Hackett Accounting Chapter 9

accounts receivable turnover

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

percent of sales method

A method of estimating uncollectible receivables that calculates bad debts expense based on a percentage of net credit sales. Income statement focus, does not affect allowance for doubtful accounts, only bad debt expense.

bad debts

Accounts of customers who do not pay what they have promised to pay; an expense of selling on credit; also called uncollectible accounts.

maturity date of a note

Date when a note's principal and interest are due.

realizable value

Expected proceeds from converting an asset into cash.

materiality constraint

Prescribes that accounting for items that significantly impact financial statement and any inferences from them adhere strictly to GAAP. An amount can be ignored if its effect on financial statements is unimportant to users' business decisions.

direct write-off method

Recording bad debt expense at the time we know the account is uncollectible

promissory note

a written promise to pay a specified amount of money on demand or at a definite time

accounts receivable

amounts due from customer for credit sales

factor

buyer of all or a portion of receivables of a company; done to raise money by converting receivables to cash

Allowance for Doubtful Accounts

contra-asset account containing the estimated uncollectible accounts receivable

Aging of Accounts Receivable Method

estimates uncollectible accounts based on the age of each account receivable. Balance sheet focus, affects allowance for doubtful accounts account.

factoring fee

fee charged to the seller of all or a portion of receivables of a company

pledging receivables

giving a third party legal rights to debts owed your business in order to provide assurance that borrowed money will be repaid

principal of a note

the original amount of a note; sometimes referred to as face amount of a note

payee of the note

the person or business to whom the amount of a note is payable

maker of the note

the person or business who signs a note and thus promises to make payment

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period, to match them against the revenues they helped produce.

percent of receivables method

A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on a percentage of accounts receivable. Balance sheet focus, affects allowance for doubtful accounts account.

interest

A sum paid or charged for the use of money or for borrowing money, charged until its due date

matching (expense recognition) principle

requires expenses to be reported in the same accounting period as the sales they helped produce