Chapter 8 powerpoint Flashcards
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:
- Direct write-off method
- 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
