Financial Services: Accrual Accounting

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Questions and Answers

What was the total amount debited to the accounts receivable in the General Journal on September 5?

$68 (correct)

$60

$128

$1900

Which entry correctly represents the return of goods bought on account according to the General Journal?

Credit to Accounts Receivable

Credit to Service Revenue

Debit to Accounts Payable (correct)

Debit to Purchases Return

On what date was the entry made for the machine purchased on account?

September 18 (correct)

September 5

September 10

September 21

Which account was credited in the case of the purchase return on September 21?

Accounts Payable – Fahad Hypermarket Signup and view all the answers

How is a contra account typically used in accounting?

To reduce the value of a related account Signup and view all the answers

What was the total credit recorded under Accounts Payable – Fahad Hypermarket after all entries for September?

$540 Signup and view all the answers

What was the value of the cleaning supplies purchased on September 10?

$1900 Signup and view all the answers

What document was associated with the return of goods on September 21?

Credit Note #2502 Signup and view all the answers

What is the primary purpose of contra accounts in the balance sheet?

To provide complete information about associated accounts Signup and view all the answers

Which account is typically used as a contra account for accounts receivable?

Allowance for doubtful accounts Signup and view all the answers

What does the term 'bad debts' refer to?

Uncollectible accounts from customers Signup and view all the answers

What distinguishes the direct write-off method from the allowance method?

The timing of recognizing bad debts as an expense Signup and view all the answers

What do businesses typically evaluate before granting credit to customers?

Customer's financial condition and credit history Signup and view all the answers

In the balance sheet presentation, where is the amount for allowance for doubtful accounts shown?

As a reduction from accounts receivable Signup and view all the answers

What financial impact does bad debts have on a company's accounts receivable?

It decreases net accounts receivable Signup and view all the answers

Which of the following is an indicator that a customer might be a likely bad debt?

They exhibit declining financial performance Signup and view all the answers

What is the first step in the allowance method for accounting?

Recording estimated uncollectible accounts Signup and view all the answers

What is the journal entry to record an estimated uncollectible amount of BD 12,000?

Debit Bad debts Expense BD 12,000, Credit Allowance for Doubtful Accounts BD 12,000 Signup and view all the answers

How is the Allowance for Doubtful Accounts presented on the balance sheet?

As a contra account deducted from accounts receivable Signup and view all the answers

Which of the following accounts would be affected by writing off uncollectible accounts?

Allowance for Doubtful Accounts and Accounts Receivable Signup and view all the answers

What does the net account receivable represent?

The amount after deducting estimated uncollectibles Signup and view all the answers

Which action is typically taken after all means of collecting a past-due account have been exhausted?

Write off the account as uncollectible Signup and view all the answers

What is the effect of recording an estimated uncollectible account on the income statement?

It decreases operating income Signup and view all the answers

Which of these methods is NOT typically used for collecting past-due accounts?

Discounting the amount owed Signup and view all the answers

What accounts are affected when reversing the write-off of R.A. Ware's account?

Allowance for Doubtful Accounts and Accounts Receivable Signup and view all the answers

What was recorded when cash was collected from R.A. Ware?

Cash was debited and Accounts Receivable was credited Signup and view all the answers

Which statement is true concerning recoveries of bad debts?

They only impact the balance sheet. Signup and view all the answers

What does the reversal of a bad debt write-off indicate?

A recovery of previously deemed uncollectible debt. Signup and view all the answers

What is the primary purpose of an Allowance for Doubtful Accounts?

To estimate expected losses from uncollectible accounts. Signup and view all the answers

When is cash considered collected in relation to Accounts Receivable?

When payment is received and recorded. Signup and view all the answers

Which of the following accounts functions as a contra account?

Allowance for Doubtful Accounts Signup and view all the answers

What happens to accounts that are deemed uncollectible?

They are immediately written off from the financial records. Signup and view all the answers

Which of the following is NOT classified as an asset account?

Accounts Payable Signup and view all the answers

What is the primary purpose of the chart of accounts?

To classify and organize individual accounts within the general ledger Signup and view all the answers

Which range of codes typically represents equity accounts in a chart of accounts?

3000 to 3999 Signup and view all the answers

Contra-accounts are best described as:

Accounts with negative balances offsetting other accounts Signup and view all the answers

Which of the following represents an expense account?

Utilities Signup and view all the answers

If a business has an allowance for bad debts, this is classified under which type of account?

Contra-account Signup and view all the answers

Which of the following types of accounts would include capital?

Equity accounts Signup and view all the answers

What type of account is best described as representing a company's earnings?

Revenue or income account Signup and view all the answers

Study Notes

Types of Accounts

Asset Accounts: Represent economic resources owned or controlled by an entity. Examples include cash, inventory, real estate, prepaid expenses, and accounts receivable.
Liability Accounts: Reflect economic obligations of an entity, such as accounts payable, loans, and accrued expenses.
Equity Accounts: Indicate the residual interest in assets after deducting liabilities, including common stock and retained earnings.
Revenue Accounts: Document the company's earnings from sales and services.
Expense Accounts: Capture expenditures like utilities, rent, and depreciation.
Contra-Accounts: Have negative balances that offset other accounts; examples include accumulated depreciation and allowance for bad debts.

Chart of Accounts

An organized index for classifying individual accounts in the general ledger.
Typically structured by ranges, such as:
- Assets: 1000-1999
- Liabilities: 2000-2999
- Equity: 3000-3999
- Revenues: 4000-4999
- Expenses: 5000-5999

General Journal Entry Example

Record transactions in a systematic way, with debits and credits clearly defined.
Example entries illustrate typical business transactions, such as accounts receivable and accounts payable.

Contra Account Overview

Used to reduce the value of related accounts; their balances are oppositional to associated accounts.
Presented in financial statements to provide clearer insights into net values, such as accounts receivable less an allowance for doubtful accounts.

Doubtful Debts

Bad debts arise when customers default on payments.
Direct Write-Off Method: Bad debts are recorded as expenses when deemed uncollectible.
Allowance Method: Estimates uncollectible accounts in advance, creating a reserve account for anticipated losses.

Steps in Allowance Method

Estimated Uncollectibles: Adjust the accounts receivable to reflect expected losses, recorded as bad debts expense and allowance for doubtful accounts.
Write-Off Uncollectibles: Formal approval is needed to write off bad debts, adjusting both accounts receivable and allowance accounts.
Recovery of Uncollectibles: If previously written-off amounts are collected, adjustments are made to reflect the recovery.

Example of Allowance Method

If accounts receivable total BD 200,000 and estimated uncollectibles are BD 12,000:
- Adjusting entry includes debiting bad debts expense and crediting allowance for doubtful accounts.
- The net accounts receivable presents a more accurate figure after accounting for expected losses.

Collection Efforts for Past-Due Accounts

Strategies include ensuring invoice delivery, follow-ups, sending reminders, and possibly pursuing legal action.
Writing off accounts when collection efforts fail is a necessary accounting process that requires management approval.

Key Takeaway

Understanding and maintaining an accurate chart of accounts, alongside methods for handling uncollectible accounts, is vital for effective financial management and reporting.

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Description

This quiz covers the essentials of establishing and maintaining an accrual accounting system within financial services. It explores various types of accounts, including asset accounts that represent economic resources owned by an entity. Test your knowledge on the classifications and functionalities of these accounts in a company.