Acct. Chapter 6
aging schedule
A listing of accounts receivable by their ages.
receivables turnover ratio
compares a company's credit sales during a period to its average receivables balance during that period. It is calculated by credit sales divided by average receivables
Accounting for notes receivable requires to record these entries
1. Issuance of the note 2. Interest earned on the note 3. collection of the note
Two methods to account for bad debt expense
1. direct write-off method 2. allowance method
the two approaches of estimating bad debt expense
1. percentage-of-sales approach 2. percentage-of-receivables approach
promissory note
A written promise to pay a specific sum of money on demand or at some specific date in the future
note receivable
An asset created when a company accepts a promissory note
direct write-off method
Method in which bad debt expense is recorded when a company determines that a receivable is uncollectible and removes it from its records
allowance method
Method in which companies use two entries to account for bad debt expense-- one to estimate the expense and a second to write off receivables
percentage-of-receivables approach
Method that estimates bad debt expense as a percentage of receivables. It is calculated in two steps. The first step is to calculate what the balance in the Allowance for bad debts accounts should be, by multiplying accounts receivable by a percentage set by the company. The second step is to adjust the allowance account to that calculated balance. The amount of the adjustment is bad debt expense for the period.
Percentage-of-sales approach
Method that estimates bad debt expense as a percentage of sales. It is calculated by multiplying sales for the period by some percentage set by the company
Net realizable value
The amount of cash that a company expects to collect from its total accounts receivable
payee
The company that will receive the principal and interest
maker
The customer or borrower who will pay the interest and principal
Allowance for bad debts
The dollar amount of receivables that a company believes will ultimately be uncollectible
bad debt expense
The expense resulting from the inability to collect accounts receivable
Accounts receivable
an amount owed by a customer who has purchased the company's product or service
allowance ratio
compares the allowance account to gross accounts receivable to determine the percentage of receivables that are expected to be uncollectible. It is calculated by allowance for bad debts divided by Gross Accounts Receivables. Gross accounts receivable is calculated by net accounts receivable+ allowance for bad debts
days-in-receivables ratio
divides the receivables turnover ratio into 365 days to express, in days, how long it takes a company to generate and collect its receivables
Calculate interest
interest= Principal (face value of the note)* Annual rate of Interest* Time outstanding
allowance
the amount that a company does not expect to collect