chapter seven notes Flashcards
accounts receivable/trade
amounts due from credit customers from sale of goods/services
bad debts
the cost of doing business on credit with customers who do not pay
bad debt expense
classified as a selling expense on the income statement and closed at the end of the year
accounts receivable
classified as a current asset on the balance sheet
net realizable value
the amount the business expects to collect
equation for net realizable value
Accounts Receivable
-Allowance for Doubtful Accounts
allowance for doubtful accounts
amount of accounts receivable that you do not expect to receive
CONSERVATISM PRINCIPLE
what kind of accounting is allowance for doubtful accounts?
contra asset
direct write-off method
records bad debt expense only when the bad debt customer has been identified
VIOLATES MATCHING
when is direct write-off method allowed?
when accounts receivable is immaterial
allowance method
estimates bad debt expense at the end of year and recorded through an AJE
FOLLOWS MATCHING
how does allowance affect accounts receivable?
INDIRECTLY only through allowance for doubtful accounts
entry for recording credit sales
accounts receivable x
revenue x
entry for writing-off accounts receivable
allowance for doubtful accounts x
accounts receivable x
entry for collecting previously written of accounts receivable
TWO STEP APPROACH
accounts receivable x
allowance for doubtful accounts x
cash x
accounts receivable x
entry for recording bad debt expense at year end
MAKE ESTIMATE OF UNCOLLECTIBLE ACCOUNTS
bad debt expense x
allowance for doubtful accounts x
income statement method
estimate=percentage of credit sales for year
BAD DEBT EXPENSE
balance sheet method
estimate=percentage of ending accounts receivable
ENDING BALANCE OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
entry for income statement method
bad debt expense x
allowance for doubtful accounts x
entry for balance sheet method
bad debt expense (AJE)
allowance for doubtful accounts (AJE)
principal
amount borrowed/amount lent
interest
an expense for the borrower (the cost of borrowing): income/revenue for the lender/creditor
maturity value
principal+interest
time period
interest rate is always expressed as an annual rate
issuer
borrower of money (issuing a promise)
lender
lender of money
accounts receivable turnover
net credit sales/average accounts receivable
average accounts receivable
(beginning accounts receivable+ending accounts receivable)/2
