How does the aging of accounts receivable determine bad debts expense?

The aging of accounts receivable allows you to quickly identify the credit customers that are past due and the length of time that the amounts have been past due. Focusing on the past due accounts receivable will assist you in estimating how much of the accounts receivable will never be collected.

The estimated amount of accounts receivable that will never be collected should be the credit balance in the general ledger account Allowance for Doubtful Accounts. This credit balance when combined with the debit balance in Accounts Receivable will mean that the amount that is likely to be collected will be reported on the balance sheet.

When the Allowance for Doubtful Accounts is credited to increase its balance, the entry will debit the general ledger account Bad Debts Expense.

Learn more about Accounts Receivable and Bad Debts Expense.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

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What is the difference between a deferred expense and a prepaid expense?

Often the term deferred expense indicates that a payment was made more than one year before the cost is expensed. This deferred expense will be reported on the balance sheet as a noncurrent or long-term asset.

Often the term prepaid expense indicates that a payment was made less than one year before the cost is expensed.  This prepaid expense is reported as a current asset.

Sometimes an accountant does not intend for there to be a difference.  For example, an accountant might say that part of a company’s six-month insurance premium should be deferred to the current asset account Prepaid Insurance. Accountants also state that any prepayment of a future expense will result in an adjusting entry known as a deferral.

Learn more about Adjusting Entries.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

Is a manufacturer’s product warranty part of its manufacturing overhead or is it part of its SG&A expense?

The costs associated with a manufacturer’s product warranty are part of its selling expenses and therefore part of its SG&A expenses.

If the future costs of the warranty coverage are probable and can be estimated, they are recorded at the time of the sale. The accounting entry will debit Warranty Expense and will credit Warranty Liability. If the estimated warranty costs are recorded at  the time of the sale, the actual costs of the repair work or the replacement of the product during the warranty period will be debited to the Warranty Liability account—thereby reducing the liability balance.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

The Statement of Functional Expense

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