Accounting 201Chapter 05 Power Point Flashcards
What will you learn in Accounting Chapter 5?
Receivables and SalesRecognition of Accounts ReceivableRecognize Accounts ReceivableValuation of Accounts ReceivableNotes Receivable
Define Credit sales
Common for large business transactions inwhich buyers don’t have sufficient cashavailable or where credit cards cannot be usedbecause the transaction amount exceedstypical credit card limits.- Revenue is recognized at the time of a creditsale.- An asset (accounts receivable) is recognizedat the time of a credit sale.
Define Recognize Accounts Receivable
credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future.- Even though the seller does not receive cash at the time of the credit sale, the firm records Revenue immediately, as long as future collection from the customer is reasonably certain.- Along with the recognized Revenue, at the time of sale the seller also obtains a legal right to receive cash from the buyer. the legal right to receive cash is valuable and represents An asset of the company.
Calculate net revenues using discounts,returns, and allowances. I.E. Sales Discounts
- Represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time.- It’s a discount intended to provide incentive for quick payment.- The am
Define Sales Return
If a customer returns a product it is _______ _______. After a ________ _______. - We owe reduce the customer’s account balance if the sale was on account or - We owe issue a cash refund if the sale was for cash.
Define Sales Allowances
If a customer does not return a product, but the seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service, we call that a ______ _____________.
Record an allowance for futureuncollectible accounts.
the right to receive cash from a customer is a valuable resource for the company. This is why accounts receivable is An asset, reported in the company’s balance sheet.- to be useful to decision makers, accounts receivable should be reported at the amount of cash the firm expects to collect, An amount known as net realizable value.
What is the upside of companies selling goods and services to their customers on account and not just accepting cash payments at the time of purchase?
the upside, allowing customers theability to purchase on account andpay cash later boosts sales.- the downside of extending credit tocustomers is that not all customerswill pay fully on their accounts.
What is The Allowance Method
Involves allowing for the possibility that some accounts will be uncollectible at some point in future.Uncollectible accounts have the effect of:- reducing assets (accounts receivable) by an estimate of theamount we don’t expect to collect and- increasing expenses (bad debt expense) to reflect the cost of offering credit to customers.
Explain the process of Estimating Uncollectible Accounts and what method you use and how you record it.
A company specializes in emergency outpatient care. It doesn’t verify the patient’s health insurance, It knows that a high proportion of fees for emergency care provided will not be collected.- Performed an amount of services.- Only collected a partial amount of payments by the end of the year. - X amount remains due from customers. - Of this amount, you estimates that 30%is likely to be uncollected. - you use the “Percentage-of receivablesmethod” to allow for these future uncollectible accounts is as follows:Recorded as:Bad Debt Expense as a DebitAllowance for Uncollectible Accounts as a Credit
Apply the procedure to write off accounts receivable as uncollectible
Receives notice one your former patients has filed for bankruptcy. You believe it is unlikely they will pay their account.Remember, you previously allowed for the likelihood that some of your customers would not pay.Now you knows a specific customer will not pay, you can adjust the allowance and reduce the accounts. Makes the following entry:Allowance for Uncollectible Accounts as a CreditAccounts Receivable as Debit
Define “the aging method” to estimate future uncollectible accounts
- Management can estimate this percentage using historical averages, current economic conditions, industry comparisons, or other analytical techniques.- A more accurate method than assuming a single percentage uncollectible for all accounts is to consider
Contrast “the allowance method” and “direct write off method” when accounting for uncollectible accounts. Explain how they are recorded.
Recording bad debt expense at the time we know the account to be uncollectible.- the direct write-off method is used for tax purposes but is generally not permitted for financial reporting.Bad debt expense as DebitAccounts receivable as credit
Apply the procedure to account for notesreceivable, including interest calculation.
Notes receivable are similar to accountsreceivable but are more formal creditarrangements evidenced by a written debtinstrument, or note.- Notes receivables are classified as eitherCurrent or Noncurrent depending on theexpected collection date.- if the time to maturity is longer than oneyear, the note receivable is a long-termasset.
Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
- The amount of a company’s accounts receivable is influenced by a variety of factors, including the level of sales, the nature ofthe product or service sold, and credit and collection policies.- More liberal credit policies—allowing customers a longe
