Hey here we are again right ready to start
they just played that snazzy music and now we are ready to go. Has anybody here ever
listened to that music at the start of it? Is it me or does it sound like the music to
a really bad 1990s sitcom. Right you know I expect to kind of come in and trip over
something but anyway let’s go ahead and start. It seems like I assigned a lot of homework
did I how long did it take? Not too bad okay so let’s dive right in there I’m going to
do them a little bit out of order. The first one I want to do is problem eight one A so
let’s go ahead and do that that’s on page three forty nine in you book problem eight
one A for each of these five separate cases identify the principle or principles of internal
control that are violated. Recommend what the business should do to adhere to the principles
of internal control. Alright number one heather flat records all incoming cash receipts for
her employer and posts the customer payments to the respective accounts. Okay what is violated
here what are they doing wrong? Okay this is a violation of the separation of duties.
Okay the same person should not be recording cash receipts and posting the payments to
the customer’s account. Okay so you want to try to separate out those duties. Correct
okay at Nedco. Company Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian
but if someone needs petty cash at lunch Jose fills in as custodian okay what is the principal
violated there. This would be a violation of principal of establishing responsibility
remember how I said at a bank you wouldn’t just say hey go whatever bank you want no
you would say this is your droor this is your droor this is your droor now I think it says
Jeff is the petty cash custodian. So either I would say he is the only one who could be
the petty cash custodian or I would have two petty cash accounts and I would put Jeff I
charge of one and Jose in charge of the other. And that way if there is a discrepancy you
know who to go and talk to right? You could do that at a company couldn’t you have two
petty cash accounts. To me that makes better sense than dipping into the same box. Because
if something is wrong Jeff can say Jose did it and Jose can say Jeff did it. So you might
just have two separate boxes and say you are in charge of this one and you are in charge
of this one. Number three Nadine Cox posts all medical charges and payments at the dole
medical clinic at night Nadine locks up the computerized accounting system and stores
the tape in a locked file in her desk. Okay what is um what is the principal violated
there? I don’t know if I would have gotten that one. The principal they violated was
actually the application of technological controls. The problem here is that she, it’s
good that she’s backing these up but she shouldn’t be storing them in her desk okay what happens
if the whole place burns down that could happen couldn’t it? Okay um she should take these
home or take them to another place or whatever. Now this used to be a common situation where
people would make a backup and take the backup home so that if the company was broken in
to or if it caught on fire or whatever now largely what are our companies doing now?
Yeah they are backing up using the internet or something. I do quicken for my home finances
and I backup on the internet I have a website and I send them over there so if something
happened to my computer or something happened there I could go out to my website and have
a backup there so you want to have a backup safe. Number four Barto sales prides himself
on hiring quality workers who require little supervision. As office manager Barto gives
him employees’ full discretion over tasks and for years he has seen no reason to perform
independent reviews at work. What’s the one going on there? There are no reviews going
on he needs to perform individual reviews of his workers. And that’s great that he thinks
he’s doing a great job but we have talked about many instances where that wonderful
employee that you thought wasn’t stealing from the company was in fact was happening
so they have to be performing independent reviews. Okay or hire an internal auditor
to come in and perform independent reviews alright number five Dezzy Wests manager has
told her to reduce costs. Dezzy decides to raise the deductible on the plants property
insurance from five thousand to ten thousand this cuts the property insurance premium in
half. In a related move she decides that bonding the plants employees is a waste of money since
the company has not experienced any company theft. Dezzy saves the entire amount of bonding
insurance premium by dropping the bonding insurance. Obviously the principal violated
here is to insure assets and bond premium employees. Okay now if they have to raise
the deductible then that’s one thing sometimes you do that and sometimes it financially makes
sense to do so. However I would not cease bonding key employees. Okay for the reasons
that we have talked about in previous lectures okay questions on those? Those are just some
good scenarios to kind of walk through to see if you understand these principals alright
lets go ahead and jump to problem eight dash four A on page three five O’ now I should
have told you I apologize you only needed to do the first and second requirements on
here so you folks at home hopefully you are not mad at me I will put up the answer real
quick if you want to look at it. But I’m not going to spend a lot of time talking about
it okay but did you guys get this one to reconcile? Okay let’s take a look at this. The following
information is available to reconcile Clark Company’s book balance of cash with its bank
statement cash balance as of 2011 okay on July thirty first the companies cash accounts.
The books has a twenty six nine three debit balance but its debit balance shows a twenty
eight o’ twenty cash balance. Okay so we have got a difference in balances right? We have
a difference in balances and so here is what we are dealing with here okay so now we have
to go through these items and decide which side they go on and if they are added or subtracted
the questions I always ask are who already knows about these and it’s in their records
versus who is just now finding out about them whoever is just now finding out about them
and who is just whose side it goes on. And then you ask yourself as they do find out
about it are they going to add it or subtract it from that balance does that make sense?
Okay let’s take a look B check number three o’ three one for thirteen eighty and three
o’ four o’ for five fifty two were outstanding one the June thirty bank reconciliation now
we are doing the July one right? Now check number thirty forty is listed with the July
canceled check but check number thirty thirty one is not when they say its listed with the
canceled checks that means its cleared the bank. It’s gone through the system right?
Now that might have been a little confusing that’s a terminology where sometimes people
think a canceled check means you destroyed it or wrote it off or something. No in this
terminology people still use this, a list of canceled checks means it’s gone through
the system and it means they are no longer outstanding okay. So of those two checks thirty
thirty one and thirty forty only thirty thirty one is still outstanding. So we have got that
one check however also check number three o’ six five for three three six and check
number three o’ six nine for two four eight in July are not among the canceled checks
that means those are outstanding. So those are our outstanding checks okay and I don’t
have to show you this whole thing but I’ll show you where these go. So those are your
outstanding checks and that’s the total of them. Okay those are the checks that have
not been canceled okay they haven’t gone through the system. Okay lets read the next one in
comparing the canceled checks on the bank statements with the entries in the accounting
record it is found that number three o’ five six for July rent was correctly written and
drawn for twelve fifty but we mistakenly entered it in the accounting record as twelve thirty.
Okay alright so come back to me. We should have reduced our cash to twelve fifty but
we only reduced our cash by twelve thirty so we got to reduce it by another twenty bucks
right? So this is on the books side this is a book error for twenty bucks and its deducted
so it’s right there questions thus far okay D a credit memo to the July bank statement
say that they collected nine thousand dollars cash on a non interest bearing note for court
they deducted a forty five memo fee and credited the remainder for its account. They have not
recorded its event so who is just finding out about this? We are right the bank knew
about it, we are just finding out that they collected this nine thousand dollar note lest
the collection fee so we are collecting a total net amount of eight nine nine five right?
So the way we show that on the bank rec is it’s on the book side like I said we add it
so it goes right here doesn’t it? Now some people might have shown a collection of nine
thousand here and a deduction down here of forty five that would be okay. It would be
the same net affect wouldn’t it? But that’s on the book side as an addition. Okay E a
debit memo for eight o’ five lists a seven ninety five for non-sufficient funds check
plus a ten dollar non-sufficient funds charge, the check had been received by a customer
Jim Shaw, Clark has not yet recorded this check as non-sufficient funds okay so we accepted
this check from Jim Shaw thinking it would clear no so we got to back that out don’t
we? So let’s see how we do this, how much was the check for? The check was for seven
ninety five and there is a ten dollar non-sufficient funds check so we have to take it back a total
of ten ninety five of our records so there it is right there that dead beat his check
didn’t clear did it so that’s not a fee we are charging him that’s a fee the bank charged
us. So we might just pass that along to Mister Shaw. Okay we might just pay him a visit at
his home and we might break his legs. No I’m kidding we don’t do that anymore okay in the
old days that’s what they did alright F enclosed with the July statement is a fifteen debit
memo for bank services has not been recorded yet. The bank knows about this but we are
just finding out about it. Is finding out about this a deduction or addition to our
cash it’s a deduction so it shows right here on our bank record, fifteen dollar service
charge deducted cool? Okay finally on G Clarks July thirty one daily cash receipt of ten
thousand one five two were placed in the banks night depository on that date but did not
appear on the statement yet this is a deposit in transit isn’t it? So a deposit in transit,
who doesn’t yet know about this? The bank when they find out about it are they going
to add it or subtract it? They are going to add it so let’s list it right here okay the
adjusted bank balance is thirty three four o’ eight the adjusted book balance is thirty
four o’ eight. We have got a reconciliation don’t we now this is a formal, something that
you would keep a file of the statement. They probably would sigh it whoever did this reconciliation
they would have a record of who did it, what date they did it. All that sort of stuff did
you guys get this? It’s a little harder isn’t it? Okay alright questions on that? Okay um
now the next thing I wanted you to do was to do the journal entries. Now going back
to the reconciliation do we do journal entries for the left side or for the right side? The
right side. Alright okay now um let’s go ahead and let me see how I think they combined entries,
okay the first one is we have to debit cash for eight nine five five. We have to debit
cash for eight nine five five so that part of the journal entry writes itself correct?
Well what’s the rest of it? We need to decrease our receivable by nine thousand right? So
we have to record that collection event. You have to make sure you don’t just decrease
your receivable by eighty nine fifty five because that’s going to imply that this person
owes us forty five bucks right? And they don’t they owed us nine thousand; we collected eighty
nine fifty five. That’s all we are going to collect and so we do have to record that collection
expense of forty five in the manner shown. Okay what’s the next thing? Um this non-sufficient
funds check? For eight o’ five well we have to reestablish that receivable don’t we? We
have to re-establish that receivable for good ol’ mister Jim Shaw so we debit accounts receivable
for eight of five and credit cash for eight o’ five and in real life we might even add
another fifty bucks on there. And say you have an accounts receivable for eight fifty
five. And then we would have to credit some sort of revenue account like revenue from
uncollected accounts or something to offset that. But have you ever been to a grocery
store and it says balance checks have such and such a fee attached to them? That means
if you bounce a check for one hundred bucks you are going to end up paying them one hundred
and thirty bucks. That’s what that fee is. Because they probably had to pay their ten
dollar bank fee that they had to pay plus twenty dollars for being a pain in their rear
end. Okay next item we have on here is a service charge and we have to credit or reduce cash
so that’s what that looks like. You could debit banking expense if you’d like and then
the last thing is there is an error for twenty dollars. Now we know we are going to credit
cash right? Because this is a deduction from cash and we reduce cash we know we reduce
cash by crediting it correct? What are we going to debit? Well look back at what the
original entry was. We should have debited originally, oh which item is this? Which one
is it? C, we should have debited rent expense for twelve fifty but we only debited it for
twelve thirty right? So we have to make that other twenty dollar debit to rent expense
so that expense account is also properly recorded are you with me? Cool, mhm did you guys get
that? Is that kind of hard? How many people got that to reconcile? Um why don’t you go
ahead and I’m going to go ahead and put the answer up there. I don’t really require this
but I’m going to put it down and there is somebody at home who did it because they thought
they were supposed to and it drives them crazy not to know the answer so if you are in that
camp you can take a look at that, I’m not going to really talk through it because I
don’t want to confuse what we know I think it’s kind of counterproductive so don’t worry
about this its only up there for you folks at home if you really really have to know
the answer but I would just encourage you just to not worry about it. Okay we are done
with bank recs however I want to tell you one thing. For you folks here live and for
you folks at home in the handout section under lessons under chapter nine I’m going to put
one more bank rec. and it’s the Besty Dough, the Besty Dough company bank rec. and it is
out there under chapter nine handouts under the lessons tab. It is out there along with
the answer if you want little more practice doing bank recs. Okay not going to go over
it in class at all if you look at the answer and you still can’t figure it out. Well then
get ahold of me however and we can talk through it. But I’m not going to go through this.
This is just one out there if you want a little extra practice. Does that make sense? Okay
lets go ahead and jump over to quick study eight eleven, quick study eight eleven. Alright
quick study eight eleven. An entrepreneur commented that a bank rec may not be necessary
as she regularly reviews her online bank statement for any unusual items and errors describe
how a bank rec in an online review or reading of the bank statement is not equivalent. Alright
how are they different? Well let me go ahead and read the second question because maybe
you’ll be answering both of these questions kind of at the same time. The next thing that
they ask is identify or explain at least two frauds or errors that would be covered in
bank rec reconciliation but wouldn’t be covered in an online review in a bank statement alright
um what do you think? Well in the books I feel like that’s the most current there may
be errors on both sides but in the examples that we have done when the cash receipts haven’t
been deposited in the bank yet but you have it in your books okay yes and what you are
pointing out is a reconciliation is a formal looking at your books compared to the banks
of each item to see if it reconciles. And you have this set of books which is hopefully
current and that you feel confident with and you compare it and you perform this formal
reconciliation right? This is why a lot of people, I actually do my bank rec not every
month, I just do it every week because I know my last week’s activity a lot better but if
I look at a list of activity three or four weeks ago I’m like I can’t remember that stuff.
And it’s just easier I can do it really quick. So you are right Sarah I would say that. What
are some of the errors that would not be uncovered by just perusing your online activity that
would be caught by a bank rec? Figures on checks depending on what you have on an invoice.
Very good now you might see that you always pay the, you have a vendor that, you know
your vendors by now and let’s say you always pay at&t well what if there was an erroneous
payment to at&t? Or they double billed you or they billed you for somebody else’s charges
or something like that do you see what I’m saying? Well you’re just looking for things
okay there’s at&t that’s fine you’re not going to catch that are you? Okay what’s something
else that we wouldn’t catch? Maybe if you deposited a check for like eight fifty five
and you put in like four fifty five or something. Yeah an error on deposit maybe they just put
in the wrong amount or maybe they didn’t put it in at all. Errors of omission are harder
to catch aren’t they? But you’re right they might have made a deposit but at a different
amount. Okay good that would not be caught in just a perusal of online activity okay
maybe the payment was made but it was made from one of the different checking accounts
than the one that was made or maybe they made them from both of them actually and you’re
just looking through and oh that looks good, that looks good. It’s the same payment, I
can’t stress enough the need for, don’t even start a business if you don’t want to do bank
reconciliation because it’s one of the most basic and important of internal control functions.
And you’re going to get ripped off if you won’t do it, there is a good chance you will
eventually and it’s just a basic part of business that if you don’t want to do it maybe you
should reevaluate if you should even have a company correct? I know that sounds harsh
but I tell you that because I care alright? Alright so there might be others but I think
that’s a pretty good discussion of that any other comments on that or things you came
up with? Okay alright let’s go jump over, we are going to spend a lot of time going
over homework aren’t we? That’s alright, uh quick study eight seven, quick study eight
seven the following annual account balances are taken from pro team sports at December
thirty first. They give us the AR and they give us the net sales for both 2010 and 2011
what is the change in the number of days of sales uncollected between those years, is
it improving or getting worse? Well first let’s talk about the basic interpretation
or basic calculation of it alright did you get um first of all how do we calculate it?
Well we take accounts receivable divided by net sales times three sixty five. So for 2011
it was ten point seven days and for 2010 it was eleven point two. So it’s going from there
to there right? Is it getting better or worse? Its improving isn’t it? It’s improved by half
a day that’s good what might be some reasons for it improving? What might be some reasons
they’re coming in quicker? Maybe we changed our credit policy and we offer a larger incentive
for payment on um remember the two ten net sixty, maybe we changed it to two ten net
thirty or three ten net thirty, maybe we have a new credit manager who is really awesome
and when accounts get old at all she gets on it and in the past we were kind of lazy
about it and the economy is improving probably not it’s probably one of the other reasons
alright but as you can see here this has gotten better and I don’t think they give us any
competitors information to compare this to. I would be interested to see what this was
for 2009, 2008, 2007 and really do a strong trend analysis on this right? Okay I think
you’d have a little bit more accurate interpretation but this is a good basis for it okay alright
it think that’s it for chapter eight isn’t it? It’s a good chapter an important chapter
um but that’s all the homework I assigned for it wasn’t it? Is that correct no we did
nine two yeah we did exercise nine two but that’s all the homework I assigned for chapter
eight yes okay alright lets hop over to exercise nine two exercise nine two this goes to the
information that I was talking about as far as um we have our accounts receivable and
we have our subsidiary detail and the total of the detail has to equal what’s in the control
account remember when we discussed this last lecture? So whenever you do a debit or credit
to an account receivable you need to do it for both the control account and to the customer
detail alright okay lets read this a sanding company opened the following transactions
during 2011 we are on exercise nine two and you can see that there right I won’t read
all of those open a general ledger account having a T account for accounts receivable
sales and sales returns and allowances or let me say that a little different a T account
for accounts receivable sales returns and allowances also open an accounts receivable
subsidiary ledger having a T account for each customer and then they want you to post these
to both the GL and the AR ledger correct? So let’s do that. Now first of all whenever
you. This is a little harder to do with a constrained this is something that if I had
a bunch of white board and you could see them all I could walk through this a little differently
but that’s okay we’ll deal with what we got this is what they give you correct? Let me
blow that up a little bit. Larger now the way you want to post these things is whenever
you post you want to do it line by line okay accounts receivable thrift shop a debit for
four four one so I want to debit the control account for four four one seven and I want
to go over to the customer details for thrift shop and debit it for four four one seven
okay then I want to credit sales for four four one seven then I want to go to accounts
receivable for young enterprises whenever I do a debit or credit to accounts receivable
I have to take it to both the control account and the detail right? Then I do the next line
well you might say well how else would you do it? Well some people look at it in its
entirety and say let me do all the sales first and then let me do all of the accounts receivables
you always end up missing one you always end up skipping one so just go and take care of
business line by line okay chronologically now when that’s all said and done you should
have information that looks like this. Okay this is you control account and this si you
subsidiary accounts receivable ledger sometimes we call this the subsidiary detail okay and
you can see that each one of those is posted right okay so the total of the accounts receivable
control account at the end of the period is eight eight one seven right? Is that the total
of the ending balances? For the subsidiary detail? Does seven o’ two three plus twelve
fifty plus five five four equal eight eight one seven it does doesn’t it? And that’s the
key you can see on November fifth they posted it to the control account and to the detail
at November tenth they posted it to control account and to the detail even when there
was a credit on November twenty first they posted a credit to the control account and
also the credit to the subsidiary detail you always have to go both places does that make
sense? Questions? Okay then they wanted us to prepare a schedule of accounts receivable
is that correct? Now this is a pretty basic simple example there is only three customers
but for most cases there are many many customers wouldn’t there? Okay so the schedule of accounts
receivable as of November thirty 2011 simply lists each of our customers and what they
owe us in receivable in that date and as to verify that eight eight one seven is the amount
of accounts receivable that would show up on the balance sheet if we did a balance sheet
in November thirty wouldn’t it correct? Does that make sense guys? Alright did you all
get that? That’s not too hard of a concept is it? Now I think we are done we are going
through homework aren’t we? Okay great you guys done with that? Alright we only have
few we don’t have that much more time so I’m just going to let you go early. No I’m just
kidding I’m not going to let you go early only a teacher who doesn’t care about his
students lets them go early okay and I care way too much okay I want to take a look a
little bit more at chapter nine okay now what I want to do is I’m kind of thinking on the
run here um we have talked a little bit about accounts receivable and about the control
account versus the subsidiary account correct? Um going to the PowerPoint another real quick
term that I just want to make sure we get in here um there is also something called
an installment accounts receivable and this is when customers owe us from credit sales
but they pay us off in periodic amounts over an extended time period and sometimes we charge
them interest okay very similar to a notes receivable but there is I want you to be familiar
with the term installment accounts receivable.in case you ever hear it. You have probably heard
about this we are going to pay in installments right? Okay now I am not going to talk. I’m
going to switch the order that I usually do for this chapter. I’m not going to talk right
now about credit cards we’ll talk about that later. I want to stay on the subject of pure
receivables; pure receivables being when we sell to a customer and they are going to pay
us at a later date okay and we are hoping that they are going to pay us right that’s
what I want to continue talking about now. Now sometimes a customer does not pay us the
money they owe sometimes we have a receivable from a customer who we provided product or
service to and they did not pay us okay that is called bad debt expense. They owed us money
and they didn’t pay us. Now coming off the PowerPoint let’s just talk a little bit. Why
might a customer not pay you on your receivable that you have for them what are some reasons
that you may not be able to collect that and you might incur bad debt expense. The customer
lost their job yeah sometimes has anybody here every done collection? You have? Kim
was it the most miserable job in the world? Yeah its awful I still do it I work at a chiropractic
clinic and I do the book keeping you seem like such a nice sweet person I am and they
tease me about it all the time they are like you need to be start on the phone yeah I’ve
done a little bit of it and I don’t like it. I hate it but sometimes and I want to hear
some of your comments in this discussion but do you ever hear people say I can’t because
I lost my job yeah but we try to work with them as long as they pay something every month
we don’t really worry about it. Yeah exactly you try to work with them. But sometimes people
say hey I know I owe you the money I know I want to pay you but you know what I just
got laid off, my wife got laid off we don’t have any money you can come over and you can
look in our sofa for coins you can go through my wallet you can look in the ash tray in
my car I don’t have the money I’m sorry I want to pay you I do not have the money have
you heard that before okay so that’s one reason they may night you may not get paid what are
some other reason you may not get paid? Maybe they are just not very good record keepers.
Maybe they are just oh yeah I got to get to that I’m behind on everything you probably
heard that too haven’t you Kim. Yeah we got that bill somewhere can you resend it? Can
you resend that bill? I don’t think we ever got it it’s like oh boy what does their house
look like. Good what are some other reasons? Maybe they just don’t want to pay you maybe
they said you know what I know I owe you money but I don’t want to pay you I know I owe you
three hundred dollars for this sprinkler system you put in but this sprinkler system you put
in is garbage its broken it’s you know there are pipes sticking out of the ground it’s
just horrible I’m not going to pay you I’m not going to pay you sorry the services or
product you gave me stinks okay have you ever heard that one? Very rarely but there has
been a couple letters nasty letters saying they are not going to pay because they didn’t
like what they got basically I remember one time I went to a dentist we were going to
take the kids to a dentist and we have a dental insurance through the school and the dental
insurance routine checkups at certain dental practices okay so my one there was a new dentist
just half a mile from out of the house so the wife was going to take the kids to the
dentist and she called to set up the appointment I said before you set up the appointment tell
them exactly what our insurance is and make sure we are covered so she did that she says
yeah they take our insurance we have to go in three weeks so we take the kids to the
dentist before we start the process that day I say I just want to make sure here is our
insurance card I just want to make sure some dentists cover it and take this insurance
and some don’t and they said we take it its cool everything is fine all you got to do
pay your little ten dollar co pay or whatever they said good they get their work done and
all of ths sort of stuff and we go home andw e think everything is fine well they call
me a week later and go we feel horrible we feel so bad we had a new person working the
counter and we don’t take your insurance and I said oh really actually they called my wife
and she said o really and they said we apologize what we are going to do is we will meet you
half way they said um we are not going to charge you for the xrays but we are going
to charge you for the appointments so the xrays which are about one hundred fifty bucks
don’t worry about but it is like one hundred seventy dollars for the kids appointments
so if you could pay us that would be great and so my wife tells me this and I said we
aren’t going to pay them I said we are not going to pay them and I said call them and
tell them we are not going to pay them we double checked with them and we double checked
with them so she calls them and she said that we have got to pay they said we have to pay
they are not going to budge on that we got to pay Dave and my wife thinks if we don’t
pay they are going to take away our children and you know torch our house and I said do
not pay I said I will take the situation into my hands so I go home from work I drive over
there and I said okay who owns the business here and she says well can I help you, do
you own the business okay well then I want to talk to who owns the business one of the
dentist owns the business and I was always very nice about it and I’d say hey here is
the situation we checked not once but twice to see if you would take our insurance you
told us both times you do and thus we had you as our dentist now you are telling us
we don’t this is not my mistake this is your mistake you even admitted it was your mistake
I’m not going to pay you this money I’m sorry I’m not going to pay it and you know before
I left my wife said I guarantee that you are going to have to pay it they are just not
going to budge and of course the guy said you are exactly right it was our mistake I
said we wouldn’t have come to you we would have gone through this you know this is why
I pay dental insurance right so they had a receivable from Dave Krug that just never
did get paid and they had to write it off and we’ll talk about that but and I told them
I said my credit is squeaky clean I pay all my bills but I am not going to pay you and
I was nice about it but and sure enough we didn’t pay them but there is an example right?
My wife goes you had to pay didn’t you I said no I didn’t so we learned something about
our marriage she is the good cop I’m the bad cop right um not always the case I know men
who are the good cop and the wife is the bad cop but in our marriage I can be the bad cop
if I have to what is another reason some people don’t pay when they owe you money here is
a good one they are dead have you ever tried to collect money from a dead person that’s
like in that storage wars show like the people die and they don’t pay their rent and so yeah
have you ever had a customer you were trying or client or patient and they are dead yeah
we just write it off yeah because when you talk to a dead person they just ignore you
its rude but it’s very hard to get a dead person to write you a check and sometimes
people die as a matter of fact everyone here in this studio one day will probably die okay
I don’t know maybe god is going to take a straight to heaven I don’t but for you are
all going to die no I’m kidding so it happens and chances are when we die we will owe somebody
something right? Maybe hopefully it’s just a little amount but you don’t collect money
from dead people now on this I always said when customers don’t pay is that always a
bad thing and always students are always like what of course it’s a bad thing well here
is the analogy I’m going to use okay I teach accounting one every semester and there is
about seventy or eight people that take it every semester now let me ask you this if
somebody flunks is that always a bad thing well here is the deal if ninety percent of
my class or ninety five percent of my class don’t flunk and five percent flunk I’m really
okay with it I mean seriously I’m really okay with it I mean I’m sad but why might one hundred
percent of my class got an a what would tell you about me as an instructor? It’s too easy
it’s too easy or people are cheating I’d like to think it’s because I’m that good but I’d
say not everybody is going to pass the class now if everybody got an A in my class I would
say that I’m too easy well if everybody pays you if you a zero bad debt expense from people
you extend credit to I would say you credit policy terms are too restrictive okay what’s
one way to guarantee that you never have bad debt expense take cash only the old sign that’s
says in god we trust all others pay cash you ever seen that? But one way I could guarantee
that there is never bad debt expense is say we only accept cash but what might you do
there? Loose a ton of customers now what if somebody like Nebraska furniture mart said
we are changing our policy we only accept cash not check but cash because we are sick
of this bad debt expense they’d go under would they not remember the goal in business is
not to have zero bad debt expense the goal is to have a higher net income all things
being equal right? You’re going to have some bad debt expense what if you were my book
keeper? Jessica and we met every year and we talked about the bad debt that we had in
our customers and one year we were met and you said I am thrilled to tell you that we
have zero bad debt expense and we are a pretty large company and I’m like really and you
are all happy about it and I say well tell me why you have zero bad debt expense and
you say well I changed our credit terms I only extend credit to customers if they can
prove that they have a one million dollar or more net worth I would be a little upset
at you wouldn’t I? because yes we have zero bad debt expense but we have a ton of customers
do you think credit card companies like visa do you think they have bad debt expense and
I guarantee this heads would roll if they had zero because somebody would say we are
not extending credit like we should be and we are going to have some bad debt expense,
I’m going to have some students unfortunately that flunk this class but I really am okay
with it if it’s just a minority I would be upset at myself if there wasn’t a few Fs in
a large group over time does that make sense? Hopefully you guys won’t be one of those Fs
it’ll be some other poor person but do you understand what I’m saying about some people
get all bent out of shape about bad debt expense well you have to manage it you have to control
the risk but it’s part of doing business it’s part of doing business, the reason we extend
credit is to extend our customer base does that make sense but aren’t there some businesses
that sill wouldn’t have bad debt expense at all well sure for some services that you have
to pay up front well taco bell have you ever said can you put this on my bill I’m sure
taco bell has some receivables maybe from a big catering deal maybe you got married
and you were so cheap that you catered with taco bell but I bet you if you went in and
audited their books they have some receivables somebody do this go look at their financial
statements and see if they have receivables but there are a large number of companies
where the majority of their sales are cash right? You go to the dollar general store
you know they take cash or debit through card right there is no receivables but there is
a lot of other companies that don’t have receivables you are right you are exactly right but for
those who do extend credit if there is some bad debt you have to go manage it but its
part of doing business now I want to don’t go to the PowerPoint yet um I’m going to actually
stop there okay and we want to uh you know what I’m not even going to give you any homework
wow okay no homework this period yeah it does not happen much oh wait there is one no I’m
just kidding no homework but here is what I want to do folks come back to me as I close
up next lecture is a really important one I want you to be here I want you to engage
your brains I want you to bring your calculators because we are going to talk about how we
deal with bad debt expense so no homework get some rest come back next time and be ready
to engage your brain bye bye.