Chapter 8: Accounts Receivable Flashcards
What are some facts about accounts receivable?
- It results from selling goods/services on account
- Normally collected within 30 or 60 days
- Classified as a “current asset” on the balance sheet
What are notes receivable?
- A formal, written instrument of credit with a stated interest rate
- Typically for periods greater than 60 days
- If collected within a year, it is classified as a “current asset” on the balance sheet
Why are receivables important?
Receivables are important because they are usually the company’s largest assets and the most significant type of claim held by a company
What are some details about the subsidiary accounts receivable ledger?
- Supporting detail for the General Ledger account
- Total of all subsidiary ledgers must reconcile to the control account
- Requires posting of journal entries in two places
What is interest receivable?
- Can be a result of notes, credit card or other trade receivable
- Most often recorded as an adjusting entry
- Interest rates are stated on an annual basis
How do you shift the risk of uncollectible receivables
- Do not accept sales on account
- Selling receivables
Why do we value the accounts receivable?
A receivable can be reported as an asset only if it will give a future benefit. Only collectible assets can be reported as assets in the balance sheet.
What are indicators of uncollectible accounts?
- The receivable is past due
- Customer does not respond to calls for collection
- Customer files for bankruptcy
- Customer closes its business
- Company cannot locate customer
What is the carrying amount?
The value reported for accounts receivable in the balance sheet. It is the total amount of accounts receivable minus allowance for doubtful accounts
When and how are uncollectible accounts estimated?
Uncollectible accounts are estimated each period and written off to bad debt expense, reducing the net income
What are the two methods to write off uncollectible accounts?
1) Direct-write off
2) Allowance method
What is the allowance method?
The allowance method estimates the uncollectible accounts receivable at the end of an accounting period
How do you calculate interest due for notes receivable?
Principal x Interest Rate x Term (days or months) = Interest
How are assets listed in the balance sheet?
Order of liquidity
