Chapter 8: Accounting for Receivables Flashcards
Define accounts receivable
The current asset resulting from a sale or service executed on a credit basis
Will a business always get the full amount of cash on a credit basis?
No, businesses prepare to lose some revenue.
What kind of expense is the lost of money from credit basis (credit loss) considered?
Operating expense
Is the operating expense from credit loss debited or credited? And to which account?
Debited to bad debt expense
The GAAP requires an estimate of bad debt expenses. Which principle is this an example of?
Matching principle
How does a business write an estimate of bad debt expenses?
They off set it with the “allowance method”
What is the allowance method?
The process of estimating bad debt expense. Bad debt expenses is debited while allowance for doubtful accounts is credited
How does allowance for doubtful accounts fit the accounting equation?
It is subtracted from gross accounts to yield a net amount
When is a receivable written-off?
A) After it’s paid off
B) When the transaction is made (before payment)
C) When it is canceled from the buyer
D) When the company concludes the amount will not be collected
D) When the company concludes the amount will not be collected
How does writing off a receivable affect the journal entries?
It will not affect expenses or total assets.
Will clean up accounts receivable account
How do you write off an account deemed uncollectible? (Credit/Debit)
Debit allowance for doubtful accounts
Credit accounts receivable
How to record a bad debt expense for the year?
Debit bad debt expense
Credit allowance for doubtful accounts
Sometimes an account written off will be later collected. What 2 things must be recorded?
- Reverse the original write-off
- Collect the cash
How to you journal a reinstated accounts?
Debit accounts receivable
Credit doubtful accounts
How do you record a receivable account paid back in cash?
Debit cash
Credit accounts receivable
How does a company estimate bad debt expense?
As a percentage, usually based on historical past credit losses
What is the bad debt expense estimation equation?
Bad debt estimation = sales x past experiences of lost expense
Ex: A company had $700,000 in sales, and usually lost about 3%, so the equation is:
Bad debt estimation = 700,000 x 0.03 = 21,000
The companies bad debt expense estimation is $21,000
What is the aging method regarding accounts receivable?
When the allowance for doubtful accounts balance is computed by computing an aging schedule on outstanding accounts receivable partitioned by age of the receivable
Basically, the older the account is, the less likely it is to be paid, number depend on price of accounts
How would you record a credit card sale and collection?
Debit cash
Debit credit card fee expense
Credit sales revenue
What are the three key characteristics of Notes Receivable?
- A fixed due date or on-demand
- A certain principle sum to be paid
- An interest rate usually stated as an annual rate
How do you calculate interest?
Interest = principal x interest rate x interest time
Ex: a 3-month note for $10,00 with annual interest of 6%
Interest = 10,000 x 0.06 x 3/12 = $150
How do you journal the accrued interest income?
Debit interest receivable
Credit interest income
How do you record the receipt of interest payment?
Debit cash
Credit interest receivable
What is a key measurement regarding analyzing receivables?
Determining the speed of collection
To calculate the speed of collection, two ratios are needed. What are they?
- Accounts receivable turnover
- Average collection period
How is accounts receivable turnover calculated?
Accounts receivable turnover = net sales / average accounts receivable
How is the average collection period calculated?
Average collection period = 365 / accounts receivables turnover
How can a company speed up cash collection on accounts and notes receivables?
By selling the receivables
What is “factoring the receivable.”
When a company speeds up its collection of cash and receivables
If the receivables are sold without recourse - how does this affect the buyer?
The buyer cannot request reimbursement for amount not collected
If the receivables are sold with recourse- how does this affect the buyer?
The buyer has the right to return the uncollected receivables to the seller.
