The Business Operating Cycle

Customer
acknowledges
receipt of the item

Collect cash
from the
customer

Purchase materials

Ship the product

and send the
customer an
invoice

Receive an order
for the product
from a customer

Slide 5-1

Convert materials
into a finished
product

Inspect the product

Store the product in
a warehouse

20%

1000

 1
1000

1000
1000

 2

500

500
500

 3
150

150
150

 1
200

200
200

50 150

50

150

200

500

500

500

 2
80
200 150

430
430

200
300

200

300

500

5000

5000
5000

 2
4000
680

4000

680

4680

20000 3400

23400

20000

3400

1000

1000
1000

60000

60000

60000

3000

3000
3000

2/10 1/20 N/30


A
10000
2/10 1/20 N/30
1
10000

10000
2 10 9800

200
10000


3 10 20
9900

100

10000
4
26

200
200

1
9800

9800


2 10 9800
9800
3 20 9900
9800

100
4 20
10000
9800

200

200
200

Sales Discounts
Sold $1,000 of merchandise on credit
terms of 2/10, net/30.

Slide 5-10

Sales Discounts

Slide 5-10

Sold $1,000 of merchandise on credit terms of 2/10,

net/30.
dr. Accounts Receivable
cr. Sales Revenue

980
980

If payment is made within the discount period:

dr. Cash
cr. Accounts Receivable

980
980

Sales Discounts

Slide 5-11

If payment is made after the discount period:

dr. Cash
cr. Discounts Not Taken
Accounts Receivable

1,000
20
980

The
The22percent
percentdiscount
discount
really
reallyamounts
amountsto
toan
an
annual
annualrate
rateof
of36
36percent.
percent.





1000

/ 1000

1000
1
2


3
3

20000


99
56000
0.1%
:
: 56
56


1999 12 31
5600 5 , ,
8 , ,

56005-8=20
20
20
2000 40
40
40


1999 12 31
5600 5 , ,
" 20 , ,

56005+20=48
48
48
2000 40
40
40


1-30 31-60 61-90 90

A
$20,000
$20,000
B
10,000
10,000
C
$13,000 $10,000
23,000
D
3,000 $1,000
4,000
E
39,000 12,000 2,000 2,000 55,000

$69,000 $25,000 $15,000 $3,000 $112,000

0.10%
1%
5%
90%

$69
$250
$750 $2,700 $3,769


/ 20000
/ 20000

H
3000

3000
H 3000

Bad Debts
The
Thefirm
firmexpects
expects
bad
baddebts
debtsof
of
$7,132
$7,132..

Slide 5-7

Check
Checkout
outthe
theaging
aging
schedule
schedule

Bad Debts

Slide 5-8

The adjusting entry would be:

dr. Bad Debts Expense
cr. Allowance for Doubtful

7,132
7,132

The accounts receivable section of the December 31, 1997 balance sheet
would appear as follows:
Accounts receivable
$262,250less: allowance for doubtful
accounts
7,132accounts receivable, net
$255,118

Bad Debts

Slide 5-9

If sometime in 1998 the Essel Company decided that

James Johnson was never going to pay his bill of
$250, the following entry would be made:
dr. Allowance for Doubtful Accounts 250
cr. Accounts Receivable
Note the the250
net
The accounts receivable section of the
balance sheet immediately after the
write-off entry would show-Accounts receivable
$262,000less: allowance for doubtful accounts

Note the the net

amount
amount of
of accounts
accounts
receivable
receivable isis unchanged.
unchanged.

6,882

accounts receivable, net $255,118


A H
8000
13600 H

93600

80000
13600

93600

93600
2000

3 H A

93600

93600



= (1+ )

10000
9% 90
30 12%


= +
=10000+100009%(90/360)
= 10225
= 90 30 = 60
= 10225 12% 60/360

= 204.5
= 10225 204.5
= 10020.5

Interest Revenue

Slide 5-13

On September 1, 1997, a bank loaned $10,000 for

one year at 9 percent interest, the interest and
principal to be paid on August 31, 1998. The banks
entry on September 1, 1997 is:
dr. Loan Receivable
cr. Cash

10,000
10,000

On December 31, 1997, an adjusting entry is made

to record the fact that interest for one-third of a year,
$300, was earned in 1997:
dr. Loan Receivable
cr. Interest Revenue

300
300

Interest Revenue

Slide 5-14

On September 1, 1997, a bank loaned $10,000 for

one year at 9 percent discounted.
dr. Loan Receivable
cr. Cash
Unearned Interest Revenue

10,000
9,100
900

On December 31, 1997, an adjusting entry is made

to record the fact that $300 of interest was earned in
1997.
dr. Unearned Interest Revenue
cr. Interest Revenue

300
300

Interest Revenue

Slide 5-15

On August 31, 1998, when the loan is repaid, the

entry is:
dr. Cash
cr. Loans Receivable

10,000
10,000

After repayment by the borrower, an adjusting entry

is also made by the bank to record the fact that $600
interest was earned in 1998.
dr. Unearned Interest Revenue
cr. Interest Revenue

600
600

5000

5000

5000

Lets move on to something else!