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Strategies & Market Trends : BFT: Will the tulip craze ever break down? -- Ignore unavailable to you. Want to Upgrade?

To: John Tais who wrote (299)	4/8/1998 9:24:00 AM
From: Pancho Villa	Read Replies (2) \| Respond to of 650

JT: The answer to all your very interesting questions plus a short lesson on how to account for doubtful receivables will come soon in greater detail. >What's the difference between the "provision for doubtful receivables" and the "allowance for doubtful receivables"? One seems to be for the income statement and one for the balance sheet.< You are 100% right I explain: when you realize a receivable is uncollectable, you realize a loss in the income statement for the portion of the receivable that you had already counted as revenue (services rendered) in a previous period. This happens because, particularly with the emphasis in financed memberships BFT counts some of the chickens before they are hatched (realizes a significant portion of the revenue before people pay - they recognize initial membership dues in 22 months while people pay in 36 months).The portion for which you had not provided the services showed up as a liability (services to be rendered) so this portion goes just to decreasing liability since the person did not pay but also you no longer need to provide the service. Suppose you have a simple company with the following partial sets of accounts: Assets: Accounts receivables 200 Liabilities: Services to be rendered 100 stockholders equity 100 notice assets = liabilities + stockholders equity at all times. This is why this is called a BS. (BFT management would wish their BS looked this strong) Suppose you realize that out of the $200, $100 of the receivables should be declared as uncollectable (e.g., people who have not paid for a long time - BFT must have a set of criteria to judge when an account must be declared uncollectale, hopefully they are not loosening up on it! - accounting flexibility this is called. Put it on a note and you can do it as long as you are not violating GAAP- generally accepted accounting principles). Suppose further that out of this $100 you had accounted $40 for as revenue in the IS for a previous period, and $60 were still part of services to be rendered. The accounting is as follows: Assets accounts receivable goes down by 100, stockholders equity (retained earnings account which is just the bottom line of the IS) goes down for $40, and services to be rendered go down by 60: So you have Assets (-100) = Liabilities (-60) + Stockholder's equity (-40) The BS is balanced. Pancho