Lesson 6 (Accounts Receivable) Flashcards
Which financial statement accounts are affected by the sale of product on the income statement ?
- sales revenue
- cost of goods sold
Which financial statement accounts are affected by the sale of a product in the balance sheet ?
- accounts receivable
- inventory
The realization principle states record revenue when ?
- the earnings process is complete or virtually compete
- there is reasonable certainty as to the collectability of the asset to be received
The earning process is considered complete in the realization principle when ?
goods are sold or when services are performed, even if cash is not collected at the time the good is sold or service performed
If the sale of goods or performance of services occurs prior to the receipt of cash what is it called ?
an accrued revenue and an account receivable is recorded
represents revenue earned from selling inventory ?
sales revenue
Two adjustments to sales revenue are ?
- sales returns & allowances
- sales discounts
result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for a credit or a refund ?
sales returns
result when customers are dissatisfied with merchandise and the seller allows a reduction from the selling price. goods are not returned in this case ?
salles allowances
offer of a cash discount to a credit customer for the prompt payment of a balance due ?
Ex: 3/10, n/30 or read ‘three, ten, net, thirty’
sales discount
What does 3/10, n/30 mean ?
read as ‘three, ten, net, thirty
It means a 3% discount is allowed on all payments made within 10 days. After 10 days there is no discount available, and the remaining balance is due in 30 days
sales returns & allowances and sales discounts are both classified as what accounts ?
contra revenue accounts
(so their normal balance will be on the debit side)
Sales returns & allowances and sales discounts result in what on the income statement ?
a decrease to revenues (specifically sales revenue)
because sales returns & allowances and sales discounts are contra revenue accounts the Normal balance will be on what side ?
debit side
represents cash owed to the company ?
accounts receivable
accounts receivable come about when the company makes a what sale ?
credit sale
Every year the company must record what to acknowledge the fact that not all customers will pay ?
bad debt expense
In which year should bad debt expense be recorded ?
recorded in the same year as the credit sale is made
You record bad debt expense in the same year as the credit sale is made due to what concept ?
the matching concept
(expense are to be recorded in the same year they help to generate revenue. revenue is earned when the sale is made, thus bad debt expense must be recorded in the same year )
What is bad debt expense classified as ?
an estimate
Is bad debt expense recorded in a regular journal entry or an adjusted entry ?
adjusted entry
*bc you debit bad debt expense and credit allowance for doubtful accounts
*classified as an expense account
*found on the income statement
*reduces net income
What is this ?
bad debt expense
*causes a decrease in assets
*classified as a contra asset account
*normal balance is a credit
*found on the balance sheet as a decrease to the accounts receivable
*represents the amount of accounts receivable the company estimates it will not collect
What is this ?
Allowance for doubtful accounts
What happens when the company makes the determination that a specific customer will not pay ?
they must write off the customers accounts receivable
For a write off what would you debit and credit ?
Debit: allowance for doubtful accounts
Credit: accounts receivable
When can a write off occur ?
at any point during the year
represents the actual bad debts of the company
Write off have no effect on ?
the income statement *bc it reduces both accounts receivable and allowance for doubtful accounts by the same amount
does not effect bad debt expense
write offs also have no effect on what ?
Net realization value (NRV)
bc it reduces both components by the same amount
if a customer pays their bills after the company has written-off their account receivable, it is called a ?
recovery
To record a recovery what would you debit and credit ?
debit: cash
credit: allowance for doubtful accounts
Allowance for doubtful accounts t account will have a debit and credit of what ?
debit: write offs
credit: recoveries & bad debt expense
What’s the difference between bad debt expense and write offs ?
bad debt expense is an estimate
write offs are an actual amount
What are the 2 financial statement rations relating to accounts receivable ?
- accounts receivable turnover
- average collection period
measures the number of times, on average, the company collects its accounts receivable ?
accounts receivable turnover
the higher the accounts receivable ratio is for average receivable turnover ratio the ?
faster we are collecting cash from out customers
measures the number of days, on average, between making a sale on credit and collecting our cash from the customer ?
average collection period
the lower the ratio of the average collection period is the ?
the faster you are collecting cash from your credit customers
