Chapter 8 powerpoint Flashcards
Accounts Receivable
The amounts that customers owe on account, resulting from a sale of goods or services
*expected to be receivedin 30-60 days
Notes Receivable
The claims for which formal instruments of credit are issued as evidence of the debt; the creditor usually requires the debtor to pay interest
*extend for 60-90 days or longer
Trade Receivables
Accounts and Notes Receivable that result from sales transactions
Other Receivables
Non-Trade Receivables, such as Interest Receivable, Loans to Company Officers, Advances to Employees, Income Taxes Refundable
Do not result form operations
Creating of sales Returns and Allowances line rather than reducing Revenue
increases transparency and usefulness for users
Estimated Uncollectibles
The “estimated” amount of claims on customers that companies expect will be uncollectible in the future
Write-off of Uncollectible Account
The “actual” losses from uncollectibles
*company exhausts all means of collecting a past-due account and collection appears unlikely
*The customer is unable to pay to the company the amount due
Net Realizable Value
The net amount a company expects to receive in cash from receivables
Accounts Receivable - Allowance for doubtful accounts (estimated uncollectibles)
Two methods to record uncollectible account:
- Direct write-off method
- Allowance method
Bad Debts Expense
An operating expense on the income statement
Records the resulting losses from uncollectible accounts
Direct Write-Off Method
Bad debts are not estimated and accounts are written-off when deemd uncollectible
Bad debt expense will show only Actual Losses
Accounts Receivable is reported at its gross amount on the balance sheet
Journal Entry to Record Uncollectibles Using Direct Write-Off Method
Bad Debts expense XXX
Accounts receivable XXX
Direct Write-Off Method NOT acceptable under U.S GAAP because:
Does not match revenues to expenses, since revenue was earned and recorded prior to determining the uncollectible amount (expense recognition principle)
There is no way to tell the amount of the Accounts Receivable balance that will actually be realized on the balance sheet since we are directly crediting accounts receivable
Allowance Method
Company estimates the value of accounts that will be uncollectible at the end of every reporting period
*follows the expense recognition principle
Journal Entry for “Estimation of Uncollectibles”
Bad Debts Expense XXX
Allowance for Doubtful Accounts XXX
Allowance for Doubtful Accounts
Contra asset account ———–Gives users a more accurate picture of the accounts receivable asset
By crediting allowance for doubtful accounts instead of Accounts receivable, accounts receivable is displayed at its cash net realizable value on the balance sheet
Bad debts expense classified as _______________
an operating expense on the income statement
Journal Entry for a Write-off under Allowance Method
Allowance of Doubtful Accounts XXX
Accounts Receivable XXX
Journal Entry: If previous written of account is later collected (Allowance Method)
Accounts Receivable XXX
Allowance for Doubtful Accounts XXX
Cash XXX
Accounts Receivable XXX
Two methods to estimate balance of allowance for doubful accounts
- Percentage of Receivables Method
- Aging schedule - more accurate estimate
Percentage of Receivables Method
Take a percentage of the total Accounts Receivable to estimate the amount uncollectible
Journal Entry for Allowance for Doubtful Accounts Adjustment
Bad Debts Expense XXX
Allowance for Doubtful Accounts XXX
Notes Receivable
A promissory is a written promise to pay a specified amount of money on demand or at a definite time
*it is a formal credit instrument
*It is considered notes receivable
*A company generally receives both principle amount plus interest(revenue)
Promissory notes may be used:
When individuals and companies lend or borrow money
When the amount of the transaction and the credit period exceed normal limits
In settlement of accounts receivable
Maturity Date of a Notes Receivable
- On demand
- On a Stated Date
- At the End of a Started Period of Time
Hint: in counting, omit the date the note is issued but include the due date
Computing Interest
Face Value of Note x Annual interest rate x time in terms of one year (360 days)
Recognizing Notes Receivable
A note receivable is recognized when it is formally accepted by the company
Initially recorded at face value
Interest revenue in notes receivable
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
Measuring Notes Receivable
Valuing short-term notes is the same as valuing accounts receivable
Notes Receivable are reported at their cash (net) realizable value and have an allowane account (allowance for d a)
Journal entry when accept a Note Receivable
Notes Receivable XXX
Accounts Receivable XXX
Amount due at maturity
The face value of the note plus interest for the length of time specified on the note
Journal Entry when disposing honored notes receivalble
Cash XXX
N/R XXX
Interest Revenue XXX
Net Credit Sales
Net Sales - Cash Sales
Notes Receivable may be sold
A company would do this to speed up the collection of cash
The maker of the note may default (dishonored)
A dishonored note is a note that is not paid in full at maturity
Company may negotiate new terms to make it easier to repay debt
If a company has significant __________________, it must discuss this rks in the notes to financial statements
concentrations of credit risk
Receivables turnover ratio
Net Credit Sales
Average Net Receivables
Average collection period
365
Receivables Turnover ratio
Accounts Receivable turnover info:
To assess the liquidity of the receivables
To measure the number of times, on average, a company collects receivables during the period
Average Collection Period Info:
To assess the effectiveness of credit and collection policies
The collection period should not exceed credit term period
3 reasons for sale of receivable
Size of receivable
receivables may be the only reasonable source of cash
Billing and collection of receivables are often time consuming and costly
Captive Finance Companies
Companies (subsidary company) owned by the company selling the product (parent company)
Purpose: to encourage the sale of the company’s products by assuring financing to buyers
avoids parent company holding large amounts of receivables
Journal entry when company factors 600,000 of receivables at 2 percent service charge
Cash 588,000
Service charge exp. 12,000
Accounts Receivable 600,000
