Ch. 8: Receivables and Payables Flashcards
bad debt
An expense that a business recognizes because of a customer’s failure to pay an obligation usually arising as a direct result of a prior credit sale. The expense is established when it is reasonably determined that the customer will not pay.
discounting a note
The process involving the sale of a promissory note to a bank or financial institution before maturity. The bank deducts from the maturity value of the note an interest charge based on the period of time the note is to be held by the bank and the rate of interest the bank charges.
promissory note
An unconditional written promise to pay a stated sum of money upon demand, or at a future determinable date. It is usually prepared and signed by the debtor and given to the creditor.
aging of accounts receivable method
A method used to record adjusting entries at the end of the year to recognize and provide for the write-off of uncollectible accounts. Comparison of this method with the direct write-off and the net sales methods shows that the aging method is by far the most accurate.
contingent liability
A liability that will be incurred only if a particular event takes place. The endorser of a discounted note is committed to pay the discounter the maturity value of the note in the event the maker defaults on the note, in which case the contingent liability becomes an actual liability.
default
Failure to meet an obligation when it comes due.
direct write-off method
A method of not recognizing the expense of an uncollectible account (bad debt) until it can be determined that the debtor will not pay. This method does not necessarily match the expense associated with the uncollectible account in the same period as the revenue was earned.
interest-bearing promissory note
A note that has a specific rate of interest indicated on its face. When the note matures, its maturity value is its face value plus the interest earned.
net sales method
A method used to estimate, usually as a percentage, the amount of credit sales that will become uncollectible in subsequent accounting periods.
notes payable
Written promises, in the hands of the makers, that serve as evidence of debts.
notes receivable
Written promises, in the hands of the creditors, that serve as evidence of debts.
sixty-day (60-day) method of determining interest
A method of calculating interest based on the fact that interest at 6% or 60 days equals 1% of the amount borrowed.
