Chapter 8 (Week 4) Flashcards
Receivables
Claims that are expected to be collected in cash
They are acquired mainly by selling goods / services and lending money
There are three types:
–> Accounts receivable: amounts customers owe on account → they result from the sale of goods and services
–> Notes receivable: are a written promise for amounts to be received
–> Other receivables
How to recognise accounts receivable
Debit (increase) - accounts receivable
Credit (decrease) - sales revenue
Then when the cash is paid:
Debit (increase) - cash
Credit (decrease) - accounts receivable
Direct write off method
DEFINITELY UNCOLLECTIBLE
Debit Bad Debt Expense
Credit Accounts receivable
Allowance
ANTICIPATE UNCOLLECTIBLES
Involves estimating uncollectible accounts at the end of each period
Estimate uncollectible
–> Debit Bad Debt Expense
–> Credit Allowance for doutbful accounts
When you are sure it is uncollectible
–> Debit Allowance for doubtful accounts
–> Credit Accounts receivable
Percentage of receivables basis
Debit Bad debt expense
Credit Allowance for doubtful accounts
Both by the percentage of receivables
Ageing the accounts receivable
a way of categorizing unpaid customer receivables according to the length of time the debt is past due
Short term receivables appear
in the current assets section of the balance sheet
Sale of receivables usually occur to …
A factor - a finance company or bank that buys receivables from businesses and then collects the payments directly from the customers
A retailer’s acceptance of a credit card is another form of selling (factoring) the receivable
Promissory note
A written promise to pay a specified amount of money on demand or at a definite time.
The party making the promise to pay is the maker
The party to whom payment is to be made is the payee
Determining the maturity date
The due date of the money to be paid
It can be determined in terms of months, days etc
In terms of days, 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
Honoured or dishonoured note
A note is honoured when its maker pays in full at its maturity date
For each interest bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specific on the note
A note is dishonoured (defaulted) when its maker doesn’t pay in full at its maturity date
The amount is thus transferred to the accounts receivable account
Short term investments appear
after short term receivables because they are more liquid
Accounts Receivable Turnover Formula
Net Credit Sales / Average Net Accounts Receivable
Average Collection Period in Days Formula
Days in Year / Accounts Receivable Turnover
