which is essentially receivables that we are estimating to be calm
uncollectible in the near future so chorus
you know what accounts receivables are accounts receivables are an asset
that give us like a Lima to cash in the near future which is
usually 30 days and of course
if the customer pays within 10 days we usually a discount if it's more than 30
days
usually anchor interest on the receivable
and sometimes sometimes it is just
uncollectible amounts which means that
they just don't pay for the amount that he owed
and a default on their essentially the credit that we grant saddam
and receivables are always valued at net realizable value
which is just the gross amount the receivables
minus unique of us
so net realizable value the sense Lee
the amount that we can realize in cash minus any cost
and this is going to you because they are essentially going to be
contra asset account that's what's gonna lower
be gross receivables and give us are not realizable value
tonight he must be thank you what are the contract accounts
going to be and how are we going to know what they are well
what's think I'll want it. up transaction rehab will merge in a scene
inventory we went over so let's cover that's I if we were to hobble she'll
one on credit would look something like this for real had a
rehab accounts receivable and sales cost of goods sold
and merchandise and internationally but inventory parts
and you would think that our return
up a sale would be a cost to you
receivables in a sense they would create a contrast that for contour accounts
receivable accounts what it does and what would
happen if you remember was he had a contra
sailed account that was created and the accounts receivable
was just were first and then we would reverse the merchandise inventory
and be cost of goods sold so in this case
the accounts receivable just been reversed so gross receivables are
directly
just going down we're not actually creating a contract that accounts
where are our costs up accounts receivables
are going out and then I would of course
I'll got woodpecker net realizable value that
was the cost but of course this is not costs or contrast account this is just
a reduction are gross receivables so what will
be a contra accounts receivable
accounts wall not accounts gonna be called
allowance allowance
for DoD cool account and what this
accounted is that it's a contrast the counter balance sheets
should say that on the balance sheets and it's gonna be a contar accounts
receivable account then went alone spurred a quick count is
it's just he estimated amounts I love
receivables that we think are their chore that we think we will not be able
to collect
so this is a contra Asset Accounting its gonna go rate below accounts receivables
well I'm the balance sheet so when you see something like accounts the role in
the balance sheet you'll see
last allowance order to accounts because they always
go all right underneath the account that their plight Syrian
and of course the contrast account there's always gonna reduce
I the total receivables or gross receivables to give us a lower net
realizable
value bigger and the allowance for doubtful accounts
that shows up on the dance she was gonna show up on the income statement
will be be bad that's
expands because we need to show
expands on the income statement
to you word use our net income in bad debt expense is an operating expense
because
missus an expensive part of our operations because we sell
we sell products in order to you receive accounts receivables
and then when we have an expense for uncollectible the course
%ah it has to do with our are
are cycle %uh selling products so it's obviously heard over
or operating expenses so the bad debt expense on the income statement the
operative word count on the balance sheets
and it's gonna look something like this going to be actually
have gone on collect the ball that were that we think is going to occur so we'll
have bad debt expense that's going to be debited
because a great expense is better for the increase speed every bomb
an allowance for doubtful accounts some disagree be met
is going to be credited and then will be for something i dont no wat 10,000
10,000 it's not sweat an adjustment would look cool like
when we're actually ice to me and I'm collectible amounts
about might be in the future
some described you sure you're essentially
an example now I'll how the ELO
allowance for doubtful accounts I can be
I conducted using neither the Directorate of Matt bed
or an ass to me she because there's two different ways we can do this we can
either I
estimates the
the Gator estimate the job at death's expanse
or we can Wade until
it actually gets to the points where are we re
reno with the expenses because
our customer didn't pay us and we can just
rated aw which means to you
expanse when
it actually becomes uncollectible and will find 0
that actually this rate of matted is not
the proper way of doing a destination is the
cropper way CD rates
so this is the preferred way I with Dan
County and you must all the estimation method
for any widget big company that summer
a public so know we're gonna do with them a show you two different
I years we're gonna show you one for 2010 11
Michaux you want we're 2002 while
using the radar not that the show you how its improper
so what's gonna happen is what say that we have a really
easy credit policy an hour so in a
computers are any so
you the credit that means a lot of people are buying because you not to put
any money down early
and our revenues are going to go through the roof now what's gonna happen is
no one's going to you be unable to pay right now because we're offering them
time to pay so we're gonna have
some sleep 0 bad that expands
Internet Income our net income is going to a trip tickets gonna go
absolute through the roof it's gonna be ex- exponential
what's gonna happen it looks a mid-year next year
our revenues or are the same
but in this the second year people are starting to default
online their their receivables they're saying we cannot paper the computer is
andar your same too bad you're not going to receive the cash to now
using this radar were expensing its
when we actually know it's gonna become a uncollectible
and we have all these bad debt expenses coming in
in the year 2012 and what's gonna happen is our net income figure
is going to pull on it because they're all these bad debt expenses
are probably going to drive down new revenues
sore net income will fall
exponentially so the thing is
it's creating a really bold how picture
our net income because in one year it looks incredible the second year
everything's falling to pieces so what we need to do is we need to use a better
method
you actually show a consistent net income
bigger and actually show that it's really not
this bald how and nature so what we're gonna do is reused
the he estimation method you're going to see what happens now
because let's say revenues are through the roof again
because it is an easy credit policy but let's say this time
me decide bad hey we're gonna ask to meet a certain amount to
expenses are gonna go back or a certain amount receivable that are gonna go bad
because it makes sense where
of green are really easy credit policy server essay
okay bad debt expenses are going to go up by a certain amount
a fair amount soaring net income is still gonna go up
it's just not going to go up as much so
are Gras conserve it lookin completely exponential I'm gonna try to
Garrett about it's tough looking exponential gonna look more
like a streets line up
and then for 2012 what it's going to look like
and that's going to look very similar because their revenues
course are very similar and
in the next year we're gonna be like okay we'll it doesn't hold some people
did you fold
on their their loans we should probably rate of a bit more
for the next year because may be wary
I'm easy credit policy to pay off for the next you have to pay off the
computer or five years so we're going to her
estimate a bit more about that expands and of course the net income bigger
is going to look very similar as well
and this creates a somewhat consistency
between net income figures year to year and of course
this also complies with the matching principle
he remember thats bad gap
term which states that's we want to recognize
expenses that's
bats are heard of the revenues that we earned so
the revenue that we are in 2011 should be matched with any
expenses that we think are going to incur
I to earn it is represented course certain amount of uncollectible accounts
receivables
is an experiment that we think is probable and should be match with the
revenues that's why
rematch since you're in 2011 and that's why yes the nation not that
is the proper method so hopefully you have an understanding now
accounts receivable how we value that matter I or value
me two different Council on three to four counts which
which shows I've never rise will value
receivables are bouncy bad debt expense how it shows up on income statement
and of course how the estimation not been here gives us a better picture and
how it complies
ultimately with the matching grants by now I went through our
really quickly you can always go back rewind armed. Thanks for visit..
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