Chapter 8: Accounting for Receivables Flashcards
Describe the difference between an accounts receivable and notes receivable.
Accounts Receivable results from sales of goods on credit and expected to be collected within 30 days.
Notes Receivable is a written promise to pay a certain amount of money within a defined time period. This is used when companies borrow or lend money and when the amount or time limit exceeds normal limits. Can be used as a settlement of accounts receivable. Interest is charged.
What is a subsidiary accounts receivable ledger?
An account is created for each individual and each account is kept together in a ledger. The ending balance in the general ledger Accounts Receivable account is equal to the sum of the ending balances in the individual accounts in the subsidiary accounts receivable ledger.
When is interest recorded in the books?
Interest can be recorded monthly, quarterly, or annually. It MUST be recorded when preparing financial statements.
What is the carrying amount of Accounts Receivable and how is it determined?
Only collectible accounts can be recorded as assets, so the company must estimate the expense of non-collection of receivables. To record this, we DEBIT Bad Debt Expense and CREDIT Allowance for Doubtful Accounts.
The Carrying amount is calculated by subtracting the Total value of Accounts Receivable - the Allowance for Doubtful accounts.
What entry would you use to write-off an uncollectible account?
DEBIT Allowance for Doubtful Accounts
CREDIT Accounts Receivable
What entry would you use to record a payment of a previously written off amount?
First, reverse the write off:
DEBIT Accounts Receivable
CREDIT Allowance for Doubtful Accounts
Then, record the payment
DEBIT Cash
Credit Accounts Receivable
What are the two method for determining the estimate of uncollectible accounts?
Percentage of Receivables - Calculated based off a percentage of receivables. An aging schedule of the receivables is prepared. The amount calculated is the amount the must be shown as the balance of the Allowance for Doubtful accounts on the balance sheet.
Percentage of Sales - Estimated Percentage * Net Credit Sales = Bad Debt Expense
What is the formula to calculate interest owing on a Notes Receivable/Payable?
Principle amount of note x Annual Interest Rate x Time in Terms of One Year (Ex: 4/12) = Interest
What is the journal entry for Dishonoring of Note Receivable when collection is expected in the future?
DEBIT Accounts Receivable
CREDIT Notes Receivable, Interest Revenue, Interest Receivable.
What is the journal entry for Dishonoring of Note Receivable when collection is NOT expected in the future?
DEBIT Allowance for Doubtful Accounts
CREDIT Notes Receivable, Interest Receivable
What is the Receivable Turnover Ratio and what information does it provide?
Net Credit Sales / Average Gross Accounts Receivable = Receivable Turnover. This ratio measures the number of times, on average, that receivables are collected during the period. The higher the turnover ratio, the more liquid the company’s receivables are.
What is the Collection Period Ratio and what information does it provide?
Days in Year / Receivables Turnover = Collection Period
This shows the number of days it takes the company to collect its receivables. The collection period is often used to judge how effective a company’s credit and collection policies are.
What is the Operating Cycle Ratio and what information does it provide?
Days Sales in Inventory + Collection Period = Operating Cycle in Days
The operating cycle is the time it takes to go from cash to cash in producing revenues. In a merchandising company, the operating cycle may be measured by determining the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. In a service company, the operating cycle is the time it takes to offer a service, complete the service, and collect cash.
