F3 - M2 - Receivables Flashcards
What is the difference from accounts and trade receivable?
Trade is when a customer purchases your good or service, and accounts can be not customer or from goods or services.
Accounts receivable is measured at net realizable value, which means the amount to be collected. What may occur that adjusts the net realizable value?
Discounts, uncollectable amounts, credits to customers for sales returns.
What his the BASE acronym for accounts receivable?
B - The beginning balance
A - Additions
S - Subtractions
E - Ending Balance
What is the gross method in accounts receivable?
This is when you offer a customer a discount if they pay within a certain amount of time, but you ignore the discount. Basically you don’t think they are going to pay. You would record the entry as normal without taking into consideration the discount.
If you end up getting paid in the discount period, then you would debit a sales discount account, which is a contra revenue account.
What is the net method in accounts receivable?
You record the entry thinking the customer will pay you in the discount window. If they end up not paying, then you need to credit an account called “sales discount not taken.”
What is a trade discount, how does it work differently than other discounts?
Trade discounts are normally a discount you get for when you buy something in bulk. For example, you buy 100,000 items, so the vendor gives you 10% off that amount because you bought so much.
The key with this is that they are always recorded at the net method, because you are getting the discount. Also, they are applied one at a time. So for example, you buy 100,000 worth of stuff and the vendor says they will give you a trade discount for 40% and 10%. That means that the first discount is taken 40% against 100,000 which means you know owe 60,000. Then the 10% is taken at the 60,000 which now means you owe 54,000. It is not 50% of 100,000 which would be 50,000.
What is the difference between the allowance method and the direct write off method?
Allowance method - Estimates the number of accounts receivable that will go bad. This is used by US GAAP and the accrual based accounting. Estimate the number that you think will go bad, and debit bad debt expense, and credit ADA.
Direct Write-off method - This is when you wait for accounts receivable to be uncollectible before writing it off. This is used by the IRS in tax.
What is Current Expected Credit Losses (CECL)?
This is the current amount that needs to be determined as uncollectable, and should be based on:
Past experiences
Current conditions
Future expectations
Is the allowance for doubtful accounts a debit or credit balance?
It’s a credit balance, it is a contra asset account, and will decrease the AR balance. You debit bad debt expense to record the expense, and credit ADA to reduce the AR balance.
What is the aging of accounts receivable method for determining bad debt expense?
You get an AR aging schedule and you see the days something is outstanding. And then you base your ADA percentage based on the number of dates. For example:
0-30 - 1%
31-60 - 3%
etc.
How do you write off accounts receivable?
One you record the bad debt expense, you then debit ADA and credit AR to remove the AR and ADA.
What entry do you make when someone pays on an account that was previously written off?
Debit AR, and CR ADA. Basically you hit the undo button and make the entry again.
And when you get the cash, debit Cash and credit AR.
What is pledging for accounts receivables?
That is when you use your AR as collateral for a loan.
What is factoring for accounts receivables?
This is when someone takes their AR, and sells it to someone else, normally for cash. Could be a number of reasons why they do this, but normally it’s because the company doesn’t want to collect or they are not good at collecting from customers, so they sell it to someone else so they can do it.
What is factoring without recourse?
That means when you sell the AR, the buyer assumes all risk with the purchase. So if the customers do not pay, then the buyer assumes all that risk.
DR: Cash
DR: Due from factor - This is the amount the factor will pay later, since they do not pay all up front.
DR: Loss on sale of receivable - You are not going to get your receivables dollar for dollar. You are going to get less, since they assume more risk.
CR: AR
The point of the due from factor is like a security deposit. They pay that if they collect, but if they do not, then they don’t pay the remaining amount.
