Chapter 6 - Account Receivable Flashcards
Account Receivable Definition
a customer to whom inventory has been sold on credit, and the amount still owing for those sales (also called a ‘debitor’)
Credit Sale Definition
a transaction that involves selling inventory on credit, with the provision of the inventory on one date, followed by the receipt of cash at a later date.
Entries for a Credit Sale
AR - Name DR
Sales CR
GST clearing CR
Cost of Sales DR
Inventory CR
Entries for Receipts from Accounts Receivable
Bank DR
AR - Name CR
‘Cash received from AR - Name (SD) ‘
Sales Return Definition
the return by a customer (AR) of inventory sold on credit
What could be reasons for a sales return?
The inventory is faulty or damaged, the inventory is wrong size/color/shape/model, too many items of inventory were purchased, the customer simply changed their mind
Entries for a Sales Return
Sales Return DR
GST clearing DR
AR - Name CR
Inventory DR
Cost of Sales CR
‘Sales Return by Name of quantity/product (Cr.Note 101)
Discount Expense Definition
An expense in the form of a decrease in assets (Account Receivable) and owner’s equity, incurred when cash is received early from AR and settlement discount is allowed
Entries for Cash Receipt from AR with discount
Bank DR
Discount Expense DR
AR-Name CR
‘Cash received from Name with % discount for early payment (Rec.001)’
What are the benefits for offering discounts to AR
-Cash is received faster from AR, making it available for other payments
-Sales may increase as customers may be more willing to buy from a business that offers discounts
-Bad debts decreases as customers may pay early rather than leaving debts unpaid for long periods of time
Costs of offering a discount
-Less Cash is received from AR because the discount reduces the amount the AR has to pay
-Net profit is decreased, as the discount incurred is an expense
How is Account Receivable Turnover Calculated
Average AR/ Net credit sales (plus GST) *365
