What Do You Need to Know?

Whether you are teaching history, biology, or accounting, there is always the question of how you wrap up a chapter or unit of coverage. Do you just stop or do you try to bring the material together in some type of logical order for the students?

Yesterday in class I did something new (even after 39 years) which seemed to work well. I posed the following question to my students:

“Assume you are desperately looking for a summer job. A local business calls you in and says that the person who monitors their accounts receivable is going to be on leave over the summer and they need someone to take care of those accounts for a couple of months until that person gets back. They want to make sure that the accounts are appropriate because they have an August 31 year-end and need to have everything ready at that time so financial statements can be prepared.

“A person comes in to interview you for this job and asks one simple question: ‘I know you have had a course in financial accounting. What exactly do you know about accounts receivable and its reporting?’ You really want this job because it pays well. How do you respond?”

The idea of interviewing for a summer job is one that students understand immediately. So, suddenly their knowledge has a purpose. I was impressed; they quickly rolled out a long list of things that they knew about accounts receivable.
--It is reported on the balance sheet at net realizable value—the amount of cash expected to be collected.
--Reporting is not exact because of the uncertainty of collection; however, the balance should be fairly presented according to US GAAP.
--The accounts receivable balance is normally reported as a current asset because collection is expected in a short period of time.
--An allowance account is established for reporting purposes since (at the time of estimation) you do not know the identity of the accounts that will prove uncollectible.
--Because of the matching principle, the expense needs to be estimated and recognized in the same period as the revenue.
--The estimation can be made using the percentage of sales method or the percentage of receivables (aging) method. Any logical method works; these are just two different ways of making an estimate.
--The percentage of sales method estimates bad debt expense (both are on the income statement); the percentage of receivables method estimates the allowance for doubtful accounts (both are on the balance sheet).
--Writing off an account as uncollectible reduces the allowance and the receivable balance but does not affect the expense. It was recognized previously in the period of sale.
--A subsidiary ledger is used to maintain the balances owed by individual customers.
--The average age of accounts receivable can be calculated in order to monitor whether collections are speeding up or slowing down. If slowing down, actions can be taken to encourage quicker payment.

This exercise took approximately five minutes and it helped (I think) the students get an overview of what we had covered. On one sheet of paper, they had a summary of everything that they needed to know to (a) impress a person interviewing them about a summer job and (b) make a good grade on their upcoming test.

One thing I particularly liked about this exercise was that it did not come from me; the answers came from the students. In education, I always prefer anything that encourages the students to think about the material.

There are many ways to wrap up a chapter. This is an approach that you might try at some point in the future to help bring it all together.