7. Receivables and investments Flashcards
Account receivable
A receivable arising from the sale of goods or services with a verbal promise to pay.
Control account:
The general ledger account that is supported by a subsidiary ledger.
Subsidiary ledger:
The detail for a number of individual items that collectively make up a single
general ledger account.
Net receivable value
The amount a company expects to collect on an account receivable. Some goods may be damaged, or some customers might not pay (bad debts), therefore the total amount is not always collectable.
Bad debt
The part of the account receivable that is uncollectable for the company because the costumer simply does not pay.
Direct write-off method:
The recognition of bad debts expense at the point an account is written off as uncollectible.
Allowance method
A method of estimating bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. If the company has been in business for several years, this might be calculated as a percentage of either of net credits or simply the accounts receivable based on experiences from previous years.
Allowance for doubtful accounts
A contra-asset account used to reduce accounts receivable to its net realizable value.
Aging schedule
A form used to categorize the various individual accounts receivable according to the length of time each has been outstanding. The longer, the lower the chance of collecting the cash.
Accounts receivable turnover ratio
A measure of the number of times accounts receivable are collected in a period. Found by dividing net sales by average accounts receivable.
Promissory note:
A written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future.
Note payable
A liability resulting from the signing of a promissory note.
Key terms for promissory notes
These are common terms when talking about promissory notes - Principal: the amount of cash received, or the fair value of the products or services received, by the maker when a promissory note is issued.
- Maturity date: the date the promissory note is due.
- Term: the length of time a note is outstanding, that is, the period of time between the date it is issued and the date it matures.
- Maturity value: the amount of cash the maker is to pay the payee on the maturity date of the note.
- Interest: the difference between the principal amount of the note and its maturity value.
Discounting
The process of selling a promissory note. Companies can do this to speed up the collection of cash from accounts receivable. They can exchange the note for cash at the bank – however, is the customer fails to pay the bank at the note’s maturity date, the company is responsible.
Equity securities
Securities issued by corporations as a form of ownership in the business. E.g. common stock and preferred stock.
