Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- What the aging schedule is.
- Example of an aging table
- Recording the T-account balance and bad debts expense.



When reviewing the percentage of receivables method, I mentioned previously that the aging schedule is used to calculate the amount for the bad debts expense. Essentially, the longer the debt is outstanding, the less likely it will be that the company will receive the cash.

The aging method is used to break down the receivable balances based on the age and uncollectible risk associated with each age range. This is the most accurate way to use the percentage of receivables method, as it considers the risk level associated with the bad debt based on how long the balance has been outstanding.
 
Next, we will be reviewing a real-life example of an aging table and how it applied to the receivables method to record the bad debts expense journal entry.



Above is an example of an aging table that details the balances of accounts receivables based on how long they have been outstanding. Let's assume that the beginning allowance for doubtful accounts is a $5,000 credit. In this case, we have $396,000 not yet due, $90,000 aged between 1-30 days, $30,000 between 31-60 days and so on.
 
The longer that a balance is outstanding, the less probable it is that the company will receive the cash. This explains why the estimated uncollectible percentage increases based on the age of the receivables balance.

In order to calculate the actual amounts for estimated uncollectibles, we simply multiple the balance by the estimated percentage. For example, $396,000 x 0.01 = $3,960. You can see the calculations in the added column below. We would sum up all the amounts to find the total estimated uncollectibles of $14,360.



Now that we've come up with the total amount of estimated uncollectibles, let's use the T-account format to calculate the adjustment for AFDA. We would first record the beginning allowance of $5,000 and then the ending balance of $14,360.

Again, the difference between the ending balance and the beginning amount will be the adjustment entry. In this example we would calculate the adjustment amount by subtracting 5,000 from 14,360 to come up with an adjustment amount of $9,360.



We have the adjustment amount of $9,360, now we will use this to record the journal entry for the bad debts expense. The bad debts expense account would be debited by $9,360 and the AFDA would be credited by $9,360.
 
This journal entry reflects the estimation of the uncollectible accounts that we calculated using the receivables method and aging schedule.

This example should give you a much better understanding of how the bad debts expense value is calculated based on the receivables method and aging schedule. Again, using the aging table is the most accurate way of using the percentage of receivables method as it accounts for the age of the debt.