ACCT1110 Chap.5 Balance Sheet: Current Assets
Balance Sheet: Current Assets
An asset is current if it is cash, or if the entity expects to realise it within twelve months or within its normal operating cycle, whichever is longer. The classification is not cosmetic: every liquidity measure in the final topic divides one of these totals by another, so an item placed in the wrong band distorts the ratios before anything else has gone wrong.
A winery holding stock for four years still classifies it as current, because the cycle test wins.
Cash is the account most exposed to error, and it is also the only one where an outsider keeps an independent record of the same transactions. That is what makes the bank reconciliation possible and why it opens the written paper so often.
The method is sorting rather than arithmetic: if the bank already knows about an item and we do not, it belongs in our column and must be journalised; if we already know and the bank does not, it belongs in the bank's column and needs no entry at all.
Receivables are then reported at the amount expected to be collected rather than the amount invoiced, and the gap between those two figures is the allowance for doubtful debts.
Questions in this area give you an opening balance, the write offs, and a required closing balance expressed as a percentage of receivables. The expense is never given: it is whatever moves the account from where the write offs left it to where it has to end up, and finding that figure is the whole question.
What this chapter covers
- 01
The twelve month test and the operating cycle test
- 02
Where an overdraft is reported
- 03
Why the bank statement is a mirror image
- 04
Sorting reconciling items by who knows about them
- 05
Which column generates journal entries
- 06
The allowance as a contra asset
- 07
Write offs against the allowance
- 08
Reading the required closing balance backwards
A bad debts top up where the write offs have overdrawn the allowance
- +1Write off the specific debts against the allowance, not against expense: debit allowance for doubtful debts $14,600 and credit accounts receivable $14,600.
- +1State the running balance in its own line. $11,900 less $14,600 leaves $2,700 on the debit side, so the account is overdrawn rather than merely depleted.
- +1Compute the requirement: 2.5% of $683,000 = $17,075, needed as a credit balance at 30 April.
- +1Move the account from $2,700 debit to $17,075 credit. That takes $19,775: debit bad debts expense $19,775 and credit the allowance $19,775.
Key terms
- Operating cycle
- The time from buying inventory to collecting the cash from selling it. Where it runs longer than a year, it replaces the twelve month test for classifying current items.
- Bank reconciliation
- A comparison of the entity's cash record against the bank's record of the same account, resolving both to one adjusted figure.
- Outstanding deposit
- Money banked but not yet processed by the bank. It is added on the bank side and generates no entry, because the ledger already holds it.
- Unpresented payment
- A payment recorded by the entity that the bank has not yet paid out. It is deducted on the bank side and, like an outstanding deposit, needs no journal entry.
- Dishonoured deposit
- A customer receipt the bank has reversed. The entity must record it, restoring the receivable and reducing cash.
- Allowance method
- Reporting receivables net of an estimate of what will not be collected, so that the shortfall is recognised as an expense in the period of the sale.
- Net receivables
- Accounts receivable less the allowance, the figure that appears in the balance sheet and feeds every receivables measure.
Balance Sheet: Current Assets FAQ
Which reconciling items need a journal entry?
Only the ones the bank knew about first. Interest credited, account fees, dishonoured deposits and any error in our own recording all change the ledger and must be journalised. Outstanding deposits and unpresented payments are already in the ledger and are adjustments to the bank's figure alone, so writing an entry for them would count the same amount twice.
Why does writing off a bad debt not affect profit?
Because the loss was already recognised when the allowance was created. The write off simply removes a specific receivable and consumes part of the allowance set aside for exactly that purpose. Profit is affected later, by the period end adjustment that restores the allowance to the level the closing receivables require.
What if write offs exceed the opening allowance?
The allowance ends up with a debit balance, which means the account is short rather than merely reduced. The expense is then the required closing balance plus that debit balance, so it comes out larger than the requirement. Treating the debit balance as if it were a credit is the single most expensive error in this question family.
How do I find the error when the two reconciliation columns disagree?
Look for a listed amount equal to the difference, or to half of it. A gap matching one figure usually means that item was sorted into the wrong column or omitted; a gap equal to twice a figure usually means it was added where it should have been deducted. Rebuilding both columns from scratch is slower and finds the same thing.
Exam move
Practise the sorting question rather than the arithmetic. Take a list of eight reconciling items, and for each one write only two words: which column, and whether it is journalised. Once that is automatic the reconciliation itself is addition and subtraction.
For the allowance, drill the four line ledger: opening balance, write offs, expense, required closing.
Run it once with a credit balance remaining and once with a debit balance remaining, because those are the two versions the paper alternates between and the sign of the adjustment flips between them. Both of this chapter's methods reward writing the intermediate line that most candidates skip.
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