[inddutch74]

Hey guys, I am a little confused understanding ADA journal entries and how it effects other accounts. For

example, how does increase/decrease in ADA effect the Debt/equity ratio , current ratio, quick ratio,

profit margin ratio etc? Any help/ explanation would be appreciated. Thank you

[That Cartoon Mouse]

Well, receivables are usually netted against your allowance for doubtful accounts, so if the ADA goes up it means that net receivables goes down. So in the current ratio this means that the numerator — current assets — will go down making the current ratio smaller. Same for quick ratio. Think about it: if you don't think you going to collect anything that's owed you, you'll have a harder time paying your debts as they come due.

Since debt/equity doesn't touch receivables, there's no effect there. Unless you want to say that the increase in ADA means more bad debt expense which lowers net income which means less added to equity, then sure.

Bad debt is, I believe, classified as general and admin (someone correct me) so it wouldn't touch gross profit ratios, but it would touch ratios that included G&A.

REG 82 (10/07/11)
BEC 88 (11/01/11)
FAR 86 (11/21/11)
AUD 82 (11/30/11)
----------
Roger CPA Review, live & cram course

[inddutch74]

Thanks, that helps understand a little better

However, If bad debt its considered a General and admin expense, wouldn't an increase/decrease effect profit margin ratio? (Net income/Sales)

[That Cartoon Mouse]

You're right, net income would have bad debt as an expense (as it would include G&A). If you have a ratio that includes net income, bad debt would effect it.

GROSS profit margin does not include G&A — it's just gross margin (sales – COGS) over sales, so no G&A, no bad debt. Assuming that bad debt is G&A, that is — please someone correct me.

REG 82 (10/07/11)
BEC 88 (11/01/11)
FAR 86 (11/21/11)
AUD 82 (11/30/11)
----------
Roger CPA Review, live & cram course

[Author]

Replies