Accounts Receivable
average collection period
measures the number of days on average between making a sale on credit and collecting cash from customers
accounts receivable turnover
measures the number of times on average the company collects the accounts receivable/ "turning over"
3/10 n/30
three ten net thirty 3% discount allowed on all payments within 10 days, after 10 days there is no discount and the remaining balance is due in 30
accrued revenue
sale of goods or performance of services occurring before the receipt of cash - accts receivable is recorded
why do people do discounts
speeds up cash collection, minimizes bad debts, increases sales
a write off represents
the actual bad debt expense of a company (actual amount)
when is bad debt expense recorded
the same year they generate revenue (matching concept)
when the company determines a specific customer will not pay then they will....
write off the customers accounts receivable
accounts receivable represents
-cash owed to the company -comes when the company makes a credit sale
Bad debt expense
-classified as an -expense account found on the income statement -reduces net income
allowance for doubtful accounts
-decrease in assets -classified as a CONTRA ASSET -normal balance is a credit - found on the balance sheet as a decrease to the accounts receivable - represents the amount of accounts receivable the company estimates it will not collect
allowances, returns, discounts are all a:
-CONTRA REVENUE -Debit normal balance -decreases revenue
since we dont know in year 1 what will be collected in year 2 BDE is an... and we need:
-Estimate -Allowance for Doubtful accounts
2 methods to estimate bad debt expense
1. net credit sales 2. aging method
two adjustments to sales revenue
1.returns and allowances 2. discounts
average collection period (equation)
365/ acts receivable turnover
when the customer pays their bill after the company has written off accounts receivable it is called
A recovery
net credit sales method
BDE is based on a % of current credit sales estimated to be uncollected - percentage is based on past experiences
write offs do not effect
Bad Debt Expense Net Realizable Value (NRV)
BDE=
Net credit sales * expected uncollectable
accts receivable turnover
Net sales rev/ avg acts receivable
accounts receivable is
accounting for the sale of our product
the aging schedule provides the allowance for doubtful accounts
an ending balance
why does a write off not effect BDE
because we do not want to double account for the amount already estimated in BDE so we reduce the allowance and eliminate accounts receivable
recoveries debit
cash and credit allowance
returns
customers dissatisfied with merchandise and returns the goods to sellers for a refund
allowances
customers dissatisfied with merchandise and the seller allows a reduction from the selling price (not returned)
in average collection period is higher or lower better
lower
accounts receivable follows the realization principle
earnings process is virtually complete when the goods are sold or services are preformed even if cash is not collected
Bad debt expense is an
estimate
in accounts receivable turnover is higher or lower better
higher, because we are collecting cash faster
financial statements affected
income statement 1. Sales revenue 2. Cost of goods soled balance sheet 1. accts receivable 2. inventory
why does a write off not effect NRV
it reduces both accounts receivable and allowance for doubtful accounts therefore there is no change
average accts reveivable
jan1+jan31/2
issue with accounts receivable
not everyone pays their bills!
discounts
offers a cash discount to credit a customer for the prompt payment of balance due
aging schedule
placed in categories by age and assign a % uncollected to each category
sales revenue
represents revenue earned from selling inventory
aging method
requires an analysis of accounts receivable balances by the length of the time they have been unpaid (longer the debt is outstanding, the less likely it is to be paid
financial statement ratios related to accounts receivable
turnover average collection period
