chapter 7 reading Flashcards
receivable
amount due from another party
what are two common receivables
notes and account receivables
account receviable
amounts due from customers for credit sales
credit sales are recorded how
by increasing (debiting) A/R
what is the single A/R accont in general ledger called
control account
supplementary record
has a seperate account for each customer and is called A/R ledger
reasons sellers allow customers to use credit and debit
1)seller does not have to decide who gets credit and how much
2) seller avoids risk of customer not paying (risk transferred to credit card company)
3)seller receives cash very soon
4) more credit options = more sales
what do sellers pay when card is used
pays a fee that reduces sellers cash received
what do sellers expect when a company directly grants credit to customers
expects some customers will not pay what they promused
what are the accounts called for when company expects customers to not pay what they promused
uncolletible accounts or bad debts
company belives that granting credit will what
increase total sales enough to offset bad debts
what are two methods for uncollectible accounts
1)direct write off method
2)allowance method
what is direct write off method
records loss from uncollectible A/R whne ut is determined ti ve uncolletbible. no attempt is made to predict bad debts expense
what type of companies use direct write off method
publicly traded companies and private held companies
what are two things companies consider when using direct write off method
1)expense recognition
2) materiality constraint
expense recognition
requires expenses be reported in same period as sales they helped produce
materality constraint
permits use of dreict write of method
advantages of direct write off method
-simple
-no estimates needed
disadvanatges of direct write off method
-receivables and income temporarily overstated
-bad debts expense often not matched with sales
allowance method
for bad debts matches estimated loss from uncollectible A/R against the sales they helped produce
why use estimated losses
because when sales occur sellers do not know which customers will not pay
at end of each period what does allowance method require
estimate or total bad debts expected from that days sales
what are the two advatages of allowance method over direct write off
1) records estimated bad debts expense in the period when related sales are recorded
2)it reports A/R on the balance sheet at the estimated amount to be collected
allowance for doubtful accounts is what type of account
contra account
allowance method advanatges
-receivables fairly stated
-bad debts expense matched with sales
-writing off bad debt does not effect net receivables or income
disadvantages of allowance method
-estimates needed
realizable value
amount expected to be recieved
what do adjusting entries add to
add to allownace for doubtful accounts
what do bad debt write offs subtract from
subtract from allowance for doubtful accounts
% A/R assumes what
assumes % of company’s receibables is uncollectible (% is based on economic trends)
aging A/R method
applies like % A/R but several % are used to estimate allownace
promissory note
written promse to pay specified amount with interest
interest
charge for using the money until it is due day
to borrower interest is a
expense
to lender interest is
revenue
maturity date of note
day the note must be repaid
account receivable turnover
net sales/avg A/R,net
