Chapter 8 Flashcards
(30 cards)
What is the definition of accounts receivable?
Asset: probable, economic benefit, arose from past transaction
Informal credit sale that does not require a written agreement
Why do we have to estimate bad debt expense at the end of an accounting period?
Companies don’t want to wait until the payment is paid or not paid, so we make an estimate on how much might not be paid at the end of a period.
What kind of account is Allowance for Doubtful Accountants?
A contra asset account (xA)
What is a write-off of a receivable?
When a company determines that a specific account receivable is uncollectible and removes it from its books.
Definition of the allowance method:
Estimates bad debts in advance
Why would the direct write off method be a bad example of accounting?
This method leads to mismatched expenses and revenues
What does the allowance for doubtful accounts do?
Helps us estimate the amount of money that will not be paid.
What is a contra account?
an account that offsets or reduces the balance of a related account in financial statements (has the opposite balance of the account it is paired with)
What is debited and credited when a company records a bad debt expense?
Debit: Bad Debt Expense (+E)
Credit: Allowance for Doubtful Accounts (+XA)
What is debited and credited when a company writes off actual bad debt expense?
Debit: Allowance for Doubtful Accounts. (-XA)
Credit: Accounts Receivable (-A)
Do write offs make contra accounts go up or down?
Down
Why would write offs NOT effect gross accounts receivable?
the gross balance is the total amount owed by customers before any adjustments
Why would write offs effect net account receivable?
reduces the balance of the net receivable
Equation for Net Accounts Receivable:
Gross Accounts Receivable - Allowance for Doubtful Accounts
What is another name for the net realizable value?
Net Accounts Receivable
What does the unadjusted balance in the allowance for doubtful accounts mean?
represents the amount that has been previously estimated and recorded as uncollectible accounts receivable before any adjustments are made
If a company debits an unadjusted balance (has more write offs) did they over or underestimate their estimate?
They underestimated how much would not be paid.
How can we tell if a company overestimates how much will go unpaid?
Unadjusted balance was credited making the allowance go up.
What are the two reasons why accruals may not turn into cash flows?
Foggy crystal balls and evil managers
What is the foggy crystal ball problem?
A company makes estimates, the future is cloudy and unpredictable, and there are errors in the estimate
Explain how evil managers may effect why accruals may not turn into cash?
accrual accounting involves estimates and managers have discretion in making these estimates, managers have incentives to prefer aggressive income (higher net income), and managers sometimes intentionally manipulate the accruals causing error that are biased
What is a note receivable?
A contract; give money to someone else
Do accounts receivable accrue interest over time?
No
What receivable has a longer repayment period?
Notes Receivable
