accounting chapter 5

allowance method

-bad debt expense is only recorded on time each year -debit bad debt expense -credit allowance for bad debt -bad debt expense is recorded at the end of each year is an estimate about what you think you're going to collect

how does a company record a trade discount?

When recording a transaction, companies don't recognize trade discounts directly. Instead, they recognize trade discounts indirectly by recording the sale at the discounted price.

what type of account do we record sales discounts in?

in a contra revenue account

2/10

indicates a customer will receive a 2% discount if the amount owed is paid in 10 days

how do you calculate interest?

interest = face value X annual interest rate X fraction of the year

sales discount

represent 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

receivables turnover ration

shows the number of times during a year that the average accounts receivable balance is collected = net credit sales divided by average accounts receivable

net realizable value

the amount of cash a firm expects to collect

accounts receivable

the amount of cash owed to a company by its customers from the sale of products or services on account

average collection period

the approximate number of days the average accounts receivable balance is outstanding = 365 days divided by receivables turnover ratio

net accounts receivable

the difference between total accounts receivable and the allowance for uncollectible accounts

credit sales

transfer 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, service on account

sales return

when a customer returns a product, record: reduce the customer's account balance if the sale was on account OR issue a cash refund if the sale was for cash

n/30

"net thirty" if a customer does NOT take the discount, full payment net of any returns or allowances is due within 30 days

what type of effects can uncollectible accounts have?

1. reducing assets (accounts receivable) by an estimate of the amount we don't expect to collect 2. increasing expenses (bad debt expense) to reflect the cost of offering credit to customers

sales allowance

a reduction or partial refund

contra revenue account

an account with a balance that is opposite, or "contra", to that of its related revenue account

uncollectible accounts / bad debts

customers' accounts that we no longer consider collectible