Accounting quiz #4 (chapter 8)
recovery of uncollectible account
1) reverse entry made in writing off account dr. accounts receivable cr. allowance for doubtful accounts 2) journalize collection normally dr. cash cr. accounts receivable
why sale of receivables?
1. *size of receivables*: captive finance companies (owned by company selling the product--encourage sale of companies products by assuring financing to buyers) 2. *may be only reasonable source of cash* 3. *billing and collecting are time consuming and costly*: often easier for retailer to sell the receivable to another party that have expertise in billing/collecting ex. master card
allowance method: essential features
1. estimate uncollectible account receivables and match against rev. in same period rev. recorded 2. record at end of period dr. bad debt expense cr. allowance for doubtful accounts 3. records at time specific account written off as uncollectible dr. allowance for doubtful accounts cr. accounts receivable
use promissory note when....
1. individuals/companies lend or borrow money 2. when amount of transaction and credit period exceed normal limits 3. in settlement of accounts receivable
notes receivables issues: disposing of notes receivable
3 parts: 1.honor of notes receivable 2.accrual of interest receivable 3.dishonor of notes receivable
ALL FOR ALLOWANCE METHOD
ALL FOR ALLOWANCE METHOD
ALLOWANCE METHOD OVER
ALLOWANCE METHOD OVER
estimating the allowance: aging the accounts
a table that classifies customer balances by the length of time they've been unpaid then the company applies percentages to each length category and percentages are higher the longer receivables have gone unpaid
estimated uncollectibles on balance sheet
accounts receivable (total) less: allowance for doubtful accounts (estimated uncollectible)
steps in managing accounts receivable: evaluate liquidity of receivables
accounts receivable turnover and average collection period
receivables
amount due from individuals and companies; claims that are expected to be collected in cash; one of companies most liquid and largest assets
average collection period
ave. amount of time that a receivable is outstanding; used to asses effectiveness of company's credit and collection policies 365/accounts receivable turnover
notes receivables issues: determining maturity date
can be stated as demand, on stated date, or at end of a stated period of time-->when period of time a maturity date is agreed upon if stated in months: count from month it's issued if stated in days: count exact days excluding day it was issued but including due date
accounts receivable: company credit cards
charge interest if you pay bill late dr. accounts receivable (interest amount) cr. interest revenue (interest amount)
steps in managing accounts receivable: accelerating cash receipts
companies can see their receivables to another company for cash-->to shorten cash operating cycle "time is money"; "bird in the hand is worth 2 in the bush" (getting cash now is better than later/never)
accounts receivable
customers owe on account; results from sale of goods or services; no written obligation
accounts receivable: merchandiser sells good entry
dr. accounts receivable cr. sales revenue
recording write off of uncollectible account
dr. allowance for doubtful accounts cr. accounts receivable- company's that didn't pay
to record estimated amount uncollectible
dr. bad debt expense cr. allowance for doubtful accounts
accounts receivable: discount entry
dr. cash (total-discount) dr. sales discount (discount) cr. accounts receivable (total originally due)
notes receivables issues: recognizing notes receivable
dr. notes receivable cr. accounts receivable- company paying note if company issued cash in exchange for note credit cash for amt. of loan instead of accounts receivable
notes receivables issues: computing interest
face value of note X annual interest rate X time in terms of one year (/12m or 360d)
allowance method
involves estimating uncollectible accounts at the end of each period; provides better matching of expenses w/ revenues on the income statement; ensures receivable are reported at their cash (net) realizable value on balance sheet *method we use*
steps in managing accounts receivable: establishing payment period
make it consistent with competitors
estimating the allowance: percentage of receivable basis
management establishes a percentage relationship between amount of receivables and expected losses from uncollectible accounts to use multiply by ending balance in accounts receivable to find amount uncollectible
steps in managing accounts receivable: extending credit
need to see who should be extended credit and who shouldn't; to reduce losses require customers to show payment history, have to pay cash on delivery etc.
cash (net) realizable value
net amount a company expects to receive in cash from receivables-->excludes amounts company expects it won't collect for accounts receivable it's *accounts receivable-allowance for doubtful accounts (uncollected receivables)*
other receivables
normally accounted for in separate items on balance sheet ex. interest receivables
direct write off method
not approved by GAAP charge loss to bad debt expense: dr. bad debt expense cr. accounts receivable reduces usefulness of balance sheet and income statement
Dishonor of notes receivable
note that's not paid in full at maturity; may need to renegotiation to make easier to pay but if there's no hope should write off face value of note
trade receivable
notes and accounts receivable that result from sales transactions
maker
party making promise to pay
payee
party to whom payment is made
steps in managing accounts receivable: monitoring collections
prepare accounts receivable aging schedule monthly so you can see problem accounts and make better budget helps find concentration of credit risk
accounts receivable turnover
ratio used to assess the liquidity of receivables; measures # of times on avg. company collects receivables during periods net credit sales/avg. net accounts receivable
estimating the allowance: amount of bad debt expense recorded in adjusting entry
required balance (balance that's expected uncollectible)-existing balance in allowance account (amt. left from last period) you add the existing balance to the required balance if the allowance account has a debit balance
national credit card sales
retailers accept national credit cards (visa, mastercard, etc.) cuz they'll have no bad debt and more sales but they pay a fee to the national credit card to use them entry: dr. cash dr. service charge expense cr. sales revenue
notes receivables issues: valuing notes receivable
same as for accounts receivable; report at cash (net) realizable value
factor/factoring
selling receivables to a factor which is a finance company/bank that buys receivables from businesses for a fee and then collects payments directly from the customer--charge commission entry: dr. cash dr. service charge expense cr. accounts receivable
allowance for doubtful accounts
shows estimate amount of claims on customers that companies expect will become uncollectible in the futre; contra accounts receivable account
uncollectible accounts receivable
some accounts receivable become uncollectible ex. individual gets laid off or business has huge loss in sales
concentration of credit risk
threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of company
accrual of interest receivable
to reflect interest earned but not received (if you prepare financial statement before note due) entry at date of financial statement: dr. interest receivable (amount up to this date) cr. interest revenue entry at date note due: dr. cash (total) cr. notes receivable (original amount of note) cr. interest receivable (interest from previous entry) cr. interest revenue (interest from previous until now)
honor of notes receivable
when maker pays in full by maturity date dr. cash cr. notes receivable cr. interest revenue
bad debt expense
where the losses that result from extending credit (receivable unpaid) are recorded-->this expense increased like crazy when home prices fell and people went into foreclosure and economy in general slowed
notes receivable
written promise for amounts to be received; normally include interest
promissory note
written promise to pay a specified amount of money on demand or at a definite time