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