Accounts Receivable and Bad Debts Expense Flashcards
What is accounts receivable?
An asset reported on the balance sheet representing amounts due from customers.
What happens when a seller offers goods or services on credit?
Increases potential revenues and exposes the seller to potential losses from unpaid invoices.
Under the accrual basis of accounting, when is revenue recognized for a sale on credit?
At the time the services are provided or goods are shipped.
What is bad debts expense?
A credit loss reported on the income statement when a customer does not pay.
What accounting method should a seller use to report estimated credit losses?
The allowance method.
What is the direct write-off method used for?
Reporting losses for income tax purposes at a later date.
What are the financial statement effects of providing services on credit?
Increase in accounts receivable and increase in service revenues.
What does FOB Shipping Point mean?
Ownership of goods transfers at the seller’s dock.
What does FOB Destination mean?
Ownership of goods transfers at the buyer’s dock.
When should a seller record a sales transaction in principle?
When ownership of the goods is transferred to the buyer.
What is the cost of goods sold for a transaction where the sales value is $1,000 and cost is 80%?
$800.
What are credit terms with discounts used for?
Encouraging early payment from customers.
What does the term 2/10, net 30 mean?
A 2% discount is available if paid within 10 days, otherwise the net amount is due in 30 days.
What is the net amount owed if a customer returns $100 worth of goods from a $1,000 sale?
$900.
How is the amount received calculated under the credit term 2/10, net 30 when payment is made within 10 days?
$882 after deducting the 2% discount.
