CHAPTER 8 Flashcards
Characteristics of accounts receivable
amounts owed by the customer’s account
result from sales of goods or services
expected to be collect within 30-60 days
MOST significant type of claim held by a company
notes receivable
THis is when they dont pay off aacounts receivable
Represent claimsf orwhich formal instruments of credit are issued as evidence of debt
Credit instrument normally requires payment of interest and extends for 60-90 day periods
other receviables
non-operational items
loans, interest receivable, advances to employees, income tax refundables
generally reported as separate items on the balance sheet
how do companies value accounts receivable and record their disposition?
?
credit losses
bad debt expense
uncollectible accounts expense
part of the risk of putting things on an account
direct write-off method
only good as a sales promotion
but when customers default on loans net bad debt expenses increase dramatically causing net income to slope downwards
bad debt losses are not estimated so it is not acceptable for finance reporting purposes
no allowance account is useed
accounts are written off when determined uncollectible :
Debit bad debt expense an credit accounts receivable
Allowance Method
excludes values that were not collected
Better matching for income statements
journalizes as debit for bad debt :expense and
credit : allowance for doubtful acounts
when collected then you credit allowance for doubtful acccounts
Credit: accounts receivable
UNDER THE ALLOWANCE METHOD…
Actual uncollectibles are DEBITED to allowance for doubtful accounts and are CREDITED to accounts receivable
Estimated uncollectibles are debited to Bad debt expense and CREDITED for Allowance for doubtful accounts
Writing off an account DOES NOT CHANGE receivables on balance sheet.
Calculating interest on a note
face value of note * annual interest rate * time in terms of one year (because interest rate on notes are always annual)
what does it mean when a note is honored
when it is paid fully, not just interest paid
a dishonored note is one what is not paid and if it has no hope for collection, it should be written off
how do notes receivable, accounts recievable appear on balance sheet?
Notes receivable are listed before accounts receivable because they are easily converted to cash
both
how does bad debt and interest revenue show on an income statement?
Bad debt expense is reported under selling expense
interest revenue: other revenues and gains
5 steps to managing receivables
- Determine to whom to extend credit
- determine pay period
- monitor collections
- Evaluate the liquidity of receivables
- accelerate cash receipts from accounts receivable s
Receivables turnover ratio
net credit sales / average net receivables
why do companies sell over receivables for cash? (3 reasons)
- their size when major companies create other companies to be in charge of their receivables like ford motor creidt corp
- sold because that may be the only reason they can do to get cash.
- the billing and collection are time consuming and costly
What is a factor?
A finance company where it sells receivables for a company for a fee
how do you journalize accrued interest in a given year?
debit Interest receivable for the amount it accumulated and then credit interest revenue for that same amount
how do i journalize a $6,800, 12-month, 6% note in exchange for an outstanding account receivable from R. Stoney
Debit Notes receivable 6800
credit accounts receivable 6800
the interest will be journalized separately with it is accrued.
how do I journalize accrued interest if it was charged before the 12 month period (ie at the end of the year)
take the % of interest times the amount due and then if the interest is accrued at the end of the year but before the 12 month note period. then you would take number of months the note is and divide by 12. take that number and then multiply it by the interest % of amount due and then you will get the amount of interest accrued at that time
how do I journalize buying something on account with a n/30 3/10 agreement?
starting amount due is debited to Accounts receivable and then credited to sales rev. If they have a return, then you debit Sales Return and credit accounts recevable. then when they pay it off before 30 days, you debit cash for the (amount - returns)- discount. You put this total debited to cash, discount value debited to SALES DISCOUNTS and then Credit Sales Rev. for the amount - return.
turnover rate
?
turnover rate
net credit sales (add the years and divide by #) divided by average Net accounts receivable
average collection period
365/accounts receivable turnover
