Accounting chapter 5
direct write-off method
recording bad debt expense at the time we know the account to be uncollectible. the direct write-off method is used for tax purpose but is generally not permitted for financial reporting
sales allowance
the customer does not return the product or service, but the seller reduces the customer's balance owed to provide at least a partial refund. sales allowances accounts receivable
average collection period
another way to express the same efficiency measure 365 days(days x average amount of accounts receivables)/receivables turnover ratio
credit sales
common for large business transactions. Transfer products and services to a customer today while bearing the risk of collecting payment form that customer in the future.
credit balance before adjustment
indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high
interest
face value x annual interest rate x fraction of the year
write-off
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues the write=off of the account receivable has no effect on total amounts reported in the balance sheet or in the income statement
net revenue
a company's total revenues less any amounts for discounts, returns, and allowances.
aging method
a more accurate method than assuming a single percentage uncollectible for all accounts is to consider the age of various accounts receivable, and use a higher percentage for "old" accounts than for "new" accounts the older the account, the less likely it is to be collected
allowance for uncollectible accounts
adjust for future bad debts, represents the amount of accounts receivable we not except to collect
contra revenue account
an account with a balance that is opposite, or contra, to that of its related revenue account
percentage-of-receivables method
estimating uncollectible accounts based on the percentage of accounts receivable expected not the collected. balance sheet method
sales return
if a customer returns a product, because the customer may not be satisfied with a product or service purchased.
debit balance before adjustment
indicates that the estimate at the beginning was too low
uncollectible accounts
or bad debts, customer's accounts that that we no longer consider collectible. the downside of extending credit to customers is that not all customers will pay fully on their accounts
trade discounts
represent a reduction in the listed price of a product or service.
sales discount
represents a reduction, not in the selling price of a products or service, but in the amount to be paid by a credit customer.
bad debt expense
represents the cost of the estimated future debts.
receivables turnover ratio
shows the number of times during a year that average accounts receivable balance is collected. net credit sales/average accounts receivable
notes receivable
similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note
net accounts receivable
the difference between total accounts receivable and the allowance for uncollectible account, net realizable value
allowance method
we account for uncollectible accounts using what's called the allowance method. it involves allowing for the possibility that some accounts will be uncollectible at some point in the future. under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year.
