ","End":"11:23.310","Text":"would\u0027ve been, as I say,"},{"Start":"11:23.310 ","End":"11:29.220","Text":"750 less 7,687.5+750 income less the 7,687."},{"Start":"11:29.220 ","End":"11:30.590","Text":"5 expense."},{"Start":"11:30.590 ","End":"11:34.370","Text":"That would have given us 6,937.50."},{"Start":"11:34.370 ","End":"11:36.380","Text":"Now, that isn\u0027t what was asked."},{"Start":"11:36.380 ","End":"11:40.160","Text":"We were simply asked to complete the transaction worksheet."},{"Start":"11:40.160 ","End":"11:44.720","Text":"But, just be aware that if you were asked to calculate the profit or"},{"Start":"11:44.720 ","End":"11:51.170","Text":"loss from this transaction in the year ended 31 December 20X2,"},{"Start":"11:51.170 ","End":"11:53.143","Text":"you would only include those 2 figures,"},{"Start":"11:53.143 ","End":"11:58.920","Text":"and you\u0027d have to show it as a separate calculation like I have done here."}],"ID":27505}],"Thumbnail":null,"ID":255637}]

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