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Question 1

What is the difference between credit and debit sales?

Answer 1

Credit Sales: The customer buys now and pays later. Recorded as Accounts Receivable. Involves risk of nonpayment and may require collection.

Debit Sales: The customer pays immediately using cash, debit card, or similar. Recorded directly as Cash. No collection risk.

Question 2

Why do businesses allow credit card sales?

Answer 2

• Customers’ credit is evaluated by the card issuer
• Risk of nonpayment is transferred to the card issuer
• Sales increase due to flexible payment options
• Cash collections are faster

Question 3

What are the two methods of accounting for bad debts?

Answer 3

1. Direct Write-Off Method – Bad debts are recorded only when they are clearly uncollectible.
2. Allowance Method – Estimates bad debts in advance and matches them to the same period as the related sales.

Question 4

What is the formula to compute interest on a note?

Answer 4

Interest = Principal × Annual Interest Rate × Time

Question 5

How is time expressed in interest computation?

Answer 5

Days → Use a 360-day year
Months → Use a 12-month year