accounting chapter five vocabulary

bad debt expense

the cost of estimated future bad debts that is reported as an expense in the current years income statement.

the amounts reported for contra revenues include...

1. actual returns, allowances, and discounts during 2021 plus 2. estimates of returns, allowances, and discounts expected to occur in 2022 that relate to transactions in 2021.

net revenues

a companys total revenues less any discounts, returns, and allowances. also referred to as net sales.

subsidiary ledger

a group of individual accounts associated with a particular general ledger control account.

a trade discount is...

a percentage reduction from list price.

the percentage-of-receivables method of estimating bad debt applies _____to_______.

a single percentage; accounts receivable.

invoice

a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms. payment terms typically require the customer to pay within 30 to 60 days after the sale.

contra revenue account

an account with a balance that is opposite, or "contra," to that of its related revenue account.

when an account previously written off is collected in full, which is required to endure the accounting for the complete payment history of the customer?

an entry to reinstate the account receivable and an entry to record payment.

when an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

an entry to reinstate the account receivable and an entry to record payment.

average collecting period

approximate number of days the average accounts receivable balance is outstanding. it equals 365 divided by the receivables turnover ratio.

aging method

basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts.

a trade discount is recognized...

by reducing the revenue amount recorded.

allowance for uncollectible accounts

contra asset account representing the amount of accounts receivable not expected to be collected.

the income statement approach for estimating bad debts uses a percentage of...

credit sales

uncollectible accounts

customers' accounts that no longer are considered collectible. also called bad debts.

a sales allowance ______ the amount owed by the customer for merchandise that is ______ by the customer.

decreases; retained

the receivables turnover ratio and the average collection period provide information about a company's...

effectiveness in managing receivables.

under the allowance method, companies estimate ________ uncollectible amounts and report those estimates in the ______ year.

future; current

using a percentage of each periods net credit sales to estimate bad debt expense is an ________ _________ approach to measuring bad debts.

income statement

interest on a note equation

interest=face value x annual interest rate x fraction of the year.

an aging schedule classifies accounts receivables based on...

length of the time outstanding.

non trade receivables

less common than accounts receivable. they are receivables that originate from sources other than customers. they include tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees.

the financial statement effects of recording an allowance for estimated sales returns are that:

net income decreases, equity decreases, assets decrease.

receivables turnover ratio

number of times during a year that the average accounts receivable balance is collected. it equals net credit sales divided by average accounts receivable.

direct write-off method

primarily used for tax reporting. recording bad debt expense at the time we know the account is actually uncollectible, unlike the allowance method which requires estimation of uncollectible accounts before they even occur.

what are two important ratios that help in understanding the company's effectiveness in managing receivables?

receivables turnover ratio and the average collection period.

sales discount

reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time.

trade discounts

reduction in the listed price of a good or service. companies typically use this to provide incentives to larger customers or consumer groups to purchase from the company. they can also be a way to change prices without publishing a new price list or to disguise real prices from competitors.

what do you use when calculating net revenues?

returns, allowances, and discounts.

sales to customers in which the customers pay within 30 to 60 days are referred to as

sales on account and credit sales.

sales allowance

seller reduces the customers balance owed or provides at least a partial refund because of some deficiency in the company's good or service.

accounts receivable

the amount of cash owed to the company by its customers from the sale of goods or services on account.

cost of extending credit

the delay in collecting cash from customers, and some customers end up not paying at all.

net accounts receivable

the difference between total accounts receivable and the allowance for uncollectible accounts.

the benefit of extending credit

the seller makes it more convenient for the buyer to purchase goods and services.

credit sales

transfer goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. also known as sales on account. ex: selling candy as a part of a fundraiser and having the person promise to pay you later.

sales return

when a customer returns a product. we reduce revenue for sales returns using a contra revenue account.

notes receivable

formal credit arrangements evidenced by a written debt instrument, or note.

percentage of receivables method

method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected. sometimes referred to as a balance sheet method, because we base the estimate of bad debts on a balance sheet account- accounts receivable.

allowance method

method of reporting accounts receivable for the net amount expected to be collected. to do this, the company must estimate the amount of current accounts receivable that will prove uncollectible in the future and report this estimate as a contra asset to its accounts receivable.