Accounting Ch 7 8 9

Accounts Receivables:

-amounts due from individuals and companies(oral promises to pay from customers) -expected to be collected in cash -non-interest bearing and one of the most liquid assets of the company

Valuation Issues:

-extending credit to customers results in increased sales: therefore most companies will sell to customers on credit -some customers will not pay their bills -GAAP requires that bad debit expense be recorded in the same period as the corresponding sale under the matching principle -receivables are valued at net realizable value on the balance sheet. NRV is the net amount expected to be received in cash -Net Realizable Value=Accounts Receivable-Allowance for uncollected/doubtful accounts

Allowance Method:

Involves estimating uncollectible accounts at the end of each period in AJE. Allowance method complies with the matching principle and GAAP. Additionally, A/R on the balance sheet are stated at net realizable value (the amount expected to be collectible in cash) and therefore is a conservative estimate of accounts receivable. There are two different ways to use the allowance method: the percentage of sales method and the percentage of receivables method.

types of receivables:

accounts receivable notes receivable non-trade receivables

non-trade receivables:

arise from other sources (interest receivable, taxes receivable, advances to employees)

Allowance for doubtful accounts:

contra asset account normal credit balance allowance account represents an estimate of the dollar amount of A/R the company does not expect to collect from customers in the future

Methods for Accounting for uncollected accounts:

direct write off method allowance method

Notes Receivables:

formal written promises agreement from individual or company to receive money in the future

Why does the Direct Write off method not follow GAAP

it violates expense recognition principle and violates conservatism since A/R is overstates because it includes customer accounts who may not pay in the future

Direct Write off Method:

method that writes off a customer's account when it becomes uncollectible. Violates GAAP since it does not comply with the principle of matching (bad debit expense is often recorded in a period different from the period the revenue was recorded). Additionally, the accounts receivable reported on the balance sheet if overstated. The direct write of method can be used if bad debit is immaterial or insignificant.

allowance for doubtful accounts

normal credit balance but can sometimes be a debit when a company writes off more customer accounts than was previously estimated

Recognition Issues:

recognition of a/r is straightforward and guided by the revenue recognition principle Receivables can be reduced due to sales discounts or reduced by sales returns and allowances

Merchandising or Manufacturing Companies recognition:

recognize at point of sale when the goods are exchanged or when the title or the goods is transferred

Service Organizations Recognition:

recognize receivables when services are performed on account

Net Realizable Value:

represents what the company estimates it can collect in A/R from customers and this amount is what is added to total assets on the balance sheet. NRV=A/R-Allowance for Doubtful Accounts

Subsidiary ledger or sub ledgers:

separate ledger where more detailed information is kept about certain types of accounts. A/R subsidiary ledger would have information on specific customer, maximum credit they are extended, what has been purchased on account, any payments made on account, balance due and age of receivable.