Accounts Receivable

Uncollectible Account

written-off (asset is moved) and an expense is recognized

What are some advantages of Percentage of Sales Approach?

simplicity and good matching

Allowance method

splits accounting into TWO entries (1. record an estimate of bad debt expense) (2. write-off receivables when they become uncollectible)

What is the problem with the Direct-Write off method?

violates GAAP

Three approaches to Allowance Method

(1) percentage of sales (2) percentage of receivables (3) aging of Accounts Receivable

Net Realizable Value

Accounts receivable - allowance account (represents an estimate of the cash value of accounts receivable)

What are the two methods for accounting for uncollectible accounts?

Direct write-off and allowance

Equation for Net Credit Sales

Gross Credit Sales - Sales Discounts - Sales Returns and Allowances = Net Credit Sales

-Estimates the amount of uncollectible from existing accounts -Allowance account is adjusted to reflect this balance

Percentage of Receivables and Aging of Receivables

-Varies with volume of business -for most companies, is between 1-2% of credit sales

Percentage of Sales

Sometimes customers are offered a ________ to encourage early payment

Sales Discount

Another name for an Accounts Receivable is a

Trade receivable

Accounts Receivable

amount owed by a customer

Direct-write off method

bad debt expense is realized when account is written off

Maker of the note

borrower that will pay principal and interest

Payee

company that will receive principal and interest

Allowance Account

contra-account with a credit balance

Sales Discount

contra-revenue account

Sales Returns and Allowances

contra-revenue account (its balance is subtracted from Sales Revenue)

What is the disadvantage of Percentage of Sales Approach?

no consideration for resulting balance in Allowance account