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Accounts receivable

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Amounts customers owe on account.

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Accounts receivable turnover

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A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

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Aging the accounts receivable

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A schedule of customer balances classified by the length of time they have been unpaid.

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Allowance method

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A method of accounting for bad debts that involves ESTIMATING uncollectible accounts at the END of each period. Provides better matching of expenses with revenues on the income statement Ensures that receivables are stated at their cash (net) realizable value on the balance sheet

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3 features of the Allowance Method for uncollectible accounts

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1. Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded. 2. Companies record estimated uncollectibles as an increase (a debit) to Bad Debt Expense and an increase (a credit) to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable. 3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible.

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Average collection period

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The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.

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Bad Debt Expense

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An expense account to record losses from extending credit.

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Cash (net) realizable value

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The net amount a company expects to receive in cash from receivables.

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Concentration of credit risk

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The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.

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Direct write-off method

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A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible. under this method, bad debt expense will show only ACTUAL losses for bad debts, there are no estimates ***the direct write-off method is not acceptable for financial reporting purposes

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Dishonored (defaulted) note

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A note that is not paid in full at maturity.

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Factor

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A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.

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Maker

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The party in a promissory note who is making the promise to pay.

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Notes receivable

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Written promise (as evidenced by a formal instrument) for amounts to be received.

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Payee

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The party to whom payment of a promissory note is to be made.

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Percentage-of-receivables basis

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A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.

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Promissory note

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A written promise to pay a specified amount of money on demand or at a definite time.

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Receivables

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Amounts due from individuals and companies that are expected to be collected in cash.

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Trade receivables

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Notes and accounts receivable that result from sales transactions.

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Types of Receivables

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1. Accounts Receivable 2. Notes Receivable 3. Other receivables

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Other receivables

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include nontrade receivables such as... Interest receivable Loans to company officers Advances to employees Income taxes refundable These do not generally result from the operations of the business.

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To record sales on account

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Dr. Accounts Receivable Cr. Sales Revenue

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To record merchandise returned

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Dr. Sales Returns and Allowances Cr. Accounts Receivable

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To record collection of accounts receivable

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Dr. Cash Dr. Sales Discounts Cr. Accounts Receivable

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To record interest of the amount due

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Dr. Accounts Receivable Cr. Interest Revenue

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What are the accounting methods used to book uncollectible accounts?

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Direct write-off method for uncollectible accounts Allowance method for uncollectible accounts

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To record write-off of an account under the direct write-off method

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Dr. Bad Debt Expense Cr. Accounts Receivable

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To record estimates of uncollectible accounts under the allowance method

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Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts

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To record the write-off of an account under the allowance method

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Dr. Allowance for Doubtful Accounts Cr. Accounts Receivable

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To record the reverse write-off and collection of an account under the allowance method

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Dr. Accounts Receivable Cr. Allowance for Doubtful Accounts Dr. Cash Cr. Accounts Receivable

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To adjust allowance account to total estimated collectibles???

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Dr. Bad Debt Expense Cr. Allowance for Doubtful accounts The amount of bad debt expense that should be recorded in the adjusting entry is the difference between the required balance and the existing balance in the allowance account

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5 issues in recognizing notes receivable

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1. Determining the maturity date. 2. Computing interest. 3. Recognizing notes receivable. 4. Valuing notes receivable. 5. Disposing of notes receivable.

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Equation to Compute Interest on an interest-bearing note

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(face value of note) x (annual interest rate) x (time in terms of a year, months passed, or days passed) = interest

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To record the acceptance of a note

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Dr. Notes Receivable Cr. Accounts Receivable

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To record the honor/collection of a note and its interest

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Dr. Cash Cr. Notes Receivable Cr. Interest Revenue

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To accrue interest on a note

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Dr. Interest Receivable Cr. Interest Revenue

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To record the collection of a note and interest

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Dr. Cash Cr. Notes Receivable Cr. Interest Receivable Dr. Interest Revenue

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To record the sale of receivables to a factor

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Dr. Cash Dr. Service Charge Expense Cr. Accounts Receivable

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To record Visa credit card Sales

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Dr. Cash Dr. Service Charge Expense Cr. Sales Revenue

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Identify the different types of receivables.

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Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

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Explain how accounts receivable are recognized in the accounts.

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Companies record accounts receivable when they perform a service on account or at the point-of-sale of merchandise on account. Sales returns and allowances, and cash discounts reduce the amount received on accounts receivable.

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Describe the methods used to account for bad debts.

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The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach.

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Compute the interest on notes receivable.

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The formula for computing interest is: (face value of note) x (annual interest rate) x (time in terms of a year, months passed, or days passed) = interest

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Describe the entries to record the disposition of notes receivable.

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Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off.

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Explain the statement presentation of receivables.

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Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement.

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Describe the principles of sound accounts receivable management.

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To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary.

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Identify ratios to analyze a company's receivables.

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The accounts receivable turnover and the average collection period both are useful in analyzing management's effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information.

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Describe methods to accelerate the receipt of cash from receivables.

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If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.

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Indicate which type of receivable should be recorded Advanced $1,000 to a trusted employee.

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Other Receivables

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Indicate which type of receivable should be recorded Accepted a $2,000 promissory note from a customer as payment on account.

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Notes Receivable

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Indicate which type of receivable should be recorded Determined that a $10,000 income tax refund is due from the IRS.

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Other Receivables

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Indicate which type of receivable should be recorded Sold goods to a customer on account for $5,000.

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Accounts Receivable

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Indicate which type of receivable should be recorded Recorded $500 accrued interest on a note receivable due next year.

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Other Receivables

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Indicate which type of receivable should be recorded Loaned a company officer $4,000.

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Other Receivables

Chapter 8: Reporting and Analyzing Receivables – Flashcards

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