Accounts receivable

Financial statement ratios relating to accounts receivable

Accounts receivable turnover ratio and average collection period ratio

Effect on net income, NRV, and cash flows from a collection of a credit sale

No effect, decease, increase (operating)

Effect on net income, NRV, and cash flows from a recovery

No effect, decrease, increase (operating)

Does the number you get from the aging schedule represent the bad debt expense estimate

No it represents the required ending credit balance in the allowance for doubtful accounts

The earnings process is considered blank when goods are sold/services performed

Complete

Journal entry for a collection of a credit sale

Debit: cash Credit: A/R

Journal entry for a recovery

Debit: cash Credit: allowance for doubtful accounts

Journal entry for a write off

Debit:allowance for doubtful accounts Credit: accounts receivable

3/10, n/30

"Three, ten, net, thirty" 3% discount is allowed on all payments within 10 days. Rest is due in 39 days

2 adjustments to sales revenue

1. Sales returns and allowances and 2. sales discounts

Indication of how many times during a year a company is turning over or collecting its receivables

Accounts receivable turnover ratio

Net sales revenue / average accounts receivable =

Accounts receivable turnover ratio

To determine the allowance for doubtful accounts always use

A t account

Represent cash owed to the company and come about when the company makes a credit sale(sale on account)

Accounts receivable

Which accounts on the balance sheet are affected by the sale of a product

Accounts receivable and inventory

Measures the number of times on average the company collects its accounts receivable

Accounts receive turnover ratio

If the sale goods/performance of services occurs prior to the receipt of cash it is considered blank and recorded as what

Accrued revenue and account receivable is recorded

In what bad debt expense calculating method does an existing balance in the allowance for doubtful accounts effect the bad debt expense estimate

Aging method

Requires an analysis of accounts receivable balanced by the length of time they have been unpaid. Idea is longer a debit is outstanding the less likely it is to be paid

Aging method

Put accounts receivable into categories by age and assign a % expected be uncollectible to each category

Aging schedule for aging method

Causes a decrease in assets, classified as a contra asset account, normal balance=credit, found on balance sheet as a decrease to A/R, and represents the amount of A/R the company estimates it won't collect

Allowance for doubtful sccounts

When can a write off occur

Any time of the year

Accts receivable at jan. 1 + dec. 31 / 2 =

Average accounts receivable

Measures the number of days on average between making a sale on credit and collecting our cash from the customer

Average collection period

365/accounts receive turnover ratio =

Average collection period (lower is better)

Classified as an expense account, found on the income statement, and reduces net income

Bad debt expense

Not all customers pay their bills and this has an expense for the risk

Bad debt expense

Net sales method formula

Bad debt expense=net credit sales x % expected uncollectible

To record bad debt expense estimate

Debit: bad debts expense Credit: allowance for doubtful accounts

Allowance for doubtful accounts t chart

Debit side: write offs Credit side: beginning balance, recoveries and bad debt expense and ending balance

Journal entry for a credit sale

Debit: A/R Credit: sales revenue

Effect on net income, NRV, and cash flows from a bad debt expense estimate

Decrease, decrease, no effect

What do we do when we write something off

Eliminate the A/R and reduce the allowance for doubtful accounts

Is bad debt expense an estimate or something that is known

Estimate

Higher or lower is better for Accounts receivable turnover ratio

Higher

Reasons for offering sales discounts

Increase sales, speed up collection of cash, minimize likelihood of bad debts

Effect on net income, NRV, and cash flows from a credit sale

Increase, increase, and no effect

Bad debt expense estimate journal entry is ...

Made at the end of every year and is an adjusting entry

Expenses are to be recorded in the same year they help to generate revenues

Matching concept

Net realizable value

NRV=A/R - allowance for doubtful accounts

Bad debt expense is based on a % of current credit sales estimated to be in collectible where the % is based on past experience/patterns

Net credit sales method

Do we know in year 1 what accounts will not be collected in year 2

No

Does the write off effect bad debt expense

No because bad debt expense is estimated at the end of each year and this would lead to double counting

Does a write off of an account have an effect on the net realizable value (nrv)

No because the A/R and allowance are both decreased and leaves the difference between the two the same

Effect on net income, NRV, and cash flows from a write off

No effect for all 3

Two GAAP methods to estimate bad debt expense

Percentage of sales (net sales method) and percentage of receivables(aging method)

Record revenue when the earnings process is complete/virtually complete and reasonable certainty as to the collectibility of the asset to be received

Realization principle

When a customer pays their bill after the company has written off their account receivable

Recovery

Result when customers are dissatisfied with merchandise and the seller allows a reduction in selling price. Goods are not returned

Sales allowances

Offer a cash discount to a credit customer for the prompt payment of a balance due

Sales discounts

Result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund

Sales returns

Both accounts are classified as contra revenue accounts. Result in a decrease to revenues (sales rev) on the income statement. Normal balance=debit

Sales returns and allowances and sales discount

Represents revenue earned from selling inventory

Sales revenue

Which accounts on the income statement are affected by the sale of a product?

Sales revenue and cogs

In which year should bad debt expense be recorded

Same year the credit sale is made due to the matching concept

What happens when the company determines a specific customer won't pay?

They must write off the customer's A/R

Represents the actual bad debts of the company

Write offs