Receivables Flashcards
Accounts receivable
Amounts due from customers for credit sales. Also referred to as trade receivables.
What are the two most common receivables?
Accounts receivable and notes receivable.
What are bad debts?
The accounts of customers who do not pay what they’ve promised to pay. The amount is an expense of selling on credit. Also called uncollectible accounts.
What is the allowance method of accounting for bad debts?
1) Estimates and reports bad debt expense from credit sales during the period of the sales
2) Reports accounts receivable as the amount of cash proceeds that are expected from their collection
Describe allowance for doubtful accounts
A contra asset account with a balance equal to the estimated amount of accounts receivable that will be uncollectible.
Realizable value
The estimated amount to be realized in cash collections from customers
How is Allowance for Doubtful Accounts reported on the balance sheet?
It’s subtracted from accounts receivable to show the realizable value
How is the adjusting entry recorded for bad debt at the end of the period?
Debit to Bad Debt Expense
Credit to Allowance for Doubtful Accounts
What is the direct write-off method?
Records the loss from an uncollectible account receivable at the time it is determined to be uncollectible. No attempt is made to estimate uncollectible accounts or bad debt expense. Doesn’t satisfy GAAP.
What are the two approaches for estimating bad debt expense?
1) Percent of Sales approach (Income Statement approach)
2) Accounts Receivable approach (Balance Sheet approach)
- Percent of Accounts Receivable
- Aging of Accounts Receivable
What idea is the Percent of Sales approach (Income statement approach) based on?
Based on the idea that a percentage of a company’s credit sales for the period are uncollectible.
What idea is the Accounts Receivable approach (Balance sheet approach) based on?
Based on the idea that some portion of the end-of-period accounts receivable balance is uncollectible.
What is the objective of the Accounts Receivable approach?
To make the AFDA balance equal to the portion of estimated uncollectible accounts receivable.
How is the Percent of Accounts Receivable method calculated?
Total amount of outstanding receivables is multiplied by an estimated percent. The adjusting entry is made to bring the balance of AFDA to equal this amount.
How is the Aging of Accounts Receivable method calculated?
Accounts are grouped by how much time has past since they were created. Estimated rates of uncollectibility are applied to each group and totaled to get the required balance of AFDA.
