A/R

Credit Term
The term 2/10, net 30 allows a customer to deduct 2% of the net amount owed if the customer pays
within 10 days of the invoice date.
FOB Shipping Point
FOB Shipping Point means the ownership of the goods is transferred to the buyer at the seller's dock. This
means that the buyer is responsible for transporting the goods from Quality Product's shipping dock.
Therefore, all shipping costs (as well as any damage that might be incurred during transit) are the
responsibility of the buyer.
FOB Destination
FOB Destination means the ownership of the goods is transferred at the buyer's dock. This means
the seller is responsible for transporting the goods to the customer's dock, and will factor in the cost
of shipping when it sets its price for the goods.

allowance for doubtful accounts
Allowance for Doubtful Accounts is a contra current asset account associated with Accounts
Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the
debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts
Receivable.
The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The
amount in this entry may be a percentage of sales or it might be based on an aging analysis of the
accounts receivables (also referred to as a percentage of receivables).
When the allowance account is used, the company is anticipating that some accounts will be
uncollectible in advance of knowing the specific account. As a result the bad debts expense is more
closely matched to the sale. When a specific account is identified as uncollectible, the Allowance for
Doubtful Accounts should be debited and Accounts Receivable should be credited.

Allowance Method for Reporting Credit Losses
To guard against overstatement, a company will estimate how much of its accounts receivable will
never be collected. This estimate is reported in a balance sheet contra asset account called
Allowance for Doubtful Accounts.
Any increases to Allowance for Doubtful Accounts are also recorded in the income statement
account Bad Debts Expense (or Uncollectible Accounts Expense).
Make Provision/ Allowance for Bad Debt:
Bad debt Expense Dr
Provision/Allowance for bad Debits Cr

To Write Off:
Provision for Bad Debt Dr
Account Receivable Cr

Recovery of A/C Under Allowance Method:
A/R Dr
Provision for Bad Debit Cr
Cash/Bank Dr
A/R Cr
Difference between Expense and Allowance
The account Bad Debts Expense reports the credit losses that occur during the period of time covered by
the income statement. Bad Debts Expense is a temporary account on the income statement, meaning it
is closed at the end of each accounting year. (Closed means the account balance is transferred to
retained earnings, perhaps through an income summary account.) By closing Bad Debts Expense and
resetting its balance to zero, the account is ready to receive and tally the credit losses for the next
accounting year.
The Allowance for Doubtful Accounts reports on the balance sheet the estimated amount of
uncollectible accounts that are included in Accounts Receivable. Balance sheet accounts are almost
always permanent accounts, meaning their balances carry forward to the next accounting period. In
other words, they are not closed and their balances are not reset to zero.
Because the Bad Debts Expense account is closed each year, while the Allowance for Doubtful Accounts
is not, these two balances will most likely not be equal after the company's first year of operations.
Accounts Receivable Ratios
Accounts receivable turnover ratio, and
Days sales in accounts receivable.

Direct Write-off Method
Bad Debt Expense Dr
A/R Cr
In some industries, companies often sell their accounts receivable to a firm known as a Factor




A/P
account payable, pl. accounts payable. a liability to a creditor, carried on open account, usually for
purchases of goods and services
Not all vendor invoices will have purchase orders or receiving reports. Hence, the three-way match
is not always possible. For example, a company does not issue a purchase order to its electric utility
for a pre-established amount of electricity for the following month
Pay only from vendor invoices; never pay from vendor statements.

Related Expense or Asset
The vendor invoices received by a company could involve the following:
A vendor invoice may be a bill for a repair or maintenance service
A vendor invoice may be a bill for the purchase of expensive equipment that will be used by the
company for several years. The equipment will be recorded as an asset
Another vendor invoice may be a billing for the cost of a service that the vendor will provide in the
future, but the payment must be made in advance.
Under the accrual method of accounting, a company's financial statements must report all
expenses and liabilities that are probable and can be measured even if the vendors' invoices
have not yet been received or fully processed.
Invoice Credit Terms
Net due upon receipt
Net 30 days
1/10, n/30

Introduction to Adjusting Entries
An adjusting journal entry is typically made just prior to issuing a company's financial statements.
Another situation requiring an adjusting journal entry arises when an amount has already been
recorded in the company's accounting records, but the amount is for more than the current
accounting period
There are two scenarios where adjusting journal entries are needed before the financial statements
are issued:
Nothing has been entered in the accounting records for certain expenses or revenues, but those
expenses and/or revenues did occur and must be included in the current period's income statement
and balance sheet.
Something has already been entered in the accounting records, but the amount needs to be divided
up between two or more accounting periods.
Adjusting entries almost always involve a
balance sheet account (Interest Payable, Prepaid Insurance, Accounts Receivable, etc.) and an
income statement account (Interest Expense, Insurance Expense, Service Revenues, etc.)
Contra assets are asset accounts with credit balances
Allowance for Doubtful Accounts
Accumulated Depreciation-Land Improvements
Accumulated Depletion
Contra liabilities are liability accounts with debit balances. (A debit balance in a
liability account is contraryor contrato a liability account's usual credit
balance.) Examples of contra liability accounts include:
Discount on Notes Payable
Contingent Liabilities
Three examples of contingent liabilities include warranty of a company's products, the
guarantee of another party's loan, and lawsuits filed against a company. Contingent liabilities
are potential liabilities. Because they are dependent upon some future event occurring or not
occurring, they may or may not become actual liabilities.
Adjusting Entries - Asset Accounts
The adjusting journal entry for Allowance for Doubtful Accounts is:


The adjusting entry for Supplies in general journal format is:


The adjusting journal entry for Prepaid Insurance is:


The adjusting entry for Accumulated Depreciation in general journal format is:


Adjusting Entries - Liability Accounts

The adjusting journal entry for Interest Payable is:

The adjusting journal entry for Wages Payable is:

he adjusting entry for Unearned Revenues in general journal format is:




Accruals & Deferrals
Adjusting entries are often sorted into two groups: accruals and deferrals.
Accruals
Accruals (or accrual-type adjusting entries) involve both expenses and revenues and are associated with the
first scenario mentioned in the introduction to this topic:
Nothing has been entered in the accounting records for certain expenses and/or revenues, but those
expenses and/or revenues did occur and must be included in the current period's income statement and
balance sheet.
Accrual of Expenses
An accountant might say, "We need to accrue the interest expense on the bank loan." That statement is made
because nothing had been recorded in the accounts for interest expense, but the company did indeed incur
interest expense during the accounting period. Further, the company has a liability or obligation for the unpaid
interest up to the end of the accounting period. What the accountant is saying is that an accrual-type adjusting
journal entry needs to be recorded.
The accountant might also say, "We need to accrue for the wages earned by the employees on Sunday,
December 30, and Monday, December 31." This means that an accrual-type adjusting entry is needed because
the company incurred wages expenses on December 30-31 but nothing will be entered routinely into the
accounting records by the end of the accounting period on December 31.
A third example is the accrual of utilities expense. Utilities provide the service (gas, electric, telephone) and
then bill for the service they provided based on some type of metering. As a result the company will incur the
utility expense before it receives a bill and before the accounting period ends. Hence, an accrual-type adjusting
journal entry must be made in order to properly report the correct amount of utilities expenses on the current
period's income statement and the correct amount of liabilities on the balance sheet.
Accrual of Revenues
Accountants also use the term "accrual" or state that they must "accrue" when discussing revenues that fit the
first scenario. For example, an accountant might say, "We need to accrue for the interest the company has
earned on its certificate of deposit." In that situation the company probably did not receive any interest nor did
the company record any amounts in its accounts, but the company did indeed earn interest revenue during the
accounting period. Further the company has the right to the interest earned and will need to list that as an asset
on its balance sheet.
Similarly, the accountant might say, "We need to prepare an accrual-type adjusting entry for the revenues we
earned by providing services on December 31, even though they will not be billed until January."
Deferrals
Deferrals or deferral-type adjusting entries can pertain to both expenses and revenues and refer to the second
scenario mentioned in the introduction to this topic:
Something has already been entered in the accounting records, but the amount needs to be divided up
between two or more accounting periods.
Deferral of Expenses
An accountant might say, "We need to defer some of the insurance expense." That statement is made because
the company may have paid on December 1 the entire bill for the insurance coverage for the six-month period
of December 1 through May 31. However, as of December 31 only one month of the insurance is used up.
Hence the cost of the remaining five months is deferred to the balance sheet account Prepaid Insurance until
it is moved to Insurance Expense during the months of January through May. If the company prepares
monthly financial statements, a deferral-type adjusting entry may be needed each month in order to move one-
sixth of the six-month cost from the asset account Prepaid Insurance to the income statement account
Insurance Expense.
The accountant might also say, "We need to defer some of the cost of supplies." This deferral is necessary
because some of the supplies purchased were not used or consumed during the accounting period. An adjusting
entry will be necessary to defer to the balance sheet the cost of the supplies not used, and to have only the cost
of supplies actually used being reported on the income statement. The costs of the supplies not yet used are
reported in the balance sheet account Supplies and the cost of the supplies used during the accounting period
are reported in the income statement account Supplies Expense.
Deferral of Revenues
Deferrals also involve revenues. For example if a company receives $600 on December 1 in exchange for
providing a monthly service from December 1 through May 31, the accountant should "defer" $500 of the
amount to a liability account Unearned Revenues and allow $100 to be recorded as December service
revenues. The $500 in Unearned Revenues will be deferred until January through May when it will be moved
with a deferral-type adjusting entry from Unearned Revenues to Service Revenues at a rate of $100 per
month.
Avoiding Adjusting Entries
If you want to minimize the number of adjusting journal entries, you could arrange for each period's expenses
to be paid in the period in which they occur. For example, you could ask your bank to charge your company's
checking account at the end of each month with the current month's interest on your company's loan from the
bank. Under this arrangement December's interest expense will be paid in December, January's interest
expense will be paid in January, etc. You simply record the interest payment and avoid the need for an
adjusting entry. Similarly, your insurance company might automatically charge your company's checking
account each month for the insurance expense that applies to just that one month.
Additional Information and Resources
Because the material covered here is considered an introduction to this topic, many complexities have been
omitted. You should always consult with an accounting professional for assistance with your own specific
circumstances.




Account payable is amount to be paid and the period would be different when products purchased or
services rendered.
Accrual is recording of expenses when the products purchased or services rendered and the amount
in measureable and inflow or outflow of economic benefits is certain.
Provision is an item which is contingent on a future action but the amount can be measured realiably
so amount is provided.

Accrual is income earned but not received or expenses incurred but not spent. Provision is making
provision from the profit for a specified or known expense which is to be met in unknown future.
Accounts are drawn up over an accounting period - usually a year. An accrual is a payment
physically paid in one period but referring to the previous one. A prepayment is a payment physically
paid in one period but referring to the next one.

Let's suppose that your accounting period ends on 31st May. You get a bill for coconuts that were
supplied in May, but you don't pay it until June - that is an accrual. You pay for bananas in May but
they are not supplied until June - that is a prepayment.
Provisions are mainly made for stock obsolescence, doubtful debts or warranty expenses. These costs
are not yet incurred and are pretty general, and usually estimated based on a percentage of sales. These
costs may not be incurred at all, and in the event that the company is sure that it won't be needing them,
they can reverse the provisions.
Accruals are mainly made for expenses that the company knows about but invoices from suppliers not yet
received, like utilities accruals (company receives bill on May 1 for the utilities used in the month of april,
so company will accrue the utilities cost based on estimate in april, as it has not known the actual bill
during april closing).
What is the difference between an accrual
and a deferral?
An accrual occurs before a payment or receipt. A deferral occurs after a payment or receipt.
There are accruals for expenses and for revenues. There are deferrals for expenses and for
revenues.

An accrual of an expense refers to the reporting of an expense and the related liability in the
period in which they occur, and that period is prior to the period in which the payment is made.
An example of an accrual for an expense is the electricity that is used in December, but the
payment will not be made until January.

An accrual of revenues refers to the reporting of revenues and the related receivables in the
period in which they are earned, and that period is prior to the period of the cash receipt. An
example of the accrual of revenues is the interest earned in December on an investment in a
government bond, but the interest will not be received until January.

A deferral of an expense refers to a payment that was made in one period, but will be reported as
an expense in a later period. An example is the payment in December for the six-month
insurance premium that will be reported as an expense in the months of January through June.

A deferral of revenues refers to receipts in one accounting period, but they will be earned in
future accounting periods. For example, the insurance company has a cash receipt in December
for a six-month insurance premium. However, the insurance company will report this as part of
its revenues in January through June.