Revenue Recognition:
Suppose Apple, Inc., enters into a contract to deliver a truckload of iPhones to an AT&T Wireless
warehouse in Florida.
On the truck are 30,000 iPhones, each of which Apple, Inc., sells to AT&T for $100 (selling price)
on account.
Each phone costs Apple $60 to produce.
Shipping Terms:
-Two most common shipping terms: FOB Destination & FOB Shipping Point
-FOB shipping point (buyer pays shipping) – ownership changes hands and revenue is
recognized when goods leave the shipping dock
-FOB destination (seller pays shipping) – ownership changes hands and revenue is recognized at
the point of delivery to the customer
Sales Returns and Allowances:
-Sales returns and allowances are the return of merchandise or the acceptance of unsatisfactory
goods, which results in a refund to the customer
-If a customer purchased on account, their A/R account would be credited (decreased)
-There are two adjusting journal entries related to sales returns and allowances:
1.Sales portion:
-Increase the Sales Returns and Allowances account (this decreases revenue since it is a contra
account to Sales Revenue)
-Increase the Sales Refunds Payable account (this increases liabilities)
2.Inventory portion:
-Increase the Returns Inventory Estimated account (this increases assets)
-Decrease Cost of Goods Sold (this decreases expenses)
Sales Discounts:
-Credit or Discount terms are the payment terms for customers who buy on account
3/15, n/30---- 3 = % and 15= days
Net Sales:
Sales Revenue(Gross Sales) - Sales Discounts - Sales Returns & Allowances = Net Sales
-Net Sales is what’s reported on the Income Statement
Chapter 5: Receivables and Revenue
Receivables:
Types of Receivables:
-Accounts Receivable: The amounts due from customers for credit sales of goods or services
-Notes Receivable: Written promises to pay an amount of cash to the company in the future,
more formal and usually longer in term than accounts receivable, usually include a charge for
interest, loaning money
-Other Receivables: Interest receivables
-A company has to estimate what it thinks it won’t collect in cash from A/R
-This estimate represents an expense (cost) to the company
-This is expense is known as Uncollectible Account Expense
-Two methods are used to account for uncollectible accounts receivable
1.The Direct Write Off Method (generally not allowed by GAAP)
2.The Allowance Method
Allowance Method:
-Utilizes an estimate of the amount that is not expected to be collected in the future.
-Adheres to the expense recognition principle and is, therefore, required by GAAP
-Uses Allowance for Uncollectible Accounts as a contra account to Accounts Receivable
-Can calculate the Net Realizable Value of A/R, also called A/R, net
-2 basic methods to estimate the amounts to be uncollectible: Percent of Sales and Aging of
Receivables Method
Allowance Method: Percent of Sales
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