Management Accounting I

July-October 2021
BMJ Term 1
Tuesday
(6 - 7pm)
debarati@xlri.ac.in
5.13

Basu, XLRI
5.10

Basu, XLRI
 Problems Discussion
• 4.10 • 5.2

• 4.19 • 5.6

• IFR4.3 • 5.9

• 5.11

• 5.14
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Other Key Current Assets
Financial Assets
 Cash and Cash Equivalents
• Cash: money on demand
 Coins and currency
 Cheques
 Current and saving account deposits
 Post-dated cheques

• Cash equivalents:

 Short-term, highly liquid investments readily convertible to cash

 Subject to insignificant risk
 Examples: T-bills, commercial paper
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 Trade Receivables
• Short-term assets that arise from selling on credit

• Why extend credit?

• Costs of extending such credit:

 Interest
 Credit investigation / customer ratings
 Additional record keeping
 Uncollectible amounts / bad debts
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 Bad Debts
• Such losses have to be matched with the credit revenue recorded

• Do we know these losses when we provide credit?

• Need to estimate!

• Estimated amount treated as expense and a provision created

• Bad Debt Expense increases (debit)

• Provision for Doubtful Debts (contra-asset account) increases (credit)

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 Estimating Bad Debts: Methods
• Percentage of Sales

 Income Statement approach: percentage of Net Credit Sales

 Expense = value as calculated above

• Percentage of Receivables

 Balance Sheet approach: Flat percentage of TR at year end

 Aging schedule: older debts have higher probability of default
 Expense = Estimate – Existing provision

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 Test!
• Trade Receivables: Opening Bal – NIL; Closing Bal – 1,500

• During the year, received 2,000 from customers who purchased on credit

Net credit sales = 1,500 - 0 + 2,000 = 3,500

Expected
Age Amount Provision
Loss Year Credit Sales Uncollected
Not yet Year 1 2000 30
800 2% 16
due Year 2 3500 85
1 - 30 400 4% 16 Year 3 3200 90
Total 8700 205
31 - 60 200 6% 12
> 60 100 10% 10 Average Uncollected = 205 / 8700 = 2.36%
 Total 1500  - 54
Provision = 3500 * 2.36% = 82.6
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 Actual Bad Debts
• Writing off

 Provision for Doubtful Debts reduces (debit)

 Trade Receivables reduces (credit)

• Recovery (after write off)

 Reversal: Trade Receivables increases; Provision for Doubtful Debts increases

 Cash received: Cash increases; Trade Receivables reduces

Basu, XLRI
7.7

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Basu, XLRI
 The rest…

in a while,
Questions for Next Class
6.2

Basu, XLRI
6.24

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6.22

Basu, XLRI