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34 Cards in this Set
- Front
- Back
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Accounts receivable |
Cost of goods sold entries are omitted |
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Bad debt expense |
Losses that result from extending credit ex. $200 balance as uncollectible Bad debt exp 200 Acct rec 200 |
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Direct write-off method |
Charging the loss of bad debt exp when receivables are uncollectible |
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Allowance method |
Estimating uncollectible acts at the end of each period - Ensures receivables are stated at their cash realizable value on the balance sheet |
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Cash (net) realizable value |
Net amt a company expects to receive in cash from receivables |
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Allowance method rules |
1) Companies estimate uncollectible acct rec and match them against revs in the same period eve are recorded 2) Record estimated uncollectible as a (debit) to bad debt exp and a (credit) to allowance for doubtful accounts 3) Companies (debit) actual uncollectibles to allowance for doubtful accts and (credit them to acct rec |
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Allowance method Ex. |
$12,000 uncollectible Bad debt exp 12,000 Allowance for doubt 12,000 *Allowance for doubtful accounts is a contra rec acct* *Companies do not close allowance for doubtful acts at the end of the fiscal year* |
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Allowance method |
-Company debits every bad debt write-off to the allowance account and NOT bad debt exp -Exp has already been recognized in the adjustment ex. Ware pays 4500 that tbell had written off July 1 Acct Rec 500 July 1 Allowance for doubtful acct 500 July 1 Cash 500 July 1 Acct Rec 500 |
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Percentage of receivables basis |
Management establishes a % relationship between the amt of rec and expected losses from uncollectible accts *The amt of bad debt exp that should be recorded in the adjusting entry is the difference between the required balance and the existing balance in the allowance account * |
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Notes Receivable |
YEAH! |
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Promissory Notes |
Written promise to pay a specific amt of money on demand or at a definite time -Used when individuals and companies lend/borrow money -When the amt of the transaction and the credit period exceed normal limits - In settlement of accts rec Maker: The party promising to pay Payee: Party to whom payment is to be made |
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5 issues in accting for notes receivable |
1) Determining the maturity date 2) Computing interest 3) Recognizing notes rec 4) Valuing notes rec 5) Disposing of notes rec |
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Determining the maturity date |
1) can be on demand 2) Stated date 3) at the end of a stated period |
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Computing interest |
*(Face value) x (annual interest rate) x (time in terms of 1 year) = interest* *When counting days, omit the date issued but include the due date* |
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Recognizing notes rec |
Record the note rec at its face value ex. $1000, 8% promissory note, 2 month to settle an open account May 1 Notes Rec 1000 May 1 Acct rec 1000 |
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Valuing notes receivable |
Companies report short-term notes receivable at their cash (net) realizable value |
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Disposing of notes rec |
Honored- a note that was paid in full by its maturity date |
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Maturity |
Amount due at maturity- face value of note plus interest for the length of time specified Maturity value- Amt due ex. lends 10000, 5 month, 9% interest note (10000 x .09 x 5/12) = 375 10000 + 375 = $10375 Cash 10,375 Notes rec 10000 Interest rev 350 |
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Dishonored (defaulted) note |
Note that is NOT paid in full by maturity |
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Managing rec |
1) Determining to whom to extend credit 2) Establish a payment period 3) Monitor collections 4) Evaluate the liquidity of rec 5) Accelerate cash receipts from rec when necessary |
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Extending credit |
-Companies increase sales by being generous with their credit policy -Relax credit standards to new customers |
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Establishing payment period |
Payment period constant with competitors |
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Monitoring collections |
-Companies should prepare an accts rec aging schedule at least monthly - Aging schedule identifies problem accts that the company needs to pursue - Concentration of credit risk- Threat of nonpayment from a single large customer that could adversely affect the financial health of the company |
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Acct receivable turnover |
*Net credit sales / Average net acct rec* |
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Average collection period |
*365 / acct receivable turnover* |
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Accelerating cash receipts |
-Captive finance companies- companies that are owned by the company selling the product -Companies may sell receivables because they may be the only reasonable source of cash -Billing and collection are often time-consuming and costly |
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Sale of receivables to a factor |
Factor- A finance company or bank that buys receivables from businesses for a fee that collects payment directly from the customer |
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National credit card sales |
-A retailers acceptance of a national credit card is another form of selling-factoring the receivable by the retailer
-Retailers consider sales resulting from visa (etc) as cash sales |
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Merchandiser |
Records accounts receivable at point of sale Ex. July 1 Jordan sells $1000 on 2/10 basis Accts rec 1000 Sales rev 1000 July 5, polo returns $100 of goods Sales returns/allow 100 Acct rec 100 July 11, payment is made Cash 882 Discounts rec 18 Accts rec 900 |
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Using a company credit card |
1. You use JC penny credit card to buy $300 of G Acct rec 300 Sales rec 300 2. Assume you owe $300 with a 1.5% charge Cash 295 Discounts 5 Acct rec 300 |
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Direct write off method |
NOT ACCEPTED!!! -Write off receivables from books when uncollectibles are recognized -(debit) to bad debt exp -(credit) to acct rec UNDESIRABLE |
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Allowance method |
-Estimate uncollectible balance in the same year it occurs -(Debit) to bad debt exp -(Credit) allowance for doubtful acct -When account is written off, you (debit) allowances for doubtful acct and (credit) acct rec Bad debt exp xxx Allowance for doubt xxx |
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Allowance method |
*Accts rec (total) - allowance for doubtful exp (total) = Net Realizable value* *Write offs are debits to allowance for doubtful exp* |
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Interest |
*Interest= face value x annual interest rate x time in terms of 1 year* |
