Chapter 8 Flashcards
sales returns/discounts
reduce the accounts receivable balance, since the company will no longer be receiving the payment
Sales Discounts Journal Entry
Dr Cash
Dr Sales Discount
Cr A/R
Sales R/A Journal Entry
Dr Sales R/A
Cr A/R
estimated uncollectibles
estimated amount of claims on customers that companies expect will be uncollectable in the future
when does a write off occur?
- after a company exhausts all means of collecting a past due account and collection appears unlikely
- if a customer is unable to pay the company the amount due
net realizable value
the net amount a company expects to receive in cash from receivables
direct write off method for uncollectables
bad debts are not estimated/accounts are written off when deemed uncollectable
NOT acceptable under US GAAP-doesn’t follow expense recognition principle/no way to tell the amount of the a/r balance that will actually be realized on the balance sheet since we are directly crediting the a/r
journal entry for the direct write off method
Dr Bad Debt Expense
Cr A/R
allowance method for uncollectables
at the end of ever reporting period a company estimates the value of accounts that will be uncollectable- follows the expense recognition principle
journal entry for the allowance method for uncollectables
Dr Bad Debt Expense
Cr Allowance for Doubtful Accounts
Allowance for Doubtful Accounts Account
contra-asset account (normal cr balance)
this acount allows for the a/r account to be displayed at its cash net realizable value
Bad Debt Expense
classified as an operating expense on the income statement
journal entry for when estimations are actually uncollectable and must be written off
Dr Allowance for Doubtful Accts
Cr A/R
recovering a written off account
if a previously written off account is later collected we must reverse the write off account and record the cash
journal entry for recovering a written off account
Dr A/R
Cr Allowance for Doubtful Accts
Dr Cash
Cr A/R
balance sheet order for current assets
cash
a/r
less allowance for doubtful accts
etc
options for estimating balance of allowance for doubtful accts
% of receivables
aging schedules
does the allowance for doubtful accounts account get closed out at the end of the period?
NOOOO
how to find the amount to fill in for allowance for doubtful accts or bad debt expense
current balance-ending balance-find the whole
Dr BDE
Cr A4DA
notes receivable
promissory:written promise to pay a specified amount of money on demand or at a definite time
when are notes receivable used?
- when individuals or companies lend or borrow money
- when the amount of the transaction and the credit period exceed normal limits
- in settlement of an a/r
maturities
- on demand
- on a stated date
- at the end of a stated period of time
Equation for computing interest
(face value of the note) x (annual interest rate) x (time in terms of one year-360 days)
recognizing notes receivable
- recognized when formally accepted by the company
- initially recorded at face value
- interest revenue is not reported when the company accepts the note because the revenue recognition principle does not recognize revenue until earned (interest is earned, accrued, as time passes)
Journal entry for recognizing a note receivable
Dr N/R
Cr A/R
valuing a ______ n/r is the same as valuing ________
short-term; a/r
n/r are reported at their cash (net) realizable value and have an allowance acct (A4DA)
disposing of notes
- notes may be held to their maturity (honored)
- notes may be sold (speeds collection of cash)
- maker of the note may default (dishonored)
managing a/r
- determine to whom to extend credit
- establish a payment period
- monitor collections
- evaluate the liquidity of receivables
- accelerate cash receipts when necessary (sale of receivables)
receivables turnover ratio
- liquidity ratio
- measures the number of times, on average, a company collects receivables during the period
= (net cr. sales)/(average et receivables)
average collection period
- assess effectiveness of credit/collection policies
- collection period should not exceed credit term period
(365) / Receivable turnover ratio
3 reasons for the sale of receivables
- size of receivable
- receivables may be the only reasonable source of cash
- billing/collection are often time consuming and costly
National Cr Card Sales
- issuer does cr investigation of customer
- issuer maintains customer accts
- issuer undertakes collectio process/absorbs any losses
- retailer receives cash more quickly from cr card issuer
Cr Card journal entry
Dr Cash
Dr Service Charge
Cr Sales Revenue
basic principle of cash management
- increase the speed of receivables collection-offer a discount
- keep inventory levels low-remember just in time inventory
- monitor payment of liabilities
- plan timing of major expenditures
- invest in idle cash
liquid investment
someone always willing to buy/sell the investment
risk free investment
no concern that the part will default on its promise to pay the principle and interest
