Chapter 5 Receivables and sales
services on account
credit service transactions are also called services on account.
contra revenue
Both sales returns and sales allowances are classified as contra revenues. A contra revenue account is an account with a balance that is opposite, or "contra," to that of its related revenue account. The reason we use a contra revenue account is to keep a record of the total revenue earned separate from the reduction due to subsequent sales returns or sales allowances.
AGING OF ACCOUNTS RECEIVABLE method
A more accurate method than assuming a single percentage uncollectible for all accounts is to consider the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts. This is known as the aging method. For instance, accounts that are 120 days past due are older than accounts that are 60 days past due. The older the account, the less likely it is to be collected.
how and when to adjust for estimated uncollectible accounts
Adjusting for estimates of future uncollectible accounts matches expenses (bad debts) in the same period as the revenues (credit sales) they help to generate.
sales discount
Unlike a trade discount, a sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. It's a discount intended to provide incentive for quick payment.
notes receivable
When receivables are accompanied by formal credit arrangements made with written debt instruments (or notes), we refer to them as notes receivable
credit sales
Credit sales Credit sales: Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account. transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future.
Sales on account
Credit sales transactions are also known as sales on account.
discount terms
Discount terms, such as 2/10, n/30, are a shorthand way to communicate the amount of the discount and the time period within which it's available
sales return
If a customer returns a product, we call that a sales return
contra revenue normal debit balance
Like expenses, contra revenues have normal debit balances and reduce the reported amount of net income. However, contra revenues represent reductions of revenues, whereas expenses represent the separate costs of generating revenues.
net sales
Net revenues are also often referred to as net sales.
net revenues
Net revenues refer to a company's total revenues less any amounts for discounts, returns, and allowances. We discuss these items next.
nontrade receivables
Nontrade receivables are receivables that originate from sources other than customers. They include tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees
why record estimate allowance for uncollectible accounts?
Recording an allowance for uncollectible accounts correctly reports accounts receivable at their net realizable value.
sales allowance
Reduction in customer balance. In other cases, the customer does not return the product or service, but the seller reduces the customer's balance owed to provide at least a partial adjustment of the amount the customer owes. This adjustment is called a sales allowance
3 contra revenue accounts
Sales discounts, returns, and allowances are contra revenue accounts. We subtract the balances in these accounts from total revenues when calculating net revenues.
write off bad debt
Students often mistakenly record bad debt expense when they write off an uncollectible account. The bad debt expense was recorded in a prior year at the time of estimating uncollectible accounts.
net accounts receivable aka net realizable value
The difference between total accounts receivable and the allowance for uncollectible accounts is referred to as net accounts receivable
trade receivables
The legal right to receive cash is valuable and represents an asset of the company. This asset is referred to as accounts receivable (sometimes called trade receivables)
trade discounts
Trade discounts represent a reduction in the listed price of a product or service.
estimate sales discounts, returns and allowances in advance.
at the end of 2018 the company must estimate any additional discounts, returns, and allowances that will occur in 2019 as a result of sales transactions in 2018. The reason is that some activities associated with sales transactions in 2018 will not occur until 2019 but will affect the final amount of cash received from customers. Continuing our example, suppose the company estimates an additional $1,000 in sales discounts, $2,000 in sales returns, and $3,000 in sales allowances in 2019 associated with sales in 2018. These estimates represent the expectation of less cash to be received, so according to the revenue recognition standard, we need to reduce revenue in 2018 for their amounts as well.