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29 Cards in this Set
- Front
- Back
Accounts Receivable
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The current asset resulting from a sale or service executed on a credit basis.
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To record sale on account...
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Credit Accounts Receivable
Debit Sales Revenue |
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To record collection of cash from customer...
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Credit Cash
Debit Accounts Receivable |
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Losses from Account Receivable
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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.
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Allowance Method
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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
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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?
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Debit Bad Debt Expense $5,000
Credit Allowance for doubtful accounts $5,000 |
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The allowance for doubtful accounts is a...
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contra-asset account with a normal credit balance
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The allowance account is subtracted from...
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gross accounts receivable to yield a net amount.
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The company will write off a receivable...
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when it is determined the amount will not be collected.
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The write-off will not affect either...
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expense or total assets, the entry simply cleans up the accounts receivable account.
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To write off an account deemed uncollectible...
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Debit Allowance for doubtful accounts
Credit Accounts receivable |
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Recovery of accounts written off
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Two entries will be recorded:
1. Reverse to original write-off 2. Collect the Cash |
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To write off uncollectable account...
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Debit Allowance for doubtful accounts
Credit Accounts Receivable |
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To reinstate previously written off account...
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Debit Accounts Receivable
Credit Allowance for doubtful accounts |
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To record collect of cash on a account...
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Debit Cash
Credit Accounts Receivable |
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Percentage of Sales Method
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Estimates bad debt expense as a percentage of credit sales for a given period.
Percentage used is usually based on historical past credit losses |
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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 |
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Accounts Receivable Aging Method
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Estimates the allowance for doubtful accounts as a percentage of the outstanding accounts receivable.
Typically use historical probabilities to help calculate the allowance required. |
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To record bad debts expense for the period...
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Debit Bad Debts Expense
Credit Allowance for doubtful accounts |
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Notes Receivable
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Often used in sales transaction when the credit period is longer than the 30-60 day period common for accounts receivable
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Key Characteristics of Notes Receivable
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A fixed due date or on demand
A certain principal sum to be paid An interest rate usually stated as an annual rate |
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Interest Calculation
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Interest = Principal x Interest rate x Interest time
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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
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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 |
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Analyzing Receivables
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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. |
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Accounts Receivable Turnover
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Net Sales
________________ Average Accounts Receivable |
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Average Collection Period
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365
____________ Accounts Receivable Turnover |
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Factoring the Receivable
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A company can speed up the collection of cash on
accounts and notes receivable by selling the receivables. This is called factoring the receivable. |
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Direct Write-Off Method
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Doubtful accounts are charged to bad debt expense in
the period they are determined to be uncollectible. |