Notes On Financial Statements And The Liquidity And Strength Of A Business

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Introduction The financial statements are used to measure the liquidity and strength of a business. On the balance sheet; offsets are used to calculate the real value of accounts receivables and fixed assets. These offsets are called uncollectible accounts receivables and depreciation. In accordance with generally accepted accounting principles (GAAP), there are two methods used to compute the uncollectible accounts receivable expense. Just like uncollectible accounts offset the value of accounts receivables; so do depreciation expenses counteract the value of fixed assets. Also called contra accounts, the journal entries are accumulated and recorded on the balance sheet. Part One – Uncollected Receivables The first is called the write-off method. This method is used by small companies that have a small number of uncollected accounts receivables, or, bad debts. The write-off is selected when an account becomes worthless. When a customer has an uncollectible account, a write-off is recorded in the journal. A debit entry is made to the accounts receivable, accompanied by the customer’s name. The next entry is a credit to the allowance for doubtful accounts. These entries are made during the period, as the accounts become uncollectible. The book “Financial Accounting” (Duchac, Reeve, Warren, 2014) states: “At the end of a period, Allowance for Doubtful Accounts will normally have a balance.” Second is the allowance method; used to estimate the number of accounts receivables that are uncollectible. In accordance with GAAP; this process is used by companies with large amounts of uncollected receivables. The balance sheet reports the value all accounts, including receivables. This process is achieved by using both th... ... middle of paper ... ... fixed assets are reported in the assets section as well. The balance sheet is reported as follows: Majors Accounting, PLLC Balance Sheet December 31, 2014 Assets Current Assets: Cash $250,000 Trading investments (at cost) $125,000 Plus valuation allowance for trading investments 20,000 145,000 Accounts receivable $ 80,000 Less allowance for doubtful accounts 8,000 72,000 Total Current Assets: $ 467,000 Fixed Assets: Land $300,000 Building $400,000 Less accumulated depreciation 30,679 369,321 Office equipment $150,000 Less accumulated depreciation 15,000 135,000 Total Fixed Assets: $ 804,321 Total Assets: $1,271,321

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