make provision

8/12/2019 Make Provision

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A/R

Credit Term

The term 2/10, net 30allows 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 buyeris 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

theselleris 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.


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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. Inother 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


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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.


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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


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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 currentaccounting 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 creditbalances

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.
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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:
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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:
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Accruals & Deferrals

Adjusting entries are often sorted into two groups:accrualsanddeferrals.

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."
http://www.accountingcoach.com/terms/A/accrual-type-adjusting-entryhttp://www.accountingcoach.com/terms/A/accrual-type-adjusting-entryhttp://www.accountingcoach.com/terms/A/accrual-type-adjusting-entryhttp://www.accountingcoach.com/terms/D/deferralhttp://www.accountingcoach.com/terms/D/deferralhttp://www.accountingcoach.com/terms/D/deferralhttp://www.accountingcoach.com/terms/D/deferralhttp://www.accountingcoach.com/terms/A/accrual-type-adjusting-entry


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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 accountPrepaid Insuranceuntil

it is moved toInsurance Expenseduring 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 usedbeing reported on the income statement. The costs of the supplies not yet used are

reported in the balance sheet accountSuppliesand the cost of the supplies used during the accounting period

are reported in the income statement accountSupplies 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 accountUnearned Revenuesand 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 toService Revenuesat 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.
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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.


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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 accrualand 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 expenserefers to the reporting of an expense and the related liability in theperiod in which they occur, and that period isprior tothe 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 revenuesrefers to the reporting of revenues and the related receivables in the

period in which they are earned, and that period isprior to the period of the cash receipt. An


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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 expenserefers 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 revenuesrefers 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.

make provision

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