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17 Cards in this Set
- Front
- Back
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Reasons why businesses allow customers to use 3rd party credit cards:
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Seller doesn't have to make credit decisions, seller avoids risk, typically receives cash, variety of options.
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When customers do not pay their accounts, these uncollectible accounts are called:
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Bad debts
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What are the two methods for uncollectible accounts:
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-Direct write off method
-Allowance methods |
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Direct write-off method-
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records the loss from an uncollectible account when it is determined that is is uncollectible. violates the matching principle and doesn't follow GAAP
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Allowance methods
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match the estimated loss from uncollectible accounts against the sales they helped produce. GAAP
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Advantages of allowance methods:
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-records estimated bad debt expense when the related sales are recorded.
-reports accounts receivable on balance sheet at the estimated amount of cash to be collected. |
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Realizable Value:
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the expected proceeds from converting an asset to cash
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Two ways of estimating bad debt expense using the allowance method:
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-percent of sales method
-accounts receivable method |
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Formula for percent of sales method:
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credit sales X % estimated to be uncollectible for period
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The percentage of accounts receivable method-
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assumes that a given percentage of a company's receivables are uncollectible.
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Aging of accounts receivable method
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receivables are classified based on how long it is past their due date.
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A promissory note is a..
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written promise to pay a specified amount (principal), and related interest.
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The maturity date is..
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the date the note must be repaid.
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Formula for computing interest
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principal of note X annual interest rate X time expressed in years
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Formula for Accts. Rec. Turnover
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Net Sales / Average accounts rec.
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Companies will dispose of receivables for two primary reasons:
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-the need for cash
-a desire to not be involved in collection activities |
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BUyer called a factor, charges a company a...
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factoring fee
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