Topic 9: Accounting for Receivables and Payables

Question 1

What are the 3 main types of receivables?

Answer 1

1. Accounts Receivable
2. Bills Receivable
3. Other Receivables

Question 2

Is Bad Debt Expense Debited or Credited?

Answer 2

Debited

Question 3

What is the Contra Asset Account that is Credited with Bad Debt Expense? I.e., Dr Bad Debt Expense, Cr …?

Answer 3

Allowance for Bad Debts.

Question 4

What is a Contra Account?

Answer 4

It is an account used in a General Ledger to reduce the value of a related account. Its normal balance is the opposite of its related account.

Question 5

What are the 2 methods used under the Allowance Method?

Answer 5

1. % of (Credit) Sales Method
2. Ageing of Accounts Receivable Method

Question 6

What is the % of (Credit) Sales Approach?

Answer 6

It determines bad debts as a percentage of net credit sales. This is referred to as the Income Statement approach.

Question 7

What is the Ageing the Accounts Receivable Approach?

Answer 7

It analyses the age of its Accounts Receivable and determines the probability of collecting these accounts. This is referred to as Balance Sheet approach.

Question 8

What is Writing Off Bad Debt?

Answer 8

When an amount is identified as uncollectable, the bad debt is written off.

Question 9

What are the 3 ratios for an entity’s liquidity?

Answer 9

1. Acid-Test or Quick Ratio
2. Accounts Receivable Turnover Ratio
3. Day’s Sales in Receivables Ratio

Question 10

What is the Acid Test Ratio? (Explanation and formula)

Answer 10

It provides a precise measure of a firms’ ability to pay its debts.
Acid Test = (Cash + Short Term Investment = Net Current Receivables) / Total Current Liabilities

Question 11

What is the Accounts Receivable Turnover Ratio? (Explanation and formula)

Answer 11

It tells the business how many times it sells and collects average Accounts Receivable during the period.
Accounts Receivable Turnover = Net Credit Sales / Average Net Accounts Receivable

Question 12

What is the Day’s in Receivables Ratio? (Explanation and formula)

Answer 12

It provides a good indication of the continuing efficiency and effectiveness of an entity’s receivables collection policies and activities.
Days Sales in Receivables = Average Net Accounts Receivables / One Days Sale
Where:
One Days Sales = Annual Net Credit Sales / 365
and
Average Net Accounts Receivable = (Beginning Net Receivable + Ending Net Receivables) / 2

Question 13

What is Bad Debt?

Answer 13

Bad debt is any loan or outstanding balance that a business deems uncollectable.

Question 14

What is Allowance for Bad Debts?

Answer 14

It is a valuation account used to estimate the amount of a firm’s receivables that may ultimately be uncollectable.