As we begin our journey down the balance sheet, the first stop is with cash and receivables. It may not be obvious, but most of the emphasis in this chapter and in the chapters that follow will be on adjusting entries necessary to properly state the asset and related revenue or expense for financial statement presentation.
For example, we will look at how to prepare a bank reconciliation. This accomplishes three things. First, it identifies differences between what the bank says is in an account, and what the books reflect. Second, it denotes the proper amount of cash to reflect on the balance sheet. Finally, it provides a basis for performing required adjusting entries related to cash.
In looking at receivables, the focus will be on how to determine the net realizable value for balance sheet presentation. Implicit in this is the idea that just because a customer owes a company money, there is no 100% indication that the customer will ultimately pay. Therefore, some mechanism needs to be in place to estimate or “guesstimate” what portion of accounts will not be collectible. This is important for several reasons. First, the conservatism principle requires that assets not be stated at more than their net realizable value. Second, the matching principle requires that costs and expenses related to revenue be realized in the same period in which the revenue is included. Finally an adjusting entry is necessary to accomplish these two objectives.
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