chapter 8 Flashcards
what is accounts receivable?
amounts owed by customers resulting from the sale of goods and services
what is notes receivable?
written promises to pay debt, typically after the company has gone over the time allowed and notes receivable collects interest
when would accounts receivables and notes receivable be incurred?
when sale transactions called trade receivables occur
what are non trade receivables?
receivables that result from the normal operations of the business
what are 4 kinds of non trade receivables?
interest receivables
load to company officers and advances to employees
sales tax recoverable
income receivable
what is sales tax recoverable?
when you pay to much GST or PST taxes and they pay you back
what is income tax receivable?
when you pay to much income tax and you get paid it back
when is accounts receivable recorded?
when service is provided on account or at point of sale of merchandise on account, this is recored at transaction price
what is a subsidiary ledger?
a group of accounts that share a common characteristic, all receivables. they provided details that support the total balance for accounts receivable in the general ledger
what is the single accounts receivable In general ledger considered?
the control account
what must the balance of A/R must equal?
the total of all individual subsidiary ledger accounts in the subsidiary ledger
how many subsidiary ledger A/R accounts are there?
one per customer
when some accounts receivable become uncollectible, where are expected credit losses debited to?
credit losses
how do companies estimate their expected credit losses?
based on their historical credit loss experience
what are uncollectible account receivable called under IFRS and ASPE?
IFRS: credit loss
ASPE: bad debt
when is the credit loss expense recognized?
they are recognized in the same period that the related sales revenue is reported
what is the allowance method for estimating credit losses?
this method estimates the expected credit losses at the end of each period
where is the amount estimated lost shown?
in the allowance for expected credit losses
what kind of account is expected credit losses?
it is a contra asset to account receivable
how do companies calculate their allowance for expected credit losses?
they use a percentage of receivables to determine allowance
what are the 2 ways of figuring out a percentage of A/R for allowance for ECL (expected credit losses)?
either one percentage is applied to the entire accounts receivable balance or different percentages applied to accounts receivable that are classified according to the length of time that have been out standing
what is aging of accounts receivable?
when a different percentage is applied to accounts receivable based on the time they have been outstanding
what is a promissory note?
a stronger legal claim to assert than accounts receivable, written promise to repay on demand
what kind of credit instrument is a promissory note?
a credit instrument that normally requires the payment of interest and expected the payment period for the receivable for longer than 30 days
when is a promissory note used?
when individuals and companies lend or borrow money
when the amount and the length of credit period exceeds normal limits
to settle an accounts receivable when payment cannot be made within established credit period
what is the entry to move an accounts receivable to notes receivable?
dn notes receivable
cr accounts receivable
what is the formula for calculating interest on an interest barring note?
face value of note X annual interest rate X time in terms of one year
what is the amount of interest if the note payable is 10,000, interest rate is 6% and it is for one months interest?
10,000 X 6% X 1/12= 50 dollars
if a notes payable is collected at the maturity date, what is the journal entry like?
dn cash 10,050
cr notes receivable 10,000
cr interest income 50
if a notes payable is not collected what is the journal entry like?
if they expect to pay it, the note is no longer negotiable the balance is transferred to accounts receivable to be eventually collected
dn A/R 10,050
cr notes receivable 10,000
cr interest receivable 50
if they dont expect to pay it, it is written off to credit losses
dn credit losses
cr notes receivable 10,000
cr interet income 50
if a receivable that is going to be collected in more than 12 months, where does it show up on the balance sheet?
long term assets
how are credit losses represented on the income statement?
as operating expenses
how is income interest reported on the income statement?
in the non operating section as “other income and expenses”
what are the 4 ways to manage accounts receivables?
determine who to extend credit to
establish a payment period (if customer does not pay add financing charge)
monitor collections (follow up on receivables)
Evaluate the liquidity of receivables
what are the 2 measures used to assess liquidity of receivables?
receivables turnover ratio
average collection period
what is the receivable turnover ratio?
credit sales / average gross A/R
what is the formula to calculate average A/R?
(beginning A/R + end A/R) / 2
what does the receivable turnover ratio measure?
the number of times on average that receivables are collected during the year
what does the average collection period ratio measure?
the average amount of time that a receivable is outstanding
what is the formula for average collection period?
365 days / receivables turnover
what is good for the average collection period?
lower is better, this means the more liquid the companies receivables are
what is better for receivables turnover?
the higher the better, this means the receivables are more liquid
