Chapter 7- Receivables Flashcards
What is a general ledger?
contains all accounts and their total balances (ex: Accounts receivable $10000)
What is a subsidiary ledger?
contains all the detail behind the total
Ex: Accounts receivable- John Doe $5000
Accounts receivable- Jane Doe $2000
Accounts receivable- Tom Brown $3000
What are the 2 types of credit cards?
- Bank Credit Card (PNC, Chase)
- Store Credit Card (Target, Kohls)
Specific brands: Visa, Mastercard, American Express, Discover
What are some general advantages/disadvantages from the company viewpoint?
Advantages:
-Earns interest
-Increase sales
Disadvantages:
-Concern customer won’t pay
What are some bank advantages/disadvantages from the company viewpoint?
Advantages:
-Company avoids the risk of loss (the bank loses money)
Disadvantages:
-Banks charges company a fee (normally 3%)
“credit card expense”
What are some store advantages from the company viewpoint?
-increase sales through incentives (discounts, points, gift cards)
What are uncollectible accounts?
amounts expected to not be received
What is bad debt expense?
-uncollectible accounts
-NB: debit
-Equity account
What are 2 methods to records uncollectible accounts?
- Direct write off method
- Allowance method
What is the direct write off method?
-Waits until the actual uncollectible account is known to record a JE
-Directly writes off the accounts receivable
-No estimate is made to determine uncollectible amount in advance
-Not the preferred method
-easier, but does not follow the matching principle (matching revenues with expenses)
How do you recover bad debt?
-the customer can pay a portion of the accounts receivable AFTER it was already written
-JE:
1. reinstate the accounts receivable
2. record the collection of cash
For both direct write off and allowance method
What is the allowance method?
-Follows the matching principle > preferred method
-Estimates upfront the expected amount to not be collected (usually done as an AJE at year end)
-Do NOT directly write off AR
*Instead the estimate is booked to Allowance for Doubtful Accounts
What is Allowance for Doubtful Accounts?
-contra asset account (lowers AR > net against AR)
AR-AFDA=AR, net
-NB: credit
What are the 3 methods to calculate the BDE under the allowance method?
- % of sales (sales is a temporary account)
- % of receivables (receivable is a permanent account)
- AR aging
What is % of sales?
-Multiply the (uncollectible) percentage X credit sales in the current period
What is % of receivables?
-Percent expected to be uncollectible based on outstanding AR
% x AR = AFDA
-HOWEVER if there is a beginning balance in the AFDA you must take this into account
What is AR Aging?
-same concept and calculation as % of receivable
-each receivable is classified into how long it is past due
-create an “AR Aging Schedule”
-the longer the amount of AR is past due the less likely we are to receive it
What is AR Turnover?
-measures how often AR is collected during the period
-helps assess the quality and liquidity of receivables
Quality- the likelihood of collection without loss
Liquidity- the speed of collection
What is the equation for AR Turnover?
Net Sales
= ———————–
Average AR, Net
What is the equation for Average AR, Net?
2
^AR, Net= AR-AFDA
What does it mean if AR Turnover is too high?
means credit terms are too strict (less strict credit terms could result in more sales)
What does it mean if AR Turnover is too low?
not collecting AR fast enough (need stricter credit terms)
