Chapter 7 - Accounting for Receivables Flashcards
receivable
An amount due to you from another party
Two most common receivables
Accounts Receivable
Notes Receivable
Accounts Receivable
What is due from customer’s for credit sales
Entry to record a Sales on Credit
DEBIT - Accounts Receivable
CREDIT - Sales
Entry to record collection of cash for an account
DEBIT - Cash
CREDIT - Accounts Receivable
Entry to record interest for Sales on Store Credit
DEBIT - Accounts Receivable
CREDIT - Interest Revenue
Percent of Sales Method
Sales x % estimated
Based on the income statement relation between bad debt expense and sales
Percent of Receivables Method
AR x % estimated
Based on balance sheet relation between AR and allowance for doubtful accounts.
Allowance account balance is always adjusted to equal the estimate of uncollectibles.
Aging of Receivables
Uses both past and current receivables info to estimate allowance amount.
- Each receivable is grouped by how long it is past due
- Each age group is multiplied by estimated bad debt percent
- Estimated bad debt for each group is totaled
Promissory Note
A written promise to pay an amount of money with interest by a certain date.
Principal of a note
The specified amount of money on a promissory note.
Maker
The one who signed the note and promised to pay it at maturity.
A note is a LIABILITY for the maker, also known as a note payable.
Payee
The person to whom the note will be paid.
A note is an ASSET to the payee, also knows as a note receivable.
Interest
A charge for using the money until it is due.
To the borrower it is an EXPENSE
To the lender it is REVENUE
Maturity date and period
Maturity date - the day the note must be repaid
Period - time from the note’s date to maturity date.
Interest formula
Principal of note x Annual Interest rate x Time expressed in fraction of 360 year
Two methods to account for uncollectible accounts
- Direct write off
2. Allowance method
Direct write off method
Records loss from an uncollectible account when it is determined to be uncollectible.
Expense is recognized in FUTURE
DEBIT - Bad Debt Expense
CREDIT - AR account
Allowance method
Matches estimated loss from uncollectible accounts receivable against sales they helped produce.
Expense is recognized CURRENTLY
DEBIT - Bad Debt Expense
CREDIT - Allowance for Doubtful Account
Allowance for Doubtful Accounts
Contra ASSET account
Calculating due date of note
- Start with number of days in the first month and subtract the date of them note
- Continue adding days until you each the period of the note (90-day, 60-day, etc.)
