Accounts Receivable Flashcards
Gross method
Records receivables at gross invoices price before cash discount.
Net method
Records receivables at net invoice price after cash discount is taken.
Entry for cash received within discount period (Gross Method)
Cash
Sales discount
Accounts Receivable
Entry for sales discount forfeited (Net Method)
Cash
Sales discount forfeited
Accounts receivable
Entry for direct write-off method
bad debt expense
Accounts receivable
Direct write-off method
Recors bad debt expense only when a specific account receivable is considered uncollectible and is written off. It can be used only when the firm is unable to estimate uncollectible accounts receivable reliably. Most large firms do not use this method.
Allowance method
The allowance method is the method of choice for most large firms and is required under GAAP if uncollectible accounts are probable and estimable. This method records an estimate of bad debt expense at the end of each year in an adjusting entry. An allowance (contra receivable) is created at that time and reduces net accounts receivable.
Allowance method end of period entry
Bad debt expense
allowance for doubtful accounts
entry for write-off of uncollectible accounts
allowance for doubtful accounts
accounts receivable
entry for recovery of accounts previously written off
Accounts receivable
allowance for doubtful accounts
cash
accounts receivable
AR ending
AR beginning + sales -writeoffs - customer collections = AR Ending
Ending allowance balance
Beginning allowance balance + uncollectible accounts expense - write offs + recoveries = ending allowance balance
Aging method
The aging method computes a required ending allowance balance based on the aging schedule.
Describe the income statement approach for bad debts
Estimates bad debts as a percentage of credit sales.
Describe the balance sheet approach for calculating an allowance balance.
Applies a percentage to ending accounts receivable.
Notes Receivable US GAAP
In accordance with US GAAP, all notes are recorded at the present value of future cash flows. The discount rate used in this calculation is the market rate of interest on the date of note creation.
Do current notes need to be measured at present value?
No, they’re reported at face value.
Accrued interest receivable
Refers to the cash amount of interest due. The amount of interest due is based on the contractual interest rate and face value.
What isa the accounting term when factoring with recourse, as accountant for a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
Define factoring
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
Who bears the costs of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
