Chapter 8 Flashcards
What are receivables?
Receivables are amounts owed to a company by its customers, employees, the government, or other parties, expected to be collected in cash.
What are the main types of receivables?
The main types are Accounts Receivable (from sales of goods/services), Notes Receivable (formal credit instruments with interest), and Other Receivables (such as advances, recoverable taxes, and loans to officers/employees).
When is an account receivable recorded?
A receivable is recorded when a service is provided or goods are sold on account, at the transaction price.
What is the purpose of the accounts receivable subsidiary ledger?
It maintains individual customer records whose combined total equals the control account balance in the general ledger.
What is the allowance method for bad debts?
It is an estimation approach where an estimated amount of uncollectible accounts is recorded via a debit to Bad Debt Expense and a credit to the Allowance for Doubtful Accounts.
How is the Allowance for Doubtful Accounts used in financial reporting?
It is a contra asset account deducted from Accounts Receivable to present the net, or carrying amount expected to be collected.
How is the write-off of an uncollectible account recorded under the allowance method?
It is recorded by debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable, leaving the net receivables unchanged.
How is the recovery of a previously written-off account recorded?
First, the receivable is reinstated by debiting Accounts Receivable and crediting the Allowance for Doubtful Accounts; then, when cash is received, cash is debited and Accounts Receivable is credited.
What is a note receivable?
A note receivable is a written promise to pay that typically involves an interest component and extends the credit period beyond the normal terms.
How do you calculate interest on a note receivable?
Interest is calculated by multiplying the principal amount by the annual interest rate and then multiplying by the fraction of the year that the note has been outstanding (e.g., months/12).
How is accrued interest on a note receivable recorded?
Accrued interest is recorded by debiting Interest Receivable and crediting Interest Income.
What are the possible outcomes when a note receivable reaches maturity?
The note may be honored (collected in full), dishonored but still expected to be collected (transferred back to Accounts Receivable), or dishonored and deemed uncollectible (written off through Bad Debt Expense or Allowance for Doubtful Notes).
How is the carrying amount of Accounts Receivable determined?
It is determined by subtracting the Allowance for Doubtful Accounts from the total (gross) Accounts Receivable.
How are receivables presented on the Statement of Financial Position?
Receivables are shown in the current assets section at their carrying amount, with separate disclosure of the gross receivables and the allowance amount; receivables due beyond one year are reported as non-current assets.
What are key principles of sound accounts receivable management?
They include determining to whom credit should be extended, establishing a clear payment period, monitoring collections through regular aging schedules, and evaluating the liquidity of receivables using metrics like turnover ratios and collection periods.
What is the receivables turnover ratio?
It measures how many times, on average, receivables are collected during the year and is typically calculated as Credit Sales divided by Average Accounts Receivable.
What is the average collection period?
It represents the average number of days a receivable remains outstanding, calculated by dividing the number of days in the period by the receivables turnover ratio.
How is an aging schedule used in estimating uncollectible accounts?
An aging schedule groups receivables by the length of time they have been outstanding and applies higher estimated uncollectibility percentages to older, less collectible balances.
