Chapter 7 Flashcards
(37 cards)
trade receivables
arise from the sale of products or services to customers
Carried in the Accounts Receivable account
nontrade receivables
arise from other transactions like advances to employees and utility company deposits
nontrade receivables
arise from other transactions like advances to employees and utility company deposits
not directly related to sales of products/services
Bank Card Payment
Debit: cash and service charge
Credit: sales
CC Payment
AR: Debit
Sales: Credit
when cc company pays and we know fee amount
Debit: cash and service charge
Credit: sales
Uncollectable accounts
called bad debt
direct write-off method
a specific account receivable is removed from the accounting records at the time it is finally determined to be uncollectible
Debit: uncollectable accounts receivable
Credit: AR
Immaterial Amount
an item is deemed material if it is large enough to affect the judgment of an informed financial statement user
Allowance methods
account for uncollectible accounts
result in the recording of an estimated bad debts expense in the same period as the related credit sales
the actual write-off in a subsequent period will generally not impact income
allowance method for uncollectibles
A method that estimates uncollectibles as a portion of total receivables and establishes an offsetting contra allowance account
Allowance account
contra asset account
net realizable value
amount of cash expected to be collected on outstanding accounts receivable
accounts receivable minus the allowance for uncollectibles
Determine the allowance account amount
- Percentage of total receivables
anticipate certain amount won’t be collected - Aging Analysis
aging of accounts receivable
stratify receivable according to how long they have been outstanding
apply alternate %’s to different strata
% of total receivables and aging are:
balance sheet approaches
Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts
Balance Sheet Approaches
with balance sheet approaches, the amount of the entry is based upon the needed change in the account (i.e., to go from an existing balance to the balance sheet target amount), and
•the debit is to an expense account, reflecting the added cost associated with the additional amount of anticipated bad debts.
income statement approach
simpler
equally acceptable
estimated % of sales is
Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts
technique merely adds the estimated amount to the Allowance account
Balance Sheet Approaches
with balance sheet approaches, the amount of the entry is based upon the needed change in the account (i.e., to go from an existing balance to the balance sheet target amount), and
•the debit is to an expense account, reflecting the added cost associated with the additional amount of anticipated bad debts.
desired balance
income statement approach
simpler
equally acceptable
estimated % of sales is
Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts
technique merely adds the estimated amount to the Allowance account
entry would be the same even if there was already a balance in the Allowance account. In other words, the income statement approach adds the calculated increment to the allowance, no matter how much may already be in the account from prior periods
Writing off Accounts
debit: allowance for uncollectable accounts
credit: AR
no impact on income statement
no impact on the net realizable value of receivables
Previously written off accounts that pay
- Reversal of write-off
debit: AR
credit: Allowance for Uncollectable Accounts - Record cash collection
debit: cash
credit: AR
seems weird, but another account may default
Accounts Receivable Turnover Ratio
reveals how many times a firm’s receivables are converted to cash during the year
Net Credit Sales / Average Net Accounts Receivable
Days Outstanding
reveals how many days sales are carried in the receivables category:
365 Days / Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio
reveals how many times a firm’s receivables are converted to cash during the year
Net Credit Sales / Average Net Accounts Receivable
compared to industry trends
Early warning sign of potential problems in receivables management and rising bad debt risks.
