Uncollectible Accounts Using your text and at least one scholarly source, prepare a two to three page paper (excluding title and reference page), in APA format, on the following:
- Explain the difference between Charity Care and Bad Debt in a healthcare environment.
- Explain how the patient financial services personnel assist in determining which category the uncollectible account should be placed.
- Discuss the financial implications of gross uncollectibles on the bottom line of the healthcare institution, and explain how these are recorded on the financial statements.
ACC281: Accounting Concepts for Health Care Professionals-Uncollectable Accounts
Chapter 3 The Accounting System Learning Objectives • Understand the need for and general characteristics of a proper accounting system. • Understand accounts and how they are impacted by the debit/credit rules. • Know how to prepare journal entries to describe the effects of transactions and events. • Post accounts to the general ledger and prepare a trial balance. • Apply features and tools that are used to enhance and improve accounting systems and processes. Martin Barraud/OJO Images/Getty Images eps81189_03_c03.indd 37 12/20/13 8:49 AM Section 3.1 Exploring Accounting Systems Chapter Outline Introduction 3.1 Exploring Accounting Systems 3.2 Chart of Accounts 3.3 Accounts and Debits/Credits Debit and Credit Rules T-Accounts 3.4 Transaction Analysis Critical Thinking About Transaction Analysis An Applied Example of Transaction Analysis 3.5 General Journal Posting the General Ledger Review of the Sequence of Transaction Recording A Balanced Trial Balance: No Guarantee of Correctness Special Journals 3.6 Source Documents 3.7 Thinking About Automation 3.8 Critical Thinking About Debits and Credits Introduction E xhibit 2.5 shows how transactions systematically impact the accounting e quation and resulting financial statements. Although this system works fine as an introduction to the accounting equation, it is not adequate for managing an actual busin ess. Too many transactions originate in too many places for a single tabulation to cap ture all business activity reliably. Many small businesses have tried to use a simple schedule or spreadsheet to record and process all their activities; however, chaos quickly rules. A more complete and controlled accounting system is needed to manage today’s complex businesse s. In this chapter, we will explore the design and use of modern accounting practices. 3.1 Exploring Accounting Systems L arge and successful healthcare businesses have invariably developed robust account – ing information systems. This suggests that the pathway to business succ ess entails more than just providing excellent medical services. It also entails thoughtful develop – ment of well-designed accounting information systems. It is far better t o establish a proper system at the outset of launching a healthcare business than to come back later and try to repair an inadequate system. By the time a business discovers that its sy stem is deficient, it is often too late. The business may well have lost control of necessary information for proper business management. The results are often disastrous. eps81189_03_c03.indd 38 12/20/13 8:49 AM CHAPTER 3 Section 3.2 Chart of Accounts This naturally leads you to wonder about the core elements of a proper system. Clearly, the accounting system must provide a basis for preparing financial statements. This is the end objective and reflects the aggregation of all activity. Thus, the goal of an accounting system is to process transactions and events reliably into useful financial statements and reports. However, the system must also maintain retrievable documentation for every transaction. An important feature is to allow a user to query the system for the purpose of retrieving, verifying, or examining individual details of any specific business transaction. Computerized accounting systems summarize and interpret all business transactions. The result is useful financial data for purposes of investment and business m anagement. Much of the data input can actually originate with the transaction’s execution. For instance, while recording a patient’s payment, accounting records can be updated to reflect the transaction. This can additionally trigger adjustments of the company’s inventory records (for example, if medical samples or inoculations were given) and even generate an order to replace depleted stock on hand. In addition, bills for insurance companies can also be generated from the information gathered at the time the patient pays their deductibles and co-payments. While this level of sophistication can simplify the dat a entry process and increase accuracy of subsequent processing, it also entails considerable risk of “invis- ible” manipulation of data and file destruction. Thus, a good accounting system must take into consideration the need to control access, verify input, and back up essential records. Even with these important controls, a well-trained accountant must be knowledgeable and vigilant. A basic understanding of debits/credits, journals, and other basic topics is essential to interpret computer – ized reports and spot errors that may have been inadvertently (or worse, deliberately) introduced into the system. Computerized accounting information systems are typically built around a database structure. This means that data are stored in an electronic array, including a variety of descriptive codes and indices. This coding process allows you to query the database to extract desired information instantaneously, based on parameters established by the per – son initiating the request of the accounting system. The long-standing structure of the core financial statements and the basic tools used in their construction are generally pre – served in even the most sophisticated electronic environments. Indeed, it is difficult to understand or work within an automated accounting environment without first being moderately familiar and comfortable with the basic accounting tools. Thi s chapter intro – duces these important tools and helps you understand how they can be effectively used to capture and process information. 3.2 Chart of Accounts Y ou may be wondering if there is a fixed set of accounts used to develop these account – ing systems. The answer is clearly no. Each company’s unique business circumstances will dictate the particular accounts that are logical and useful to support its accounting system. Should the need for a new account arise, it is a simple matter t o add an addi – tional account. Furthermore, it is common to assign a unique number to each account. The numbering system is usually called a chart of accounts. It is common for the numbering scheme to communicate information about the nature of accounts. For example, all assets may be numbered in the 1,000s, liabilities in the 2,000s, and so on. This allows logi cal eps81189_03_c03.indd 39 12/20/13 8:49 AM CHAPTER 3 Section 3.3 Accounts and Debits/Credits sorting of data. Every company’s number system is likely to be unique . The assigned numbers are arbitrary, like zip codes, and are merely a tool of convenience for classifying data. For example, when you code bills to be paid for your department, y ou are likely using a code related to the Chart of Accounts so the accounting department knows which account to charge. Assume that Kaplan’s chart of accounts appears as Table 3.1 shows. Table 3.1: Kaplan’s chart of accounts AccountCode Cash 1,000 Accounts receivable 1,010 Supplies 1,020 Land 1,030 Accounts payable 2,010 Loan payable 2,020 Capital stock 3,000 Retained earnings 3,100 Dividends 6,000 Revenue 4,010 Supplies expense 5,010 Wage expense 5,020 3.3 Accounts and Debits/Credits A n account is the master record that is maintained for each individual financial state – ment asset, liability, equity, revenue, expense, or dividend component. Every finan – cial statement element (cash, accounts receivable, inventory, land, accounts payable, etc.) would have its own account and show the impact of all transactions causing a change to that account. The collection of all accounts is known as the general ledger. Importantly, the collective balance of all accounts should conform to the accountin g equa – tion, meaning that the sum of all asset accounts will equal the sum of a ll liability and equity components. Of course, in considering this equation, you need to be mindful that the revenue account increases equity, and expenses and dividends decrease equity. Beginning students are typically mystified about how this equality is consistently pre – served. There is an answer to this, and the answer ’s brilliance helps explain how the fundamental accounting model has persevered for more than 500 years. Indeed, that the model continues to be programmed into today’s highly sophisticated computerized sys – tems speaks volumes about the integrity of the model. The key ingredient is the concept of debits and credits. eps81189_03_c03.indd 40 12/20/13 8:49 AM CHAPTER 3 Section 3.3 Accounts and Debits/Credits Debits and credits are often misunderstood. You may have had your account credited at the bank, you might use a debit card to make a purchase, and you might prepare a credit application! The terms debit and credit are tossed around rather casually in day-to-day activities. At this point, the best thing to do is clear your mind of any meanings t hat you might already associate with the terms and start anew. Debits and credits are accounting tools, and you should focus on this important point: Every business tran saction can be described in terms of debit/credit impacts on specific accounts so that debits will always equal credits. That is an amazing concept! By preserving this equality at the transaction level, the overall equality of the fundamental accounting equation is also preserved. Are you perhaps skep- tical? Let’s look closer at this model. Debit and Credit Rules It is best to begin by memorizing certain “rules” about debits and credits. These rules are not necessarily intuitive, but at least they are not hard to learn. Think of learning them in the same way that you might memorize a few key words in a unfamiliar language, prior to taking a trip to a place where that is the only language spoken. Accountants and busi – nesspeople routinely speak about transactional effects in the context of debits and credits. Debit (often abbreviated “dr” and sometimes taken to mean “to record on the left-hand side of an account,” as will become apparent shortly) is simply the action of recording an increase to an asset, expense, or dividend account. Conversely, credit (abbreviated “cr” and sometimes taken to mean “to record on the right-hand side of an account”) is the action of recording a decrease to those same accounts. For example, if Cash (an asset) is increased, we say that we are debiting Cash. If Accounts Receivable (another asset) is decreased, we say that we are crediting Accounts Receivable. Therefore, if a transaction involves collecting $1,000 cash from a customer who owes us the money (i.e., we have a previously established account receivable on our balance sheet), then we simply say that we are debiting Cash and crediting Accounts Receivable for $1,000. By their nature, asset, expense, and dividend accounts usually have more debits than credits and are said to have a normal debit balance (see Figure 3.1). Figure 3.1: Assets, expenses, and dividend accounts Normal Balance Is Debit Decreased With Credits Increased With Debits Assets Expenses Dividends eps81189_03_c03.indd 41 12/20/13 8:49 AM CHAPTER 3 CHAPTER 3 Section 3.3 Accounts and Debits/Credits Liability, revenue, and equity accounts behave in an opposite fashion. They are increased with credits and decreased with debits. By their nature, these accounts usually have more credits than debits and are said to have a normal credit balance (see Figure 3.2). Table 3.2 lists many typical accounts, showing the application of the debit and cr edit rules. Figure 3.2: Liability, revenue, and equity accounts Table 3.2: Schedule of debit and credit rules for typical accounts Normal BalanceIncreased WithDecreased With Typical Assets Cash DebitDebitCredit Accounts receivable DebitDebitCredit Inventory DebitDebitCredit Land DebitDebitCredit Buildings DebitDebitCredit Equipment DebitDebitCredit Typical Liabilities Accounts payable CreditCreditDebit Salaries payable CreditCreditDebit Notes and loans payable Credit CreditDebit Typical Equities Capital stock CreditCreditDebit Retained earnings CreditCreditDebit Normal Balance Is Credit Decreased With Debits Increased With Credits Liabilities Revenues Equity (continued) eps81189_03_c03.indd 42 12/20/13 8:49 AM CHAPTER 3 CHAPTER 3 Section 3.3 Accounts and Debits/Credits Table 3.2: Schedule of debit and credit rules for typical accounts (continued) Normal BalanceIncreased WithDecreased With Typical Revenues Service revenue CreditCreditDebit Sales CreditCreditDebit Typical Expenses Salaries and wages DebitDebitCredit Utilities DebitDebitCredit Interest DebitDebitCredit Rent DebitDebitCredit Supplies DebitDebitCredit Ta x e s DebitDebitCredit Dividends Dividends DebitDebitCredit In addition to the preceding rules, a few select accounts are known as contra accounts. You will be exposed to these accounts in future chapters related to accounts receivable, plant assets, and certain long-term indebtedness. A contra account is an offset to another account and has opposite debit and credit rules. For example, matching the expenses of a building asset with an organization’s revenue over the passage of time can result in a reduction in the asset’s reported cost. This impact is reflected as accumulated deprecia – tion, which is netted against (i.e., reported as contra to) the building asset. Thus, the accu – mulated depreciation is reported within the asset section but has opposite debit and credit rules (e.g., increased with a credit and vice versa). This concept will be covered in more sufficient depth later. T-Accounts No introduction to accounting would be complete without mentioning T-accounts. A T-account is not part of an accounting system; it is only a device that is used to dem – onstrate the impact of certain transactions and events. T-accounts are useful teaching tools. Accountants also use them when chatting about accounting effects. You can think of T-accounts as accounting on a napkin—a quick and informal way to look at an account. A T-account is shaped like a “T,” with debits on the left and credits on the right. Exhibit 3.1 illustrates T-accounts showing the effects of purchasing $50,000 of equipment for $10,000 cash and a $40,000 note payable. In this case, Equipment (an asset) is increased via the debit; Cash (an asset) is decreased via the credit; and Note Payable (a liability) is increased with the credit. When you meet with the accounting department liaison about your reports, your liaison may use T-accounts to review transactions you may be questioning. eps81189_03_c03.indd 43 12/20/13 8:49 AM CHAPTER 3 Section 3.4 Transaction Analysis Exhibit 3.1: Example T-accounts The only limit to what can be illustrated within T-accounts is the size of the paper on which they are drawn. Exhibit 3.2 shows a T-account for Cash corresponding to all activity that impacted this particular account. Notice that the excess of debits over credits equals the ending cash balance. Later in this chapter, you will see a comprehensive example for Kaplan’s Medical Clinic, and this particular T-account will correspond to the cash transac- tions described therein. Exhibit 3.2: Sample T-account for Cash Note that on a T-account there will only be a balance shown on one side of the “T.” In this sample of a Cash account, which is usually an account that has a debit b alance, the bal- ance is only shown in the debit column. 3.4 Transaction Analysis T he process of maintaining accountability over a business’s affairs begins with an anal – ysis of each transaction. You must determine what accounts are impacted and how they are impacted (increased or decreased). These increase/decrease impacts are then translated into the accounting language of debits and credits. You may be wondering why it is not possible to just use increase and decrease to describe effects on accounts. Simply put, increases will not always equal decreases. Equipment CashNote Payable 50,000 Dr. Cr. Dr. Cr.Dr. Cr. 10,000 40,000 Cash Dr. Cr. $ 50,000 10,000 20,000 12,000 92,000 $ 54,500 Beginning balance Services for cash Collection Stock issue Total debits Resulting balance $ 6,000 20,0007,000 5,000 38,000 Payable Land Wages Dividends Total credits eps81189_03_c03.indd 44 12/20/13 8:49 AM CHAPTER 3 Section 3.4 Transaction Analysis For example, if one purchased inventory (an asset) with an account payable (a liability), both sides of the balance sheet increase. In other words, Inventory increases on the asset side, and Accounts Payable increases on the liability side. When converted to debit/ credit consequence, the same transaction is described as a debit to Invent ory (assets are increased with debits) and a credit to Accounts Payable (liabilities are increased with cred- its). Identifying a transaction where debits do not appropriately equal credits is impos – sible. Conversely, it is possible to identify a mishmash of transactions that display eve ry conceivable combination of increases and decreases, some of which are offsetting and some of which are not. Is it starting to make sense why accountants stick with debit and credit nomenclature? Critical Thinking About Transaction Analysis Perhaps one of the more frustrating parts of learning accounting is developing the skills necessary to evaluate transactions and describe the debit/credit impacts on all affected accounts. This is akin to learning a new language. For most people, prac tice and repetition is required. If you try to skip over this part of the learning process, you will find your – self increasingly frustrated with future chapters. If you don’t take the time to learn these basics, you will have great difficulty working with your organization’s accountants when developing budgets and analyzing transactions for your department or div ision. Table 3.3 is not exhaustive but is intended to provide you with some added guidance and practice in transaction analysis. Table 3.3: Transaction analysis Example Transactions Critical ThinkingConclusion Provide services for cash. Cash, an asset, and Revenues are both increased.Debit Cash. Credit Revenues. Provide services on account. Accounts Receivable, an asset, and Revenues are both increased.Debit Accounts Receivable. Credit Revenues. Pay an expense with cash. Expenses are increased and Cash, an asset, is decreased.Debit Expense. Credit Cash. Incur an expense on account. Expenses and Accounts Payable, a liability, are both increased.Debit Expense. Credit Accounts Payable. Buy an asset for cash. The specific purchased is increased, and Cash, an asset, is decreased.Debit Asset. Credit Cash. Buy an asset with debt. The specific asset purchased and Loan Payable, a liability, are both increased.Debit Asset. Credit Loan Payable. Collect an account. Cash, an asset, and Accounts Receivable, an asset, are both decreased.Debit Cash. Credit Accounts Receivable. (continued) eps81189_03_c03.indd 45 12/20/13 8:49 AM CHAPTER 3 Section 3.4 Transaction Analysis Table 3.3: Transaction analysis (continued) Example Transactions Critical ThinkingConclusion Pay an account. Cash, an asset, and Accounts Payable, a liability, are both decreased.Debit Accounts Payable. Credit Cash. Borrow cash. Cash, an asset, and Loan Payable, a liability, are both increased.Debit Cash. Credit Loan Payable. Issue stock for cash. Cash, an asset, and Capital Stock, an equity account, are both increased.Debit Cash. Credit Capital Stock. Pay a dividend. Dividends are increased and Cash, an asset, is decreased.Debit Dividends. Credit Cash. An Applied Example of Transaction Analysis To reiterate these important concepts, let’s revisit the example from Chapter 2 (see Table 2.2). This time, however, the table is expanded to include an extra column show – ing the debit and credit impacts (Table 3.4). Spend some quality time thinking about each transaction and how the proposed debit and credit impacts tie in to the debit and credit rules. Table 3.4: Debit and credit impacts Description AmountDiscussion of How Balance Is Maintained Debit 5 Credit Translation Provided medical services for cash $10,000 Cash (an asset) and Revenues both increase; revenues increase income, which increases equity. Cash, an asset, is increased with a debit 5 Revenue is increased with a credit. Provided medical services to be billed to insurance companies $30,000 The asset, Accounts Receivable (representing amounts due from customers for work already rendered), is increased, which is matched with an increase in Revenues, Income, and Equity. Accounts Receivable, an asset, is increased with a debit 5 Revenue is increased with a credit. Collected amounts due from insurance companies $20,000 Cash is increased and Accounts Receivable is decreased, resulting in no change in total assets. Cash, an asset, is increased with a debit 5 Accounts Receivable, an asset, is decreased with a credit. (continued) eps81189_03_c03.indd 46 12/20/13 8:50 AM CHAPTER 3 Section 3.4 Transaction Analysis Table 3.4: Debit and credit impacts (continued) DescriptionAmountDiscussion of How Balance Is Maintained Debit 5 Credit Translation Used up supplies in the process of providing services to customers $ 3,000 An existing asset, Supplies, is used up and must be removed from the Asset account. This represents an Expense (expenses decrease income and therefore equity). Supplies Expense, an expense, is increased with a debit 5 Supplies, an asset, is decreased with a credit. Bought additional supplies on account $ 2,500 Supplies increase, as does the Accounts Payable liability account. Supplies, an asset, is increased with a debit 5 Accounts Payable, a liability, is increased with a Credit. Paid amounts due on outstanding Accounts Payable $ 6,000 Cash and Accounts Payable are both decreased. Accounts Payable, a liability, is decreased with a debit 5 Cash, an asset, is decreased with a credit. Issued additional shares of stock $12,000 Cash and the Capital Stock account are both increased by the same amount. Cash, an asset, is increased with a debit 5 Capital Stock, an equity account, is increased with a credit. Purchased land for cash ($20,000) and incurred a $55,000 loan $75,000 Land (an asset) goes up by $75,000. This is offset by a $20,000 reduction in Cash. The balancing amount of $55,000 is reflected as increase in the liability account Loan Payable. Land, an asset, is increased with a debit for $75,000 5 Cash, an asset, is decreased with a credit for $20,000, and Loan Payable, a liability, is increased with a Credit for $55,000. Paid wages to employees $ 7,000Cash is decreased, as is Income/Equity via the recording of Wages Expense. Wage Expense, an expense, is increased with a debit 5 Cash, an asset, is decreased with a credit. Paid dividends to shareholders $ 5,000 Cash is decreased and the Dividends account is increased by the same amount (which causes a decrease in Retained Earnings and Equity). Dividends are increased with a debit 5 Cash, an asset, is decreased with a credit. You might have noticed that some transactions can impact more than just two accounts. This example included the purchase of land for cash and a loan payable. Nevertheless, these compound entries are still expected to balance. Exhibit 3.3 is a repeat of Exhibit 2.5 but revised to reflect debits and credits in lieu of pluses and minuses. Carefully note that debits equal credits within each row. eps81189_03_c03.indd 47 12/20/13 8:50 AM CHAPTER 3 Section 3.5 General Journal Exhibit 3.3: Spreadsheet for Kaplan’s Medical Center for December Pressing forward, you now have a basis to understand the fundamental way in which businesses process transactions into useful financial reports. It all begins with an analysis of transactions and their conversion into a debit and credit characterization. Obviously, this information must be systematically logged into the accounting records. Sometimes this occurs automatically, such as with a patient transaction when the patient arrives or when the patient signs out with codes indicated at time of checkout. Mor e extensive cod – ing may be done manually with human interaction for more complex procedures. Other times, a specific human action initiates the recording activity. 3.5 General Journal Y ou are familiar with the concept of a journal. Perhaps you or someone you know keeps a daily journal of life’s events. Borrowing this concept and applying it to a busi – ness, the general journal is a log of the transactions engaged in by the business. However, Assets LiabilitiesStockholders’ Equity Cash Accounts receivable Supplies Land Accounts payableLoan payable Capital stock (increase equity) Dividends(decrease equity ) Revenues (increase income, thus equity) Expenses(decrease income, thus equity) Beginning balances Services for cash Services on account Collect account Record use of supplies Buy supplies on account Pay on account Additional investment Pay wagesDividends Ending balance Description Buy land with cash and loan Retained Earnings $30,000 Net Income $288,500 Total Assets $61,500 Total Liabilities $227,000 Total Equity $30,000 – $5,000 = $25,000 Increase in retained earnings Plus beginning retained earnings Ending retained earnings = + $ 50,000 Dr. 10,000 Dr. 20,000 Cr. (6,000) Dr. 12,000 Cr. (20,000) Cr. (7,000) Cr. (5,000) $ 54,000 $ 125,000 Dr. 30,000 Cr. (20,000) – $ 135,000 $ 5,000 Cr. (3,000) Dr. 2,500 – $ 4,500$ 20,000 Dr. 75,000 – $ 95,000 $ 8,000 Cr. 2,500 Dr. (6,000) – $ 4,500$ 2,000 Cr. 55,000 – $ 57,000 $ 50,000 Cr. 12,000 – $ 62,000 Dr. 5,000 $ 5,000 $ 140,000 Cr. 10,000 Cr. 30,000 – $ 40,000 Dr. 3,000 Dr. 7,000 – $ 10,000 eps81189_03_c03.indd 48 12/20/13 8:50 AM CHAPTER 3 Section 3.5 General Journal rather than just describing transactions in narrative form (such as “ collected Cash on an outstanding Account Receivable”), the journal includes this information in debit and credit form. This information is usually logged, or journalized, in chronological order. It is the starting point for collecting information about business activity and has been called the book of original entry. Exhibit 3.4 is an example journal page for Kaplan’s Medical Clinic. T he entries correspond to the activity described in Table 3.3. Also note that debits are customarily listed first within each journal entry. Debits are naturally followed by credits and are indented. These data and entries reflect a summary of all activity for December. More likely, a business’s journal will have an entry for each transaction. Exhibit 3.4: Example journal entries for Kaplan’s Medical Clinic DateAccounts Debit Credit $ 10,000 30,000 20,0003,000 2,500 6,000 12,000 75,000 $ 10,000 30,000 20,0003,000 2,500 6,000 12,000 20,000 General Journal Cash Provided services for cash Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Revenues Accounts Receivable Provided services to be paid by insurers Revenues Cash Collected outstanding receivable Accounts Receivable Supplies Expense Used supplies from existing inventory Supplies Supplies Purchased supplies to account Accounts Payable Accounts Payable Paid outstanding account payable Cash Cash Issued capital stock for cash Capital Stock Wages Expense Issued capital stock for cash Cash Dividends Paid dividends to shareholders Cash Land Purchased land for cash and loan Cash Loan Payable Dec. 20X5 Dec. 20X5 7,000 5,000 55,000 7,000 5,000 eps81189_03_c03.indd 49 12/20/13 8:50 AM CHAPTER 3 Section 3.5 General Journal Posting the General Ledger At this point, you may be wondering how to prepare financial statements from the jour- nal’s information. The short answer is that you would not! You cannot simply look at the journal, for example, and know how much cash Kaplan’s Medical Clinic has on hand. The data from the journal must be compiled (or sorted) into relevant accounts. This process is usually called posting, the process of transferring data from the journal into the general ledger. Think of the ledger as a notebook containing a separate page for each account. The Cash account in the general ledger might look like that shown in Exhibit 3.5. Exhibit 3.5: Sample page from the general ledger for the Cash account Notice that beginning balance of Cash is updated for each transaction. A similar process would apply to each account. In other words, every entry in the journal is posted in the appropriate cell in the ledger. This process enables you to review the ledger and deter – mine the balance for each account. Exhibit 3.6 shows a comprehensive illustration for Kaplan’s general journal and ledger for December. Date Description Debit Credit Balance $ 10,000 20,000 12,000 $ 50,000 60,000 80,00074,000 86,000 66,000 59,000 54,000 $ 6,000 20,0007,000 5,000 Account: Cash Balance forward Provided services for cash Collected receivable Paid outstanding accounts payable Issued capital stock Purchased land Paid wages Paid dividends Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 eps81189_03_c03.indd 50 12/20/13 8:50 AM CHAPTER 3 Section 3.5 General Journal Exhibit 3.6: Kaplan’s general journal and ledger A properly designed system of journals and ledgers will usually include a nu meric cross- referencing system that allows you to trace journal entries to the ledger and vice versa. In a manual system, check marks may also indicate that a particular tran saction has been posted to the ledger. Without these marks, it would be very easy to fail to post a transac- tion or even to post the same transaction twice. Computerized posting so mewhat elimi – nates this particular risk. Sometimes a unique number is assigned to eac h transaction, further improving the ability to trace transactions through the entire accounting system. However accomplished, a company should maintain an indexing system to al low a user to trace amounts back to the original transaction in the journal and to be certain that each transaction was appropriately processed into the ledger. Review of the Sequence of Transaction Recording To review, notice that the accounting sequence has entailed (1) analyzing each transac- tion to determine the accounts involved and whether those accounts need to be debited or credited, (2) preparing a journal entry for the transaction, and (3) occasional postin g of journal entries to the ledger. This process sounds pretty mundane, and you may be wondering how anyone can think of accounting work as exciting, analytical, or dynamic. Date Description Debit Credit Balance $ 10,00020,000 12,000 $ 50,000 60,000 80,000 86,000 66,000 59,000 54,000 $ 6,000 20,0007,000 5,000 Account: Cash Balance forward Provided services for cash Collected receivable Paid outstanding accounts payable Issued capital stock Purchased land Paid wages Paid dividends Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Date Description Debit Credit Balance $ 30,000$ 125,000 155,000 135,000 $ 20,000 Account: Accounts Receivable Balance forward Provided services on account Collected receivable Dec. 20X5 Dec. 20X5 Dec. 20X5 Date Description Debit Credit Balance $ 2,500$ 5,000 2,000 4,500 $ 3,000 Account: Supplies Balance forward Used supplies Purchased supplies Dec. 20X5 Dec. 20X5 Dec. 20X5 Date Accounts Debit Credit $10,000 30,000 20,000 3,000 2,500 6,000 12,000 75,000 $10,000 30,000 20,000 3,000 2,500 6,000 12,000 20,000 General Journal Page 1 Cash Provided services for cash Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Dec. 20X5 Revenues Accounts receivable Provided services on account Revenues Cash Collected outstanding receivable Accounts receivable Supplies expense Used supplies from existing inventory Supplies Supplies Purchased supplies on account Accounts payable Accounts payable Paid outstanding account payable Cash Cash Issued capital stock for cash Capital stock Wages expense Issued capital stock for cash Cash Dividends Paid dividends to shareholders Cash Land Purchased land for cash and loan Cash Loan payable Dec. 20X5 Dec. 20X5 7,000 5,000 55,000 7,000 5,000 Dec. 20X5 Dec. 20X5 74,000 eps81189_03_c03.indd 51 12/20/13 8:50 AM CHAPTER 3 Section 3.5 General Journal Dismiss the thought. What has been described is really just the beginning of the account- ing process. It has been pointed out that much of this work lends itself to au tomation. The process just described is bookkeeping, not accounting. Bookkeeping is the skill or process of recording transactions; accounting goes much further. To extend this thought, you should now begin to appreciate that much of what has been shown thus far is based only on the recording of observed transactions. Other transac – tions or events may have occurred but not yet triggered into the accounting system. For instance, the business may have done some work that has not yet been bil led. Utilities might have been consumed, but no bill has been received. Further, some accounts may need to be updated. Recall the earlier reference to accumulated depreciation. As time passes, additional depreciation occurs and should be recorded. There is no automatic trig – gering or observable transaction for this process. To prepare truly correct financial statements, additional accounting steps are needed to adjust the various accounts within the financial statements. This adjustment process will be demonstrated in Chapter 4. There, you will be introduced to accrual accounting con – cepts and income measurement processes. That is the point where you will begin to under – stand where true accounting thought begins and bookkeeping ends. First, however, there are a few important loose ends to consider. There is no particular order to the following discussion. It simply provides additional important points that you need to know about. A Balanced Trial Balance: No Guarantee of Correctness Once all the transactions have been posted, the balances in all the acco unts will be listed in a trial balance. The trial balance proves that debits equal credits. This suggests that all journal entries were in balance and fully posted to the ledger. However, the equality is no guarantee that there are no errors. If the same transaction was recorded twice, or part or all of an entry was posted to the wrong accounts, the trial balance would still be in bal – ance. If a transaction was not recorded at all or some form of end-of-period adjustment was omitted, a trial balance would also fail to reveal these events. So, the trial balance is a great tool to identify some but not all potential problems within the accounting system. Numerous other processes are used to verify the correctness of accounts. For example, the Cash account should additionally be verified by periodic bank reconciliations. (Later chapters will introduce methods and procedures accountants deploy as part of the finan – cial statement assurance process.) Special Journals This text illustrates all journal entries as occurring within the genera l journal. However, some computerized and manual accounting systems will subdivide some jour nalizing activity into multiple special journals. For example, all cash outflows might be recorded in a cash disbursements journal. Conversely, cash receipts might all be recorded in a cash receipts journal. Other special journals can be designed to capture sales on account, pay – roll, purchases on account, and other redundant activities. eps81189_03_c03.indd 52 12/20/13 8:50 AM CHAPTER 3 Section 3.7 Thinking About Automation The benefits of special journals are many. For example, payroll records can be consoli- dated and housed in a single accounting record. Recording all sales on account within a specially designed journal can be helpful when billing customers. Additionally, special journals can reduce the amount of processing and posting that is necessary within a man – ual system. Consider that all cash receipts involve a debit to Cash. Thus, it would be pos – sible to post only a single debit to Cash for the aggregate of all transactions listed within the cash receipts journal. Basically, special journals are optional tools that can streamline the components of the accounting system. Strict reliance on only a general journal can result in an excessively voluminous set of accounting records. Nevertheless, any transac – tion can always be recorded in a general journal, and the general journal is supplemented (but not replaced) by special journals. 3.6 Source Documents A company must also be careful to maintain source documents. Most transactions are represented by a source document, which provides tangible evidence of the existence and nature of a transaction. Cash disbursements typically occur by issuing a chec k or bank transfer. Sales to customers are usually accompanied by a receipt or invoice. There are numerous types of source documents. They usually trigger the recording of a transaction and are often analyzed to determine how a transaction has impacted specific ac counts. Source documents should be preserved as evidence of transactions. To provide informa- tion about a past transaction, looking back at a source document is frequently necessary. Electronic imaging has facilitated the ability to retain such documents going back many years. The real trick is not in retaining the documents themselves but doing so in such a way that they can be found. Thus, dating, numbering, and cataloging sour ce documents are all crucial. Accountants may help design and implement a strong information sys – tem, and the journal/ledger system will usually link into the source document archives of modern information systems. The days of storing old documents in numb ered boxes stacked deep within an old warehouse are rapidly fading away. 3.7 Thinking About Automation T hroughout this chapter, a number of references have been made to computerized accounting. Most types of accounting software have a number of features in com – mon. For starters, programmers know the need to simplify and automate data entry. This invariably includes attempts to integrate the journalizing process with the origin of the transaction itself. Earlier, it was noted that transactions entered in a point-of-sale termi – nal may also link into the accounting system. Inventory movement may be tracked with radio frequency identification chips, and that tracking process can link into the company accounting system. Time clocks for tracking employee labor hours can become input devices for payroll accounting. Automated systems are usually subdivided into modules. There may a separate module for the revenue cycle, which serves to track all sales and collections. Another module can eps81189_03_c03.indd 53 12/20/13 8:50 AM CHAPTER 3 Section 3.8 Critical Thinking About Debits and Credits relate only to payroll. Numerous other modules can be deployed. These modules enable subdivision of processing to persons especially familiar with selected portions of a busi – ness. Individual modules may be password protected. For instance, a payroll accountant would not need to be privy to sales activity and vice versa. The consoli dated view of the entire business and the ability to view aggregated reports and financial statements should be limited to only those with a need or right to know. Software allows this important con – trol feature. Accounting software is also designed to be user friendly. It usually includes click lists, drag-and-drop tools, and auto-complete functions that allow users to quickly select options and enter data, similar to Figure 3.3. Figure 3.3: Typical accounting software 3.8 Critical Thinking About Debits and Credits E arlier you were asked to clear your mind of any preconceived notions about debits and credits. Let’s now try to make sense of how the terms are sometimes used in day-to- day commerce. If a bank informs you that it is crediting your account, then it is increasing your account. Bear in mind that your account is reflected as a liability on a bank’s balance sheet because it owes you the money that you deposited with it. In other words, when the bank credits your account, it is increasing its liability to you, and you have more funds on deposit. Conversely, if you use a debit card when you spend, your cash in the bank is decreasing (and the bank is debiting your account). When you fill out a credit application, you are asking for authorization to increase your debt. Each use of the terms debit and credit can logically be traced back to the effect on one party’s financial statements, and those effects correspond to the debit and credit rules you learned in this chapter. 502 Utilities Expense $1,000.00Debits Credits 201 Accounts Payable $1,000.00 $1,000.00 $1,000.00 + $ × Actions List: Create an Invoice Receive a Payment Record an Expense View Statements Manage Accounts Generate a Report File Edit View Help Entry in balance Record entry #756 eps81189_03_c03.indd 54 12/20/13 8:50 AM CHAPTER 3 Section 3.8 Critical Thinking About Debits and Credits Case Study: Miller Health Clinics Bonnie Jones has just taken over as the accountant for the Miller Health Clinics. The books are not kept with the level of detail that she prefers. She develop the following T-accounts based on the information taken from the books of Miller Health Clinics on December 31 of the current year. Letters in the accounts reference specific transactions of the firm. She wants to sort out these transactions based on this letters and figure out what each transaction entailed. Cash (a) 35,000 (d) 3,000 (b) 10,000 (h) 1,500 (f) 8,000 (j) 800 (i) 400 Accounts Receivable Medical Equipment (c) 14,000 (f) 8,000 (b) 26,000(g) 7,000 (e) 9,000 Accounts Payable Loan PayableMiller, Capital (g) 7,000 (e) 9,000 (h) 1,500(a) 35,000 (b) 36,000 (j) 800 Fees Earned Advertising Expense Utilities Expense (c) 14,000 (d) 2,000(i) 400 (d) 1,000 Case Study Exercises 1. Write a brief explanation of each of the transactions (a) – (j). 2. Determine the balance in each account. eps81189_03_c03.indd 55 12/20/13 8:50 AM CHAPTER 3 Review Questions account The master record that is main- tained for each individual financial state- ment asset, liability, equity, revenue, expense, or dividend component. bookkeeping The skill or process of recording of transactions. chart of accounts A numbering system in which a unique number is assigned to each account. credit The action of recording a decrease to an asset, expense, or divided account. debit The action of recording an increase to an asset, expense, or divided account. general journal A log of the transactions engaged in by the business. general ledger The collection of all accounts. posting The process of transferring data from the journal into the general ledger. source document Tangible evidence of the existence and nature of a transaction. special journal A subdivision of a general journal. T-account A device that is used to dem- onstrate the impact of certain transactions and events. trial balance A listing of accounts and their respective balances. Key Terms Review Questions The following questions relate to several issues raised in the chapter. Test your knowl- edge of these issues by selecting the best answer. (The odd-numbered answers appear in the answer appendix.) 1. A credit is used in accounting to a. increase an asset account. b. decrease a liability account. c. increase a revenue account. d. increase an expense account. 2. Allied Healthcare, Inc. recently purchased some office equipment on account. The proper entry would involve a a. debit to Office Expense and credit to Accounts Payable. b. debit to Office Equipment and credit to Accounts Payable. c. debit to Office Equipment and credit to Accounts Receivable. d. debit to Accounts Payable and credit to Office Equipment. 3. Briefly explain how a typical accounting system operates. 4. What is a general ledger? 5. In terms of debits and credits, liabilities are decreased by ________, assets are increased by ________, and revenues are increased by _________. eps81189_03_c03.indd 56 12/20/13 8:50 AM CHAPTER 3 Exercises 6. Explain the relationship between the accounting equation and normal account balances. 7. Les Howard accidentally debited an expense account rather than an asset account. As a result of this error, determine whether the following items will be overstated, understated, or unaffected. a. Total assets will be _______. b. Total expenses will be ______. c. Net income will be ______. Exercises 1. Recognition of normal balances. The following items appeared in the account- ing records of Eastern Medical Clinic. Classify each item as an asset, liability, revenue, or expense from the company’s viewpoint. Also indicate the normal account balance of each item. a. medical equipment for use in patient care b. a long-term loan owed to Citizens Bank c. advertising the clinic d. daily receipts for patient care e. amounts due from insurers f. land held as an investment g. a new fax machine purchased for office use h. amounts to be paid in 10 days to suppliers i. amounts paid to a mall for rent 2. General journal and general ledger content. St. James Medical Services uses a general journal and general ledger to process transactions. Assume that the vol- ume of transactions has grown in recent months and that all posting procedures have already been performed. A manager has requested that you provide the following data: a. the total amounts that patients owe the firm as of May 31. b. the accounts that were increased or decreased by a particular transaction on a specific date. c. the total cash received during May. d. the reason for a cash disbursement on May 14. e. a dated listing of all decreases to the Accounts Payable account during the month. Evaluate the data requests of the manager independently and determine whether the requests can be answered most efficiently by a review of the company’s gen- eral journal or the general ledger. 3. Basic journal entries. The following April transactions pertain to the Jennifer Royall Medical Services: 4/1: Received cash of $15,000 and land valued at $10,000 from Jennifer Royall as an investment in the business. 4/5: Provided $1,200 of services to Jason Ratchford, a patient. eps81189_03_c03.indd 57 12/20/13 8:50 AM CHAPTER 3 Problems 4/5: Ratchford agreed to pay $800 in 15 days and the remaining amount in May. 4/9: Paid $250 in salaries to an employee. 4/19: Acquired a new computer for $3,200; Royall will pay the dealer in May. 4/20: Collected $800 from Jason Ratchford for services provided on April 5. 4/24: Borrowed $7,500 from Best Bank by securing a 6-month loan. Prepare journal entries (and explanations) to record the preceding transactions and events. Problems 1. Journal entry preparation. On January 1 of the current year, Houston Medical Services began operations with $100,000 cash. The cash was obtained from an owner (Dr. Peter Houston) investment of $70,000 and a $30,000 bank loan. Shortly thereafter, the company acquired selected assets of a bankrupt competitor. The acquisition included land ($15,000), a building ($40,000), and vehic les ($10,000). Houston Medical Services paid $45,000 at the time of the transaction and agreed to remit the remaining balance due of $20,000 (an account payable) by February 15. During January, the company had additional cash outlays for the following items: Purchases of medical equipment $4,600 Loan payment, including $100 interest 500 Salaries expense 2,300 Advertising expense 700 The January utilities bill of $200 was received on January 31 and will be paid on February 10. Houston Medical Services rendered services to patients on account, amounting to $9,400, which was billed to insurance companies. All insurers have been billed; by month-end, $3,700 had been received in settle – ment of account balances. Instructions a. Present journal entries that reflect Houston Medical Services’s January trans – actions, including the $100,000 raised from the owner investment and loan. b. Compute the total debits, total credits, and ending balance that would be found in the company’s Cash account. c. Determine the ending balance for the Accounts Payable journal. Is the balance a debit or a credit? eps81189_03_c03.indd 58 12/20/13 8:50 AM CHAPTER 3
ACC281: Accounting Concepts for Health Care Professionals-Uncollectable Accounts
Chapter 4 Cash, Receivables, and Controls Learning Objectives • Define cash and cash equivalents. • Understand cash control principles and concepts. • Prepare the bank reconciliation and related adjusting entries. • Know how to establish and control a petty cash system. • Understand the accounting concepts and methods pertaining to receivables in a healthcare environment. • Master basic calculations and accounting techniques for notes receivable. Fuse/Thinkstock eps81189_04_c04.indd 59 12/20/13 8:53 AM Section 4.1 Concepts of Cash Chapter Outline Introduction 4.1 Concepts of Cash Cash Management and Control 4.2 Bank Reconciliations 4.3 Petty Cash Funds 4.4 Accounts Receivable 4.5 Revenue Changes and Health Care Reform 4.6 Direct Write-Off Method Allowance Techniques for Uncollectible Accounts Writing Off an Account Against an Allowance Credit and Debit Card Transactions Introduction C ash is an interesting asset. It is usually not the most important asset a company pos- sesses, and it is not a very productive asset. However, try to operate without it, and the results are usually and quickly fatal. It is the accepted medium of exchange and r ep- resents the “blood supply” to keep the business functioning. Therefore, proper cash man – agement and control is highly important to business success. 4.1 Concepts of Cash C ash includes currency, coins, bank demand deposits that can be freely withdrawn, undeposited checks from patients or insurers, and other items that are acceptable to a bank for deposit. Some items may seem like cash but are not classified that way: certifi – cates of deposit, IOUs, stamps, and travel advances. These items are reported as invest – ments, supplies, or other more descriptive classifications. Some companies will expand their reporting of cash to include cash equivalents. These are very short-term (usually interest-earning) financial instruments like government Treasury bills. They are typically deemed secure and will convert back into cash within 90 days. They are close enough to cash that they are considered to be available to satisfy obligations, and proper cash management strategies tend to discourage hoarding of large pools of unproductive currency deposits. eps81189_04_c04.indd 60 12/20/13 8:53 AM CHAPTER 4 Section 4.1 Concepts of Cash Cash Management and Control Cash management requires proper balancing to maintain sufficient cash to meet obliga- tions as they come due and to make sure that idle cash is invested to generate returns on business assets. Larger organizations may create the position of treasurer, whose job is to manage the business’s cash flows. This person may be responsible for preparing a cash budget, which is a major component of the cash-planning system. It anticipates and depicts cash inflows and outflows for a stated period of time. This tool helps identify and adjust for anticipated periods of cash deficits or surpluses. Based on a dvance knowledge gained via the cash-budgeting process, a company then has time to develop appropriate strategies to deal with the anticipated potential cash needs. Companies must also implement strong systems of cash control. Cash controls are intended to safeguard funds and include the following: • Limiting access to cash; • Separating incompatible duties (e.g., the person maintaining the cash r ecords should not reconcile bank accounts); and • Instituting accountability features such as prenumbered checks and dual signatures. Typical processes ordinarily maintain a continuous system of accountability and access control from the time a payment is accepted from the patient or insurer to the time it is deposited at the bank. In the healthcare environment, partial payment is usually received from the patient and the rest of the money comes from an insurer, which could be an insurance company or a governmental source such as Medicare or Medicaid. Table 4.1 highlights some significant control features, which you should consider implementing in almost any business environment, for cash receipts. Table 4.1: Control features for cash receipts Features to Consider Use computer terminals to record cash transactions from patients. Daily, compare cash to daily computer summary. Daily, deposit receipts in the bank. The person opening the mail immediately restrictively endorses (e.g., for deposit only) checks received. The person opening the mail immediately prepares a checklist that is forwarded to the accounting department, where patient records are updated to show payments. The person opening the mail immediately forwards all checks to the employee who handles cash deposits. eps81189_04_c04.indd 61 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations In reviewing Table 4.1, it is important to note that actual checks are immediately sepa- rated from the accounting for those receipts. Separation of duties is a paramount control feature; the person recording the checks in the accounting records is deliberately not the person making the deposit. Later, another person will be charged with comparing com – pany cash records with actual cash on deposit at the bank. By involving multiple partie s, it becomes much harder for any one person to commit fraud, and collusion is usually neces – sary. When it requires multiple persons to coordinate activities to perpetuate a fraud, the risk of fraud is greatly diminished. Disbursements of cash also entail procedures that are intended to permit only authorized payments for actual expenditures. Table 4.2 highlights some significant control features, which you should consider implementing in almost any business environment, for cash disbursement. Table 4.2: Control features for cash disbursement Features to Consider Use a check (or credit card) to make significant disbursements. Someone not otherwise regularly involved in the cash business cycle should regularly reconcile bank accounts. Use formal petty cash procedures for small disbursements. Establish a proper system of authorization for approval of significant disbursements. Set up bank accounts that require dual signatures for large disbursements. You should already be performing a bank reconciliation of your own checking account. Mostly, you perform this process to make sure that your records are correct and agree with the bank’s records. Businesses should reconcile each of their bank accounts. This process should be performed by a person not otherwise involved in the cash receipts and dis – bursements functions. For a business, the bank reconciliation is needed to identify errors, irregularities, and adjustments needed to the Cash account. 4.2 Bank Reconciliations T here is no single correct way to set up a schedule or worksheet format for the bank rec – onciliation. If you look at your monthly bank statement, you will probably see such a template in preprinted form using the bank’s suggested schedule. However designed, the purpose of the reconciliation is to compare amounts on the bank statement (the document provided by the bank showing deposits, checks, other activity, and balances) with the cash amount contained in the company records. Identified differences help isolate errors and adjustments. eps81189_04_c04.indd 62 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations Differences between cash in the company records and the bank statement are caused by the following: • Items reflected on company records but not yet recorded by the bank: (1) Deposits in transit are receipts entered on company records but not processed by the bank, and (2) outstanding checks are written checks that have not cleared the bank. • Items noted on the bank statement but not recorded by the company: (1) NSF (nonsufficient funds) checks, which are previously deposited checks that have been returned for nonpayment; (2) bank service charges and fees; (3) interest earnings on the bank account(s); and (4) cash collections of not es and drafts. The following example uses a popular two-column bank reconciliation approach. One column compares the balance per the bank statement to the correct cash balance. The sec – ond column reconciles the cash balance per company records to the same correct balance. It is imperative that the analysis is thorough so that the correct balance is obviously the same in each column. Exhibit 4.1 shows the June 30, 20X5, bank reconciliation for Kaplan’s Medical Clinic. The statement on the left is the bank statement, and the statement on the ri ght is the company records. Notice that both columns arrive at the correct cash balance of $20,959.75. Exhibit 4.1: Two statements for bank reconciliation for Kaplan’s Medical Clinic on June 30, 20X5 Ending balance per bank statement Add: Deduct: Correct cash balance $ 16,878.90 9,443.12 (5,362.27) $ 20,959.75 $ 106.15 2,256.12 3,000.00 Kaplan’s Medical Clinic Bank Statement For the Month Ending June 30, 20X5 Deposit in transit Outstanding checks #451 #458 #459 Ending balance per company records Add: Deduct: Correct cash balance $ 18,987.09 2,865.22 $ 1,060.00 1,777.0728.15 (892.56) $ 20,959.75 $ 75.00 376.56441.00 Kaplan’s Medical Clinic Records Statement For the Month Ending June 30, 20X5 Note and interest collected Credit card postings Interest earnings Service charges Electric bill ETF NSF Check eps81189_04_c04.indd 63 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations The following additional data and items of information are needed to prepare and explain the bank reconciliation: • The balance per the bank statement was $16,878.90. • The balance per the bank statement failed to include a deposit in transi t of $9,443.12. • The bank balance had not yet been reduced by three checks (no. 451, 458, and 459) totaling $5,362.27. • The balance per company records (taken from the Cash account in the general ledger and other records, such as a simple check register) is $18,987.09. • The company’s records had not yet been increased for a note and interest col- lected by the bank ($1,060). • The company’s records had not yet been increased for credit card postings to benefit the company’s bank account (e.g., credit card payments from patients in the amount of $1,777.07). • Interest earned on the bank account ($28.15) was not previously recorded by the company. • The company records had not yet been reduced for bank service charges ($75.00), electronic funds transfers to pay a utility bill ($376.56), and a bounced ( NSF) check ($441.00). In preparing a bank reconciliation, the balance per the bank must be increased for the deposits in transit and reduced by the outstanding checks. The balance per books must be adjusted for any actual transactions not yet recorded. The bank reconciliation is prepared by carefully analyzing the bank statement and the related general ledger account or check register. Exhibits 4.2 and 4.3 show the documents corresponding to the preceding reconciliation. To identify all relevant items needed for the reconciliation, you must take time to carefully study these documents. You will also observe that the bank statement includes a few irrelevant checks (like checks no. 448 and 449, probably written in a prior month and shown as outstanding in last month’ s recon – ciliation) and deposits ($3,821.13, probably recorded in the prior month and shown as in transit in last month’s reconciliation). Sometimes tracking down all the reconciling items can be a painstaking process, but it is an essential tool for maintaining accurate records. eps81189_04_c04.indd 64 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations Exhibit 4.2: Bank statement Santa Clara Bank This statement covers: Statement for: June 1, 20X5 through June 30, 20X5 Kaplan’s Medical Clinic 21 East MainSanta Clara Checking account # 4783080 Monthly summary Previous statement balance on 5-31-X5 $ 17,375.76 Total of 5 deposits for 21,935.981 Total of 12 withdrawals for $ 22,385.992 Interest earnings for 28.151 Service charges for 75.002 New balance $ 16,878.90 Checks and other debits Check Date paid Amount CheckDate paid Amount 448 3–Jun2,134.67 454 15–Jun $ 1,313.13 449 5–Jun 256.09 455 17–Jun 645.38 450 9–Jun3,334.55 456 23–Jun 1,788.07 *452* 9–Jun 24.56 457 27–Jun 4,610.00 453 12–Jun7,112.54 *460*30–Jun 349.44 Electronic funds transfer 2 Ready Electric 25–Jun 376.56 NSF refund check 27–Jun441.00 Monthly service fee 30–Jun75.00 Deposits and other credits Date Amount Patient deposit 1–Jun$ 3,821.13 Patient deposit 5–Jun3,750.00 Collection item 2 note receivable ($1,000 1 interest) 12–Jun 1,060.00 Patient deposit 15–Jun11,524.78 Credit card sales posting 28–Jun1,777.07 Interest earnings 30–Jun28.15 eps81189_04_c04.indd 65 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations Referring back to Exhibit 4.1, the company’s records show only $18,987.09 in cash, but the correct balance is $20,959.75, so cash must be increased by a total of $1,972.66 ($20,959.75 2 $18,987.09). The following journal entries record this increase, along with other debits and credits necessary to record the previously unrecorded transactions. Care – fully note how each entry corresponds to one of the reconciling items. 6-30-X5 Cash 1,060.00 Notes receivable 1,000.00 Interest income 60.00 To record proceeds of note collected by bank on behalf of the company 6-30-X5 Cash 1,777.07 Sales 1,777.07 To record credit card sales for transactions posted directly to company bank account Exhibit 4.3: General ledger account Date Patient Ref#Check Deposit Balance 1 –Jun Balance $18,806.13 4–Jun Deposit −$ 3,750.00 22,556.13 7–Jun Valequez 450$ 3,334.55 −19,221.58 8–Jun Nicole 451106.15 −19,115.43 8–Jun Smith 45224.56 −19,090.87 10–Jun Zhao 4537,112.54 −11,978.33 15–Jun Rollin 4541,313.13 −10,665.20 15–Jun Deposit −11,527.78 22,192.98 16–Jun LeBeau 455654.38 −21,547.60 20–Jun Pechlat 4561,788.07 −19,759.53 23–Jun Valequez 4574,610.00 −15,149.53 26–Jun Goodman 4582,256.12 −12,893.41 28–Jun Hanks 4593,000.00 −9,893.41 29–Jun Anderson 460349.44 −9,543.97 Deposit − 9,443.1218,987.09 $24,539.94 $24,720.90 eps81189_04_c04.indd 66 12/20/13 8:53 AM CHAPTER 4 Section 4.2 Bank Reconciliations 6-30-X5Cash 28.15 Interest income 28.15 To record interest income earned on bank account 6-30-X5 Miscellaneous expense 75.00 Cash 75.00 To record adjustment for bank service charge automatically charged against company bank account 6-30-X5 Utilities expense 376.56 Cash 376.56 To record adjustment for utility bill automatically charged against company bank account 6-30-X5 Accounts receivable 441.00 Cash 441.00 To record adjustment for returned (NSF) patient check; the intent will be to collect this amount from the patient The net effect of the preceding entries is to increase the Cash account by $1,972.66. The T-account (Exhibit 4.4) shows this impact. Exhibit 4.4: A T-account for Cash Cash Dr. Cr. $1,060.00 $ 75.00 1,777.07 376.56 28.15 441.00 $2,865.22 $892.56 1,972.66 eps81189_04_c04.indd 67 12/20/13 8:53 AM CHAPTER 4 Section 4.3 Petty Cash Funds In lieu of multiple separate entries as shown, companies might instead p repare a com- pound journal as follows: 6-30-X5 Cash 1,972.66 Utilities expense 376.56 Accounts receivable 441.00 Miscellaneous expense 75.00 Notes receivable 1,000.00 Sales 1,777.07 Interest income 88.15 To record adjustments necessitated by bank reconciliation When preparing a compound journal entry, it is always a good idea to total both the debit and credit columns to be sure they are equal. In the example above, both equal $2,865.22. If the journal entry is not equal, then the books will not balance at the e nd of the accounting period. You would need to figure out why the entry doesn’t balance before posting it to the General Ledger. Often errors happen when a number is listed incorrectly or omitted. 4.3 Petty Cash Funds P etty cash funds are in frequent use for making small payments that may be impracti – cal to pay by check or credit card. Examples include postage, employee reimburse- ments, office supplies, snacks, and similar immaterial expenditures. A petty cash fund is primarily a tool of convenience, not necessity. A petty cash fund is established by making out a check to “Cash,” cashing it, and placing the cash in a petty cash box under the con – trol of a designated custodian. The following entry would be used to initially establish a $500 petty cash fund: 3-15-X4 Petty cash 500.00 Cash 500.00 To establish a $500 petty cash fund Policies should establish the types and amounts of expenditures that can be paid from petty cash. When a disbursement is made from the fund, a receipt (a petty cash voucher) is placed in the petty cash box. Thus, the sum of the receipts plus the remaining cash should always equal the balance of the petty cash fund. As cash becomes depleted, another check payable to “Cash” is prepared in an amount to bring the fund back up to the desired bal – ance. That check is cashed and the proceeds are placed in the petty cash box. Simultane – ously, receipts are removed from the petty cash box and formally recorded as expenses. The appropriate journal entry is to debit the appropriate expense accounts based on the receipts and to credit Cash. eps81189_04_c04.indd 68 12/20/13 8:53 AM CHAPTER 4 Section 4.4 Accounts Receivable 3-31-X4Supplies expense 225.00 Fuel expense 50.00 Miscellaneous expense 75.00 Cash 350.00 To replenish petty cash; receipts on hand of $350 for supplies, fuel, and snacks Take note that the preceding entry did not impact the Petty Cash account. The balance of Petty Cash remains at $500. On occasion, the petty cash on hand may not exactly match what should be found in the box. Errors can occur, and the actual cash on hand plus receipts may differ from the official petty cash balance. Assume the preceding facts, except that only $125 of cash was actually in the box. Thus, $375 is needed to replenish the fund, as follows: 3-31-X4 Supplies expense 225.00 Fuel expense 50.00 Miscellaneous expense 75.00 Cash short 25.00 Cash 375.00 To replenish petty cash; receipts on hand of $350 for supplies, fuel, and snacks and $25 for cash shortage The Cash Short account is like an expense, and it reflects the missing $25. Hopefully, this will not be a common occurrence. If a company subsequently increases petty cash, the following entry would be necessary: 3-15-X4 Petty cash 250.00 Cash 250.00 To increase petty cash fund by $250 Notice that the preceding entry is identical to that recorded to establish a petty cash fund. 4.4 Accounts Receivable Y ou already know that receivables arise from a variety of claims against patients and insurers. Payments in a healthcare entity can be extremely complex. Unlike most busi – nesses, third parties pay a majority of the costs for health care. These can include insur – ance companies, governmental agencies, or other third-party payers. The patient often gets caught in the middle when healthcare facilities are trying to collect the money due in accounts receivable. eps81189_04_c04.indd 69 12/20/13 8:53 AM CHAPTER 4 Section 4.4 Accounts Receivable The payment system for each healthcare institution is different and depends on the con- tract rates set sometimes with hundreds of potential payers. Most healthcare providers establish rates for their services called charges. These charges may not match the actual rates negotiated with each insurer or with the government for Medicare or Medicaid pay – ments. Any difference between the charge and the negotiated rate is called the contractual allowance. Sometimes the patient pays the bill in full and then submits the bill to his or her insurer for payment, but more often the patient will pay only their co-payment and deductible. The healthcare facility will then need to bill the insurer or the government for the remainder due. The amount not received in cash would then be added to the Accounts Receivable account. For example, suppose Mary Smith received services for which Kaplan’s Medical Clinic charges $1,500. The contractual allowance for this type of service negotiate d with the insurer is $500, so the net charge is $1,000. Mary’s co-payment is 20%, or $200. She has already met her deductible for the year. The insurer will need to be billed for $800. This transaction will be entered in the books in this way: 6-15-X4 Cash 200.00 Accounts receivable 800.00 Contractual allowance 500.00 Revenue 1,500.00 If Mary Smith had not met her deductible, she would have paid more in cash, and the insurer would have been billed for less. Most healthcare providers today require payment at the time of service from the patient. In a hospital or outpatient surgery facility, where payments can run into thousands of dollars, the entity may allow patients to set up an account to pay off their portion of the charges at an agreed-upon monthly amount. This is essentially a loan or note. In these healthcare environments you may also see an account called Accounts Receivable–Notes or Notes Receivable to track patient’s long-term pay – ments due. Things can be even more complicated in a healthcare setting because not everyone pays the same amount for the same service. For example, if Jack Smith is a Medicare patient, the contractual allowance may be $700. If Harry Smith is a Medicaid pati ent, the contrac – tual allowance may be $750. If Betty Smith is a private payer, there may be no contractual allowance. If Sandy Smith is a managed care patient, reimbursement could be a flat fee arrangement, with Sandy paying $100 and the insurer paying $700. Table 4.3 shows you how these different payment arrangements would look. eps81189_04_c04.indd 70 12/20/13 8:53 AM CHAPTER 4 Section 4.4 Accounts Receivable Table 4.3: Differences in patient payments Mary SmithTraditional Fee-for-Service Jack Smith Medicare Harry Smith Medicaid Betty Smith Private Pay Sandy Smith Managed Care Provider charge $1,500$1,500$1,500$1,500$1,500 Contractual allowance $ 500 $ 700 $ 750 $ 0 $ 700 Net charge $1,000 $ 800 $ 750 $1,500 $ 800 Patient co-pay 20%20% 0%100%Flat fee of $ 100 Patient payment $ 200 $ 160 $ 0 $1,500 $ 100 Insurance payment $ 800 $ 640 $ 750 $ 0 $ 700 Total received by provider for care $1,000 $ 800 $ 750 $1,500 $ 800 As you can see in Table 4.3, reimbursements for patient care can vary significantly depending upon who the insurer is for the patient. This example showed reimburse – ment for one treatment. Sometimes a treatment will require numerous procedures at the same time. The key for provider reimbursement is how the provider codes the treat – ment. Coding medical bills is a specialty, and many providers hire people who under – stand how to code bills to get the greatest reimbursements. Many large clinics hire specialists who code bills within each medical specialty to be certain that bills are coded properly. Proper coding enables healthcare organizations to get the highest possible levels of reimbursement. As a manager or decision maker in a healthcare environment, you will need to be certain your billing is coded correctly. Keeping a close eye on your charges versus your actual payments is a critical function to ensure that your department or division is profitable. You will likely get an internal report from your accounting department with this detail. Watch your payment trends closely and question any changes that reduce your actual reimbursements. Most receivables are trade receivables originating from services to patients. Trade receiv – ables are accounted for via the Accounts Receivable account. Generally, a patient will pay their co-payment at the time of service, and the insurer will be billed for the rest of the payment due. Other nontrade receivables can originate from loans to employees, deposits left with others, and so forth, but they are rare in most healthcare organizations. These will likely only be found in large for-profit hospital or clinics, if they are found at all. Occasionally healthcare facilities will agree to provide credit to patients for major medical procedures. By providing services on credit to a patient, a company also assumes certain costs and risks. Companies must be careful when trading services for a future payment. On occasion, a patient may not pay, and this can result in a substantial loss. Credit provid – ers must investigate a patient’s credit history and expend considerable effort on billing and collection activities. Furthermore, the creditor temporarily forgoes use of funds while waiting for payment. eps81189_04_c04.indd 71 12/20/13 8:53 AM CHAPTER 4 Section 4.6 Direct Write-Off Method You may wonder why anyone would bother to extend credit, but there are certain advan- tages. For one thing, patients are sometimes more willing to agree to a treatment if they are afforded flexibility on payment terms. This can boost a company’s overall revenue. Sometimes, credit terms may include interest charges. This provides an extra source of earnings for the medical facility. 4.5 Revenue Changes and Health Care Reform T here are still many unknowns about healthcare reform and how changes will impact the revenues of healthcare providers. This is definitely a moving target that you will need to follow in the news and in healthcare journals that focus on reimbursements. Bringing potential for big changes are Accountable Care Organizations (ACOs). These are new organizations being encouraged by the law in which healthcare providers form cooperative groupings to manage the care of patients and be responsible for the quality of that care. If an ACO could provide high-quality care at a lower cost to Medicare, then it would share in the savings with Medicare. This could possibly improve the revenue to the providers involved in the ACO. An ACO may initially be costly to set up. Patient care protocols need to be developed, as do administrative procedures for patient care among the cooperating providers. Provid- ers will also need to negotiate shared fees. It is envisioned that these ACOs will specialize in certain types of chronic illnesses, such as care for a patient with diabetes, kidney dis – ease, or chronic heart conditions. How these ACOs will ultimately be accounted for in the accounting system still needs to be developed. Details will not be avail able until an ACO is actually organized, protocols are set up, and payment arrangements are negotiated. In addition to the ACO structures, the law also provides for “bundled payments” as a potential way to reduce costs for Medicare. Hospitals, ACOs, or other providers may bid to Medicare for providing care to specific types of patients, such as patients who undergo transplant surgery, on a fee-for-care basis that amounts to a lump sum less than would be paid for this care on a fee-for-service basis. Medicare would save money, and providers would have the potential to make better profits with coordinated quality care. 4.6 Direct Write-Off Method A s noted, and unhappily so, some customers may never pay for the goods an d services they have received. The provider should not carry the resulting Accounts Receivable on its balance sheet once it has become clear that it will not be paid. A simple process for accounting for uncollectible accounts is the direct write-off method. When an account is determined to be uncollectible, the following entry would be recorded: 3-20-X4 Uncollectible accounts expense 700.00 Accounts receivable 700.00 To record the write-off of an uncollectible account eps81189_04_c04.indd 72 12/20/13 8:53 AM CHAPTER 4 Section 4.6 Direct Write-Off Method Some companies use the term “bad-debt expense” to describe the cos t of the uncollectible items. In 2011, accounting rules changed for healthcare organizations. Today, bad debt for healthcare organizations is shown as a deduction from revenue in a line item called “Allowance for Bad Debt.” Allowance Techniques for Uncollectible Accounts Accountants have developed allowance methods for uncollectibles . These techniques result in the recording of estimates for bad-debt expenses in the same period as the related credit sales. Suppose that Allied Health Hospital has an Accounts Receivable balance of $500,000. It is estimated that 3%, or $15,000, of this total pool of acc ounts will ultimately prove to be uncollectible. The correct balance sheet presentation would be as follows: Accounts receivable $500,000 Less: Allowance for uncollectible accounts (15,000) $485,000 Notice that the allowance account is presented as a Contra Asset account to the gross (total) amount of Accounts Receivable. The resulting $485,000 corresponds to the net realizable value of the receivables pool. The allowance account to include on the balance sheet can be determined by various meth – ods. In the given example, it was presumed that 3% of the outstanding Accounts Receiv – able balance was the appropriate level to establish. The actual rate will vary by company and, in each case, should be based on detailed analysis of outstanding r eceivables bal – ances. This may entail an aging of accounts, which attempts to stratify the receivables according to how long they have been outstanding. There is a presumption that older accounts are more likely to be problematic and represent a higher risk of nonpayment. Whether determined by using a percentage of receivables, an aging, or another technique, the estimated amount for the allowance account must be established in th e ledger. Assume that Allied Health’s ledger revealed an Allowance for Uncollectible Accounts credit balance of $5,000 (prior to calculating the $15,000 necessary bala nce). As a result, the following entry is needed to bring the accounts up to date: 12-31-X8 Uncollectible accounts expense 10,000.00 Allowance for uncollectible accounts 10,000.00 To adjust the allowance account from a $5,000 balance to the desired balance of $15,000 This approach is a balance sheet approach . That is, an assessment was made of the desired balance for the allowance that is to be reported on the balance sheet. The adjusting entry brought the allowance up to the targeted level. You should carefully note that the amount of the entry is based on the necessary change in the account. eps81189_04_c04.indd 73 12/20/13 8:53 AM CHAPTER 4 Section 4.6 Direct Write-Off Method There is a simpler income statement approach. An estimated percentage of total net charges (or charges on account) is debited to Uncollectible Accounts Expense and cred- ited to the Allowance for Uncollectible Accounts. This method results in the addition of the estimated amount to the Allowance account. In other words, it incrementally adjusts the allowance account for a portion of each additional dollar of sales. Assume that Good Name Hospital had sales during the year of $1,000,000, and it estimates uncollectible accounts as accruing at the rate of 2% of total sales. Thus, the necessary entry would add $20,000 ($1,000,000 3 2%) to the allowance, regardless of the existing balance: 12-31-X8 Uncollectible accounts expense 20,000.00 Allowance for uncollectible accounts 20,000.00 To add 2% of sales to the allowance account Any of the allowance methods are acceptable, provided the accountant concludes that they reasonably reflect the anticipated cost of uncollectible accounts and fairly present the balance sheet of the company. Writing Off an Account Against an Allowance We have now seen how to record uncollectible accounts expense and set up the related allowance. But how do we write off an individual account that is uncollectible? This part is easy. The following entry is used: 3-15-X9 Allowance for uncollectible accounts 5,000.00 Accounts receivable 5,000.00 To record the write-off of an uncollectible account Notice that the entry reduces both the allowance account and the related receivable and has no impact on the income statement. Remember, under the allowance account, the income statement occurs when the allowance is set up (think matching principle), not when the account is actually written off against the previously established allowance. Because the write-off entry reduces both an asset and contra asset by similar amounts, there is no impact on the net realizable value of the receivables, total assets, or any other accounts. Credit and Debit Card Transactions Many providers will accept popular credit and debit cards such as MasterCard -, Visa -, and American Express -. The financial services companies offering these cards earn money by charging fees to the provider (such as 1.5% of the transaction amount). In addition, the credit card companies may also charge users service fees and interest. Although poten – tially expensive to providers and patients alike, the cards introduce convenience, stimulate spontaneous services, and usually assure collectability for the provider. Depending on the card and related agreement, providers may collect the patient co-payment on the day of service by electronic transfer of funds. This reduces the size of internal credit departments at many businesses and can accelerate a business’s access to funds. eps81189_04_c04.indd 74 12/20/13 8:53 AM CHAPTER 4 Section 4.6 Direct Write-Off Method Case Study: Happy Hospital Frank Wright, the comptroller for the Happy Hospital, has been asked to determine how much of its debts are collectable and how much should be written off as noncollectable. The December 31, 20X2, year-end trial balance of Happy Hospital revealed the following account information: DebitsCredits Accounts receivable $252,000 Allowance for uncollectible accounts $ 3,000 Sales 855,000 Sales returns and allowances 12,900 Sales discounts 8,100 Wright decided it was best to analyze the potential write-offs using both the direct write-off method and the allowance method. In order to complete this task, he must do several different types of calculations. Complete the calculations to determine which method works best in prop- erty matching revenues and expenses. Case Study Exercises 1. Determine the adjusting entry for bad debts under each of the following conditions: a. An aging schedule indicates that $12,420 of Accounts Receivable will be uncollectible. b. Uncollectible accounts are estimated at 2% of net sales. 2. On January 19, 20X3, Happy Hospital learned that Mary Smith, a customer, had declared bankruptcy. Present the proper entry to write off Mary Smith’s $950 balance. 3. Repeat the requirement in part (b), using the direct write-off method. 4. In light of the Mary Smith bankruptcy, examine the allowance and direct write-off meth- ods in terms of their ability to properly match revenues and expenses. The accounting for credit and debit card payments depends somewhat on the terms of the card. For bank card–based transactions, funding usually occurs quickly. Therefore, the following entries may be appropriate in some cases. 1-9-X3 Cash 490.00 Service charge 10.00 Services 500.00 Provided services for $500 via debit card with same-day funding, net of 2% fee If the card/debit payment involved delayed collection, the preceding debit to Cash would instead be reflected as a debit to Accounts Receivable. eps81189_04_c04.indd 75 12/20/13 8:53 AM CHAPTER 4 Review Questions allowance methods for uncollect- ibles Techniques that result in the record- ing of estimates for bad-debts expense in the same period as the related credit sales. balance sheet approach The approach in which an assessment was made of the desired balance for the allowance that is to be reported on the balance sheet. bank reconciliation The process needed to identify errors, irregularities, and adjustments needed to the Cash account. bank statement The document provided by the bank showing deposits, checks, other activity, and balances. cash Currency, coins, bank demand deposits that can be freely withdrawn, undeposited checks from customers, and other items that are acceptable to a bank for deposit. cash equivalents Sometimes included in reporting of cash, very short-term (usually interest-earning) financial instruments like government Treasury bills. charges Rates for health services estab- lished by the healthcare facility. contractual allowance The difference between the charge established and the negotiated rate with the insurer or government. deposits in transit Receipts entered on company records but not processed by the bank. direct write-off method A process for accounting for uncollectible accounts. income statement approach A method that employs estimates of uncollectibles based on total sales or credit sales. net realizable value The amount of cash expected from the collection of current customer balances. NSF (nonsufficient funds) checks Checks that have been previously deposited but that have been returned for nonpayment. outstanding checks Written checks that have not cleared the bank. petty cash Funds used for making small payments that may be impractical to pay by check or credit card. treasurer The person in a company whose job is to manage cash flows of the business. Key Terms Review Questions The following questions relate to several issues raised in the chapter. Test your knowl- edge of the issues by selecting the best answer. (The odd-numbered answers appear in the appendix.) 1. Which of the following statements about the direct write-off method is false? a. The direct write-off method can result in recognizing sales revenue in one period and expense related to that revenue in a subsequent period. b. The write-off of a customer ’s account balance results in a debit to Uncollectible Accounts Expense. c. The Allowance for Uncollectibles account is not used when the direct write-off method is employed. d. Sales are essentially recognized by the cash basis of accounting when the direct write-off method is used. eps81189_04_c04.indd 76 12/20/13 8:53 AM CHAPTER 4 Review Questions 2. The income statement and balance sheet approaches are used to estimate uncol – lectible accounts. Which of the following comments applies to both of th ese approaches? a. The aging process is often used to obtain proper valuation amounts. b. Generally speaking, matching is improved when compared with the direct write-off method. c. The focus is on the net realizable value of accounts receivable. d. Total credit sales is commonly used as the estimation base. 3. Allied Health Systems estimates uncollectible accounts at 5% of ending accounts receivable. The company’s records reveal ending receivables of $2,000,000 and a $40,000 debit balance in the Allowance for Uncollectibles. How much would Allied’s year-end adjusting entry for bad debts increase the ending balance in its Uncollectible Accounts Expense? a. $40,000 b. $60,000 c. $100,000 d. $140,000 4. Kaplan’s Medical Clinic uses the allowance method of accounting for b ad debts. The company recently wrote off the $135 balance of Karen Sorrell as uncollect- ible. As a result of the write-off, Kaplan’s Medical Clinic will experience a. a $135 decline in income. b. a $135 decline in the net realizable value of Accounts Receivable. c. a $135 increase in the Allowance for Uncollectible Accounts. d. no change in total assets. 5. The collection of an account previously written off under the allowance method will involve two separate journal entries. After both of these entries are recorded, a. total accounts receivable will be unchanged. b. the Allowance for Uncollectibles Accounts will decrease. c. uncollectible accounts expense will increase. d. uncollectible accounts expense will decrease. 6. What items are normally included in the Cash account on the balance sheet? 7. What is cash management? Briefly discuss the planning and control aspects of an effective cash management system. 8. What is a bank reconciliation? 9. What is the effect of a bank debit memo on a depositor ’s account balance? 10. What are the reasons for the discrepancy between the cash balance reported on the bank statement and the cash balance in the accounting records? 11. Briefly describe the two methods that can be used to record losses from uncollect – ible accounts. eps81189_04_c04.indd 77 12/20/13 8:53 AM CHAPTER 4 Exercises Exercises 1. Bank reconciliations: missing amounts. The following independent cases relate to bank reconciliations. Compute the missing amounts, assuming that no other reconciling items exist. Case ACase BCase C Balance per bank $6,000$4,000 $ ? Outstanding checks 5002,100 1,400 Deposits in transit 2,000?1,000 Balance per company records ?8,000 450 2. Items on a bank reconciliation. You are preparing the June bank reconciliation for Advanced Systems. Identify the proper placement of parts (a)–(f) on the rec- onciliation by using the following codes: 1—An addition to the balance per bank as of June 30 2—A deduction from the balance per bank as of June 30 3—An addition to the balance per company records as of June 30 4—A deduction from the balance per company records as of June 30 _____ a. Interest earned on the account during June _____ b. A company deposit taken to the bank at 3:00 p.m. on June 30 but not recorded on the June bank statement _____ c. A $3,000 deposit, entered in the company records as $300 _____ d. A deposit of Allied Health Systems, incorrectly credited to Allied Health Systems’s account receivables account _____ e. A customer ’s check returned for nonsufficient funds _____ f. Check no. 765, which has not yet cleared the bank 3. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Clinic for the month of January: Balance per bank $6,150 Balance per company records 3,580 Bank service charge for January 20 Deposits in transit 940 Interest on note collected by bank 100 Note collected by bank 1,000 NSF check returned by the bank with the bank statement 650 Outstanding checks 3,080 eps81189_04_c04.indd 78 12/20/13 8:53 AM CHAPTER 4 Problems a. Prepare Palmetto’s January bank reconciliation. b. Prepare any necessary journal entries for Palmetto. 4. Accounting for cash. Evaluate the following comments as true or false. If the comment is false, briefly explain why. a. A petty cash fund should be replenished at the conclusion of an accounting period. b. A journal entry is needed in a company’s accounting records to record both a bank service charge and the firm’s outstanding checks. c. As shown on May’s bank statement, the Nebraska National Bank incorrectly deducted $200 from the account of Millar ’s Medical. When preparing its bank reconciliation, Millar ’s should subtract $200 from the accounting records so that the adjusted cash balance (company records) will equal the adjusted cash balance (bank). d. Customer checks, money orders, and certificates of deposit are properly classi – fied as cash on the balance sheet. e. To achieve strong internal control, a store cashier should have access to a com – pany’s accounting records for cash. 5. Direct write-off method. Allied Health Clinic, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was a $550 claim against Tom Mattingly from ser – vices in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Allied Health Clinic uses the direct write-off method to account for uncollectibles. a. Prepare the journal entry needed to write off Mattingly’s account. b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet. Problems 1. Direct write-off and allowance methods: matching approach. The December 31, 20X2, year-end trial balance of Happy Hospital revealed the following account information: Debits Credits Accounts Receivable $252,000 Allowance for Uncollectible Accounts $ 3,000 Sales 855,000 Sales Returns and Allowances 12,900 Sales Discounts 8,100 eps81189_04_c04.indd 79 12/20/13 8:53 AM CHAPTER 4 Problems Instructions a. Determine the adjusting entry for bad debts under each of the following conditions: (1) An aging schedule indicates that $12,420 of accounts receivable will be uncollectible. (2) Uncollectible accounts are estimated at 2% of net sales. b. On January 19, 20X3, Happy Hospital learned that Mary Smith, a customer, had declared bankruptcy. Present the proper entry to write off Mary Smith’s $950 balance. c. Repeat the requirement in part (b), using the direct write-off method. d. In light of the Mary Smith bankruptcy, examine the allowance and direct write-off methods in terms of their ability to properly match revenues and expenses. 2. Allowance method: income statement and balance sheet approaches. Carson Clinic reported accounts receivable of $300,000 and an allowance for uncollectible accounts of $31,000 (credit) on the December 31, 20X2, balance sheet. The follow- ing data pertain to 20X3 activities and operations: Sales on account $2,000,000 Cash collections from credit customers 1,600,000 Sales discounts 50,000 Sales returns and allowances 100,000 Uncollectible accounts written off 29,000 Collections on accounts that were previously written off 2,700 Instructions a. Prepare journal entries to record the sales-related and receivables-related transactions from 20X3. b. Prepare the December 31, 20X3, adjusting entry for uncollectible accounts, assuming that uncollectibles are estimated to be 2% of net credit sales. c. Prepare the December 31, 20X3, adjusting entry for uncollectible accounts, assuming that uncollectibles are estimated at 1% of year-end accounts receivable. d. Compute the amount of the adjusting entry in part (c), assuming that $ 46,000, rather than $29,000, of accounts were written off in 20X3. eps81189_04_c04.indd 80 12/20/13 8:53 AM CHAPTER 4