If you received a bill then you have to accrue the amount because (and I am assuming here from the information you provided) that the goods or services that you received from that supplier have already been used or consumed to help generate revenue. Therefore, you must Dr. Expense and Cr. Accounts Payable. Note that if you received some goods that were NOT, as yet, consumed, then you would have to recognize a portion or all of the billed amount as an asset. You have not provided enough information for me to know which one is correct! Hope that helps!!
when you say using direct write off only when the amount is small? how small? Is it based on the % of an annual revenue or a certain amount? let say a small home business which annual revenue is $50,000 and has a bad debt expense of $10000. sure you cannot use direct write off in this case. What about multi billion $ corp like Walmart with more than $10 billion annual revenue, is $10,000 or maybe even $100,000 small enough to use the direct write off method?
Hi Ben, This is a very important and difficult question to answer because it addresses the issue of what is material, which depends on the situation and the level of risk in the company at the time of the decision. Something that may be immaterial one year may be material the next year if the level of risk (of losses) changes. Often a benchmark is used (5% or 10% are frequent standards) but, again, that benchmark depends on the level of risk in the company. Generally it is based on a % of assets since any entry you make to the income statement is also going to impact the assets through the allowance for doubtful accounts. The basis for a decision about what is material and what is immaterial is based on what will affect the decisions of the users of the financial statements. And yes, sometimes $100,000 would be immaterial. For instance, General Motors Canada may be immaterial when a user looks at the consolidated statements for General Motors world wide. That is because their revenues are $155,929,000,000 and their total assets are $177,677,000,000. Considering their size, an amount of 10% of their assets may be considered immaterial because it will not change the decisions of the users of the financial statements. Hope that helps! Else
Another great review. I’m preparing for an A/R assessment for my job and this is very helpful
So glad I could be of help Emily!!
Great Video Else
Thank you so much. Your lesson's very helpful for me.
Thanks from comment ,where are you from???
the video's very helpful. Thanks so much!
You are very welcome!!
love you
else you are bae
What are the expenses for a service revenue to be matched off, if they were to collect AR within the year? the presentation was great by the way!
Hi ma'am, if u don't mind can I ask u favor to please answer this one transaction
March 25- Received a bill from caltex gasoline station and oil, 8500
If you received a bill then you have to accrue the amount because (and I am assuming here from the information you provided) that the goods or services that you received from that supplier have already been used or consumed to help generate revenue. Therefore, you must Dr. Expense and Cr. Accounts Payable.
Note that if you received some goods that were NOT, as yet, consumed, then you would have to recognize a portion or all of the billed amount as an asset.
You have not provided enough information for me to know which one is correct!
Hope that helps!!
when you say using direct write off only when the amount is small? how small? Is it based on the % of an annual revenue or a certain amount? let say a small home business which annual revenue is $50,000 and has a bad debt expense of $10000. sure you cannot use direct write off in this case. What about multi billion $ corp like Walmart with more than $10 billion annual revenue, is $10,000 or maybe even $100,000 small enough to use the direct write off method?
Hi Ben,
This is a very important and difficult question to answer because it addresses the issue of what is material, which depends on the situation and the level of risk in the company at the time of the decision. Something that may be immaterial one year may be material the next year if the level of risk (of losses) changes. Often a benchmark is used (5% or 10% are frequent standards) but, again, that benchmark depends on the level of risk in the company. Generally it is based on a % of assets since any entry you make to the income statement is also going to impact the assets through the allowance for doubtful accounts. The basis for a decision about what is material and what is immaterial is based on what will affect the decisions of the users of the financial statements.
And yes, sometimes $100,000 would be immaterial. For instance, General Motors Canada may be immaterial when a user looks at the consolidated statements for General Motors world wide. That is because their revenues are $155,929,000,000 and their total assets are $177,677,000,000. Considering their size, an amount of 10% of their assets may be considered immaterial because it will not change the decisions of the users of the financial statements.
Hope that helps!
Else
By the way, I was looking that the annual report from General Motors for year ended 2014 for those figures!
+Else Grech Accounting you are amazing .. i'm watching your videos from Oman . thank you