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29 Cards in this Set

  • Front
  • Back
Accounts Receivable
The current asset resulting from a sale or service executed on a credit basis.
To record sale on account...
Credit Accounts Receivable
Debit Sales Revenue
To record collection of cash from customer...
Credit Cash
Debit Accounts Receivable
Losses from Account Receivable
Businesses extend credit to increase sales volume, but understand that they will likely not collect 100% of their outstanding accounts receivable. Credit losses are considered an operating cost and are debited to bad debt expense.
Allowance Method
GAAP requires an estimate of bad debt expenses at the time of the revenue recognition even though the actual accounts to be written off are unknown at this time. The estimate results in an adjusting entry to the contra-asset account Allowance for Doubtful Accounts
Assume Scripps Company estimates its bad debts expense for its first year of operations to be $5,000. What would you do to record bad debts expense for the year?
Debit Bad Debt Expense $5,000
Credit Allowance for doubtful accounts $5,000
The allowance for doubtful accounts is a...
contra-asset account with a normal credit balance
The allowance account is subtracted from...
gross accounts receivable to yield a net amount.
The company will write off a receivable...
when it is determined the amount will not be collected.
The write-off will not affect either...
expense or total assets, the entry simply cleans up the accounts receivable account.
To write off an account deemed uncollectible...
Debit Allowance for doubtful accounts
Credit Accounts receivable
Recovery of accounts written off
Two entries will be recorded:
1. Reverse to original write-off
2. Collect the Cash
To write off uncollectable account...
Debit Allowance for doubtful accounts
Credit Accounts Receivable
To reinstate previously written off account...
Debit Accounts Receivable
Credit Allowance for doubtful accounts
To record collect of cash on a account...
Debit Cash
Credit Accounts Receivable
Percentage of Sales Method
Estimates bad debt expense as a percentage of credit sales for a given period.
Percentage used is usually based on historical past
credit losses
Assume Scripps Company has 2013 credit sales of
$700,000 and past experience is that three percent
of these sales will not be ultimately collected. What is the bad debt expense? What is credited and debited to record the bad debts
expense estimate for the year?
Bad debts expense is calculated as $700,000 x .03 =
$21,000
Debit Bad debt expense $21,000
Credit Allowance for doubtful accounts $21,000
Accounts Receivable Aging Method
Estimates the allowance for doubtful accounts as a percentage of the outstanding accounts receivable.
Typically use historical probabilities to help calculate the allowance required.
To record bad debts expense for the period...
Debit Bad Debts Expense
Credit Allowance for doubtful accounts
Notes Receivable
Often used in sales transaction when the credit period is longer than the 30-60 day period common for accounts receivable
Key Characteristics of Notes Receivable
A fixed due date or on demand
A certain principal sum to be paid
An interest rate usually stated as an annual rate
Interest Calculation
Interest = Principal x Interest rate x Interest time
Assume a 3 month note for $10,000 at an annual
interest rate of 6 percent, what is the interest?
Interest = $10,000 x .06 x 3/12 = $150
To record the previously computed interest of $150,
the maker of the note would record the following
entry:
Debit Interest receivable $150
Credit Interest Income $150
Analyzing Receivables
A key measure of analyzing receivables is
determining the speed of collection. Two ratios, the
accounts receivable turnover and the average
collection period are commonly calculated.
Accounts Receivable Turnover
Net Sales
________________
Average Accounts Receivable
Average Collection Period
365
____________
Accounts Receivable Turnover
Factoring the Receivable
A company can speed up the collection of cash on
accounts and notes receivable by selling the
receivables. This is called factoring the receivable.
Direct Write-Off Method
Doubtful accounts are charged to bad debt expense in
the period they are determined to be
uncollectible.