Accounting Exam 2

temporary accounts that get zeroed out at end of period into retained earnings:

bad debt expense depreciation expense sales revenue

2 steps required when using the allowance method:

1. make an end-of-period adjustment to record the estimated bad debts 2. write-off specific customer balances when it is known they will not pay

which is more accurate: percentage of credit sales or aging of accounts receivable

aging of accounts receivable

3 things needed to calculate interest

annual interest rate, time covered, principle

the allowance method requires that

bad debt expense be recorded in the same period as the related credit sales, allowances for doubtful accounts be netted against accounts receivable

the adjusting entry to record the allowances for doubtful accounts includes:

debit to bad debt expense credit to allowance for doubtful accounts

aging of accounts receivable method:

based on the amount of days the receivables have been unpaid. (when determining the amount of the allowances for doubtful accounts, the older ones are assigned a higher percent)

using the allowance method, which is the correct adjusting entry to to record bad debt expense?

debit bad debt expense credit allowances for doubtful accounts

the journal entry for the direct write-off method includes a

debit to bad debt expense credit to accounts receivable

entry to record lending 1,000 to an employee at a 6% rate includes a

debit to notes receivable 1000 credit to cash 1000 (interest revenue is not recorded until until time passes and its earned/ accrued)

which method is not acceptable under GAAP

direct write off

notes receivable are:

interest bearing, formal written agreements, have a stronger legal claim than accounts receivable

why is the direct write-off method illegal under GAAP

it violates the expense recognition principle

allowance for doubtful accounts is a

permanent account so its balance carries forward to the next accounting period.

collection of a previously written off account is called a

recovery

for billing and collection purposes, companies keep a separate accounts receivable account for each customer called a

subsidiary account

bad debt expense is a

temporary account so it is closed/ zeroed out at the end of the accounting period

what is recorded with a debit to cash and a credit to notes receivable

the receipt of the principle payment

the estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?

the same period as credit sales

when a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?

an adjusting entry at the end of the current period to accrue the interest earned

a contra-asset account such allowances for doubtful accounts or accumulated depreciation have a normal balance of _____ and cause total assets to ______

credit decrease

the allowances for doubtful accounts is ____ when specific uncollectable accounts are written-off

debited

the allowance method ______ net income and net accounts receivable for estimated bad debt

decreases

the effect of the adjusting entry is to:

reduce net income by debiting bad debt expense and reduce net accounts receivable by crediting allowance for doubtful accounts.

the adjusting entry to record the allowances for doubtful accounts causes total

stockholder's equity to decrease assets to decrease