Chapter 8 Recievables Flashcards
What is a receivable?
A receivable is a monetary claim against a business or an individual
What are the 3 major types of receivables?
Accounts receivable - represents the right to receive cash in the future from customers for goods sold for services performed
Notes Receivable - represent a written promise that the customer will pay a fixed amount of principal plus interest by a certain date in the future
Other Receivables - A misc category that includes any other type of receivables where there is a right to receive cash in the future
How are credit sales recorded?
A critical component of internal control over receivables is the separation of cash handling and cash-accounting duties. a separate accounts receivable account(called a subsidiary account) must be maintained for each customer in order to account for payments received from the customer and amounts still owed. The sum of all balances in the subsidiary accounts receivable will equal a control account balance, accounts receivable. Sales by credit cards and debit cards are treated as cash sales and typically include a fee (credit Card Expense) that is paid by the business to the credit card processor . As a way to receive cash before receivables are collected, businesses can factor or pledge their receivables.
How are uncollectibles accounted for when using the allowance method?
When using the allowance method, companies estimate bad debts expenses at the end of the period and record and adjusting entry that debits Bad Debts Expense and credits Allowance for Bad Debts.
What are the three ways to estimate bad debts expense?
Percent-of-sales method - computes bad debts expense as a percentage of net credit sales. Percent-of-receivables method - determines the balance of Allowance for Bad Debts account based on a percentage of accounts receivables. Aging-of-receivables method - determines the balance of the allowance for bad debts account based on the age of the individual accounts receivable
How are uncollectible accounts written off and recovered?
Write off: DR Allowance for Bad Debts, CR Accounts Receivable
Recovery: DR Accounts Receivable, CR Allowance for Bad Debts
How are notes receivable accounted for?
__________ involve interest that is computed as principal X interest rate X time
Interest on notes must be accrued at the end of the cash period, and an adjusting entry must be recorded by DR Interest Receivable and CR Interest Revenue
The receipt of cash at a note’s maturity includes the principal plus interest
When a customer dishonors a note, the business can transfer the note receivable (plus interest earned) to an accounts receivable
What is the acid test ratio?
The ____________ reveals whether an entity could pay all its current liabilities if they were due immediately. (Cash + Short-term Investments + Net current receivables) / Total current liabilities
What is the accounts receivable turnover ratio?
The____________ measures the number of times the company collects the average accounts receivables balance in a year. Net credit sales / Average net accounts receivable
What are the days’ sales receivables?
The _____________ indicates how many days it take to collect the average level of accounts receivable. 365 / Accounts receivable turnover ratio
Define Dishonor a note
failure of a note’s maker to pay a note receivable at maturity
define interest
the revenue to the payee for loaning money - the expense to the debtor
define interest period
the period of time during which interest is computed, it extends from the original date of the note to the maturity date
define interest rate
the percentage rate of interest specified by the note
define maturity date
the date when a note is due
