Chapter 8 Flashcards
Receivables
Refers to amounts due from individuals and companies
Expected to be collected in cash
*one of most liquid assets
Accounts receivable
Amounts customers owe on account
Result from sale of goods and services
30-60 days
*Most significant type of claim held by a company
Notes receivable
Claims for which formaul instruments of credit are issued as evidence of the debt
exted 60-90 days or longer
Trade receivables
Notes and accounts receivable that result from sales transactions
Other receivables
Include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable
*not from operations
*classified and reported as seperate items
Issues with accounts receiveable
- Recognizing accounts receivable
- Valuing accounts receivable
Also, accelerated cash receipts from receivables
Bad Debts Expense
An expense account to record losses from extending credit
AKA “Uncollectible accounts expense”
Direct write-off method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible
Allowance method
Involves estimating uncollectible accounts at the end of each period
Provides better matching of expenses with revenues
receievables at net realizable value
Cash (net) realizable value
The net amount a company expects to receive in cash from receivables
Material
Significant or important information to financial statement users
What type of account is Allowance for Doubtful Accounts
a contra account because they do not know which customers will pay
not closed at the end of fiscal year
Cash realizable value formula
Accounts receivable - Allowance for doubtful accounts
Who writes off accounts?
To maintain good internal control, companies should not authorize someone to write off accounts who also has daily responsibilities related to cash or receivables
Write-offs and recovery affect what?
Affects the balance sheet accounts
not the income statement
Percentage of receivables basis
Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts
Aging the accounts receivable
Company prepares a schedule in which customer balances are classified by the length of time they have been unpaid
Amount of bad debts expense adjusting entry
The difference between the required balance and the existing balance in the allowance account
When allowance account has a debit balance prior to adjustment
Occurs because the debits to the allowance account from write-offs exceeding the beginning balance in the account which was based on previous estimates for bad debts
Promissory note
A written promise to pay a specified amount of money on demand or at a definite time
Maker: promissory note
The party making the promise to pay
Payee: promisory note
The party to whom payment is to be made
3 uses for promissory notes
When individuals and companies lend or borrow money
When amount of transaction and the credit period exceed normal limits
settlement of accounts receivable
Two key parties to a note and entries made
Maker - credits notes payable
Payee - debits notes receivable
