COMMERCE 1AA3 Lecture 14: Class 14
10 Mar 2017
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You must know the ratios for the midterm. You can guess on a question, no negative marks for wrong answers. Accounts receivable = monetary claims against someone else, something they owe you. This method does not follow the matching principal. If you sell the goods in january and you default in may, then the revenue was in january but the expense was in may. This also goes against the faithful representation assumption. However, this is allowed under the materiality principal. Allowance (allowance for bad debts, provision for bad debts, etc) is a contra asset. It acts as funds that you keep aside for when people default. When you want to put more money into this fund, you credit it. When you want to remove money from it, you debit it. You put money into this account by debiting bad debt expense. When you do a write off, you debit this account because a customer now cannot pay you.
