Accounting: The Language of Business - Vol. 2 (Intermediate: Part 139)

Birth of a Profession

Accountants were already essential for attracting investors, and they quickly became essential for maintaining investor confidence. The American Association of Public Accountants (AAPA) was established in 1887, and the accounting profession was formally recognized in 1896 with the establishment of the professional title of certified public accountant (CPA). The title is awarded to those who pass state examinations and have three years of experience in the field. The creation of professional accountants came at an opportune time. Less than 20 years later, the demand for CPAs skyrocketed as the U.S. government, in need of money to fight a war, began charging income tax in 1913 (Investopedia).

Short-Term Operating Assets: Cash and Receivables (Part D)

by

Charles Lamson

Sales Discounts

Recall from Part 138 that sales discounts (also called cash discounts) are reductions granted to customers for early cash payments as an incentive to encourage quick invoice payment. Although the seller will collect less total cash, it will have cash earlier for use in current operations. The benefits of improved cash flow and liquidity are greater than the cost of the discount. There are two acceptable approaches to recording sales discounts: the most-likely-amount method or the expected-volume method. The most-likely-amount method was discussed in Part 138. In this post we'll discuss the expected-volume method.

Expected-Value Method. Under the expected-value method, the probability-weighted amount in a range of possible consideration amounts. For example, if the company thinks it is 30% likely that the customer will take the discount, then it will initially record the accounts receivable at the sum of the gross amount times 70% plus the net amount times 30%. Example 9.3 illustrates accounting for sales discounts using the expected-value method.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 449-450*

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