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Flashcards in Chapter 8 powerpoint Deck (44):

Accounts Receivable

The amounts that customers owe on account, resulting from a sale of goods or services

*expected to be receivedin 30-60 days


Notes Receivable

The claims for which formal instruments of credit are issued as evidence of the debt; the creditor usually requires the debtor to pay interest

*extend for 60-90 days or longer


Trade Receivables

Accounts and Notes Receivable that result from sales transactions


Other Receivables

Non-Trade Receivables, such as Interest Receivable, Loans to Company Officers, Advances to Employees, Income Taxes Refundable

Do not result form operations


Creating of sales Returns and Allowances line rather than reducing Revenue

increases transparency and usefulness for users


Estimated Uncollectibles

The "estimated" amount of claims on customers that companies expect will be uncollectible in the future


Write-off of Uncollectible Account

The "actual" losses from uncollectibles

*company exhausts all means of collecting a past-due account and collection appears unlikely

*The customer is unable to pay to the company the amount due


Net Realizable Value

The net amount a company expects to receive in cash from receivables

Accounts Receivable - Allowance for doubtful accounts (estimated uncollectibles)


Two methods to record uncollectible account:

1. Direct write-off method

2. Allowance method


Bad Debts Expense

An operating expense on the income statement

Records the resulting losses from uncollectible accounts


Direct Write-Off Method

Bad debts are not estimated and accounts are written-off when deemd uncollectible

Bad debt expense will show only Actual Losses

Accounts Receivable is reported at its gross amount on the balance sheet


Journal Entry to Record Uncollectibles Using Direct Write-Off Method

Bad Debts expense               XXX

                 Accounts receivable       XXX


Direct Write-Off Method NOT acceptable under U.S GAAP because:

Does not match revenues to expenses, since revenue was earned and recorded prior to determining the uncollectible amount (expense recognition principle)

There is no way to tell the amount of the Accounts Receivable balance that will actually be realized on the balance sheet since we are directly crediting accounts receivable


Allowance Method

Company estimates the value of accounts that will be uncollectible at the end of every reporting period

*follows the expense recognition principle


Journal Entry for "Estimation of Uncollectibles"

Bad Debts Expense               XXX

                   Allowance for Doubtful Accounts     XXX


Allowance for Doubtful Accounts

Contra asset account -----------Gives users a more accurate picture of the accounts receivable asset

By crediting allowance for doubtful accounts instead of Accounts receivable, accounts receivable is displayed at its cash net realizable value on the balance sheet


Bad debts expense classified as _______________

an operating expense on the income statement


Journal Entry for a Write-off under Allowance Method

Allowance of Doubtful Accounts  XXX

                        Accounts Receivable         XXX


Journal Entry: If previous written of account is later collected (Allowance Method)

Accounts Receivable                    XXX    

        Allowance for Doubtful Accounts        XXX 

Cash                         XXX

              Accounts Receivable          XXX


Two methods to estimate balance of allowance for doubful accounts


1. Percentage of Receivables Method

2. Aging schedule - more accurate estimate


Percentage of Receivables Method

Take a percentage of the total Accounts Receivable to estimate the amount uncollectible


Journal Entry for Allowance for Doubtful Accounts Adjustment

Bad Debts Expense         XXX                            

Allowance for Doubtful Accounts    XXX


Notes Receivable

A promissory is a written promise to pay a specified amount of money on demand or at a definite time

*it is a formal credit instrument

*It is considered notes receivable

*A company generally receives both principle amount plus interest(revenue)


Promissory notes may be used:

When individuals and companies lend or borrow money

When the amount of the transaction and the credit period exceed normal limits

In settlement of accounts receivable


Maturity Date of a Notes Receivable

1. On demand

2. On a Stated Date

3. At the End of a Started Period of Time

Hint: in counting, omit the date the note is issued but include the due date



Computing Interest

Face Value of Note x Annual interest rate x time in terms of one year (360 days)


Recognizing Notes Receivable

A note receivable is recognized when it is formally accepted by the company

Initially recorded at face value


Interest revenue in notes receivable

Not reported when the company accepts the note, because the revenue recognition principle does not recognize revenue until earned

Interest is earned (accrued) as time passes


Measuring Notes Receivable

Valuing short-term notes is the same as valuing accounts receivable

Notes Receivable are reported at their cash (net) realizable value and have an allowane account (allowance for d a)


Journal entry when accept a Note Receivable

Notes Receivable   XXX

              Accounts Receivable   XXX


Amount due at maturity

The face value of the note plus interest for the length of time specified on the note



Journal Entry when disposing honored notes receivalble

Cash           XXX       

                  N/R  XXX

                        Interest Revenue XXX


Net Credit Sales

Net Sales - Cash Sales


Notes Receivable may be sold

A company would do this to speed up the collection of cash



The maker of the note may default (dishonored)

A dishonored note is a note that is not paid in full at maturity

Company may negotiate new terms to make it easier to repay debt



If a company has significant __________________, it must discuss this rks in the notes to financial statements

concentrations of credit risk


Receivables turnover ratio

Net Credit Sales

Average Net Receivables


Average collection period


Receivables Turnover ratio


Accounts Receivable turnover info:

To assess the liquidity of the receivables

To measure the number of times, on average, a company collects receivables during the period



Average Collection Period Info:

To assess the effectiveness of credit and collection policies

The collection period should not exceed credit term period


3 reasons for sale of receivable

Size of receivable

receivables may be the only reasonable source of cash

Billing and collection of receivables are often time consuming and costly


Captive Finance Companies

Companies (subsidary company) owned by the company selling the product (parent company)

Purpose: to encourage the sale of the company's products by assuring financing to buyers

avoids parent company holding large amounts of receivables


Journal entry when company factors 600,000 of receivables at 2 percent service charge

Cash     588,000

Service charge exp. 12,000

                         Accounts Receivable    600,000