actg exam 2 Flashcards
A/R
Accounts Receivable
Amounts customers owe on account.
asset
Cash collection of A/R does not affect income!
A/R balance increases (debit) when
Additional sales are made on account
A/R balance decreases (credit):
Cash is collected from customers who owe
* Customer accounts are written off as uncollectible
Revenue is recognized (recorded) when:
The service obligation has been performed (earned).
* The seller has delivered the goods or performed the service.
* Payment is reasonably assured (realizable).
* The seller is confident that payment will occur in the future.
Companies set credit policies to balance:
Desire for greater revenues vs.
* Assurance of collectibility
Accounting for Bad Debt
- Record sales on account (current period)
- Record adjusting entry for bad debt expense (current period) 3. Record write-offs (future periods)
- Record recoveries, if they occur (future periods)
net accounts receivable.
ccounts receivable minus allowance
Net A/R represents the amount the company actually expects to collect from the total A/R that customers owe.
bad debt expense
We do not decrease A/R directly.
* Instead we credit the Allowance for doubtful accounts (Allowance, ADA), a contra-asset
* Net A/R = Gross A/R - Allowance
write-off
accounts that are deemed to be uncollectible.
* These write-offs reduce accounts receivable and the allowance.
does not affect net income or net A/R.
allowance
a contra-asset, so it is reduced with a debit.
we defined the allowance as a place to record
“potential” or “expected” bad debts.
recording recoveries
In the first step, reverse the write-off transaction.
* This restores the amount previously written off to both accounts receivable and the allowance.
* In the second step, record the cash receipt.
recoveries
the customer may pay some or all of an account that has been written off.
Sales Discount
is a contra-revenue account.
It is paired with revenue.
* It has a debit balance (opposite to the credit balance of revenue).
* The difference between revenue and contra-revenue is the net sales.
A reduction to net revenue is classified as a sales discount if:
The sale is made on account (i.e., not cash or credit card) and
* There are time-based discount terms associated with the sale.
Sales Returns
is a contra-revenue account, allowing the seller to track sales and returns separately.
factor
A bank or finance company
* Buys receivables from businesses and then collects the payments directly from the customers.
* Typically “high quality” receivables with very low credit risk
Credit Card Sales
- Companies can allow customers to use bank-issued credit cards to make purchases
Fees
paid to credit card companies and to factors are expenses.
operating liabilities
obligations related to the company’s core business.
must be repaid within a year.
Accounts payable
accrued expense
- An expense that is incurred in one period but paid in the next
Incurring an expense
means the company receives the benefit of the resource being used.
Accruing an expense
means the company records the expense through an adjusting entry even though cash has not yet been paid.
Unearned revenue
Cash is received, but revenue is deferred until the company earns it.
