Answer:
Rosie Dry Cleaning
a. Organization of the transaction data in accounts under an accounting equation:
Year 1:
The accounting equation is Assets = Liabilities + Equity.
1) Provided $29,940 of cleaning services on account.
Assets (Accounts Receivable) increases by $29,940; Equity (Retained Earnings) increases by $29,940. So, Assets + $29,940 = Liabilities + Equity + $29,940.
2) Collected $23,952 cash from accounts receivable.
Assets (Cash) increases by $23,952 and Assets (Accounts Receivable) decreases by $23,952. So, Assets + $23,952 and - $23,952 = Liabilities + Equity.
3) Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.
Assets (Accounts Receivable) reduces by $59.88 and Equity (Retained Earnings) reduces by $59.88. So, Assets - $59.88 = Liabilities + Equity - $59.88.
Year 2:
1. Wrote off a $225 account receivable that was determined to be uncollectible.
Assets (Accounts Receivable) decreases by $225 and Equity (Retained Earnings) decreases by $225. So, Assets - $225 = Liabilities + Equity - $225.
2. Provided $34,940 of cleaning services on account.
Assets (Accounts Receivable) increases by $34,940 and Equity (Retained Earnings) increases by $34,940. So, Assets + $34,940 = Liabilities + Equity + $34,940.
3. Collected $30,922 cash from accounts receivable.
Assets (Cash) increases by $30,922 and Assets (Accounts Receivable) decreases by $30,922. So, Assets + $30,922 - $30,922 = Liabilities + Equity.
4. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.
Assets (Accounts Receivable) decreases by $37.93 ($97.81 - $59.88) and Equity (Retained Earnings) decreases by $37.93. So, Assets - $37.93 = Liabilities + Equity - $37.93.
b. 1) Net Income for Year 1:
Sales = $29,940
less Allowance for uncollectible = $59.88)
Total = $29,880.12
2) Net Cash Flows from operating activities for Year 1 = $23,952.
3) Balance of Accounts Receivable at the end of Year 1:
Sales = $29,940
Less Cash Receipt = $23,952
Balance = $5,988
4) Net Realizable value of accounts receivable at the end of Year 1.
Accounts Balance = $5,988
less Allowance for Uncollectible = $59.88
Net Realizable = $5,928.12
c 1) Net Income for Year 1:
Sales = $34,940
less Bad Debts Expense = $262.93 ($37.93 + $225)
Total = $34,677.07
2) Net Cash Flows from operating activities for Year 1 = $30,922.
3) Balance of Accounts Receivable at the end of Year 1:
Beginning balance = $5,988
Sales = $34,940
Less Bad Debts Expense = $225
Less Cash Receipt = $30,922
Balance = $9,781
4) Net Realizable value of accounts receivable at the end of Year 1.
Accounts Balance = $9,781
less Allowance for Uncollectible = $97.81
Net Realizable = $9,683.19
Explanation:
The accounting equation states that Assets equal Liabilities plus Equity. Any change in one side of the equation affects the other. Sometimes, a transaction or event affects one side only by increasing one account and decreasing another account on the same side of the equation. Examples are demonstrated in the answer above.
When an uncollectible is deemed bad, it reduces the Accounts Receivable and increases the bad debt expense. The overall effect on the accounting equation is a reduction in Assets and Equity respectively.
