MGMT 200 Chapter 5

Accounts Receivable

The legal right to receive cash is valuable and represents an asset of the company.

invoice

source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms. **. Even though no cash is received at the time of the credit sale, the seller records revenue immediately once goods or services are provided to the customer and future collection from the customer is probable.

Trade discounts

**represent a reduction in the listed price of a good or service. Companies typically use trade discounts to provide incentives to larger customers or consumer groups to purchase from the company **can be a way to change prices without publishing a new price list.

Aging Method

*Considers the age of receivables *Older accounts are more likely uncollectible *More accurate than using a single percentage *The aging method recognizes that the longer accounts are past due, the less likely they are to be collected.

direct write-off method

*Write off bad debts only at the time they actually become uncollectible *Unlike the allowance method, which requires estimation of uncollectible accounts before they even occur * used when uncollectible accounts are not anticipated or are immaterial *The direct write-off method is primarily used for tax reporting

write-off of an account receivable

*occurs when the company identifies the specific account that has become uncollectible. *The write-off has no effect on total amounts reported in the balance sheet or in the income statement.

allowance method

. Under the allowance method, a company reports its accounts receivable for the net amount expected to be collected **Under the allowance method, companies are required to estimate future uncollectible accounts and report those estimates in the current year.

three stages in the allowance method

1)At the end of the initial year, establish an allowance by estimating future uncollectible accounts. 2)During the subsequent year, write off actual bad debts as uncollectible. Note that actual write-offs may differ from the previous year's estimate. 3)At the end of the subsequent year, once again estimate future uncollectible accounts.

Bad Debt Expense

Bad debt expense represents the cost of estimated future bad debts that is reported as an expense in the current year's income statement, along with other expenses.

Note Receivable

Classified as either current or noncurrent asset depending on time until due date

Average Collection Period

Number of days the average accounts receivable balance is outstanding = 365 days/receivables turnover ratio

Writing off customers account

Writing off a customer's account as uncollectible reduces the balance of accounts receivable but also reduces the contra asset—allowance for uncollectible accounts. The net effect is that there is no change in the net receivable (accounts receivable less the allowance) or in total assets.

Notes receivable

formal credit arrangements evidenced by written debt instruments (or "notes")

contra revenue account

is an account with a balance that is opposite, or "contra," to that of its related revenue account. The reason we use a contra revenue account is to keep a record of the total revenue recognized separate from the reduction due to subsequent sales returns.

sales discount

represents a reduction, not in the selling price of a good or service, but in the amount to be received from a credit customer if collection occurs within a specified period of time. A sales discount is intended to provide incentive to the customer for quick payment.

Credit sales (sales on account)(services on account)

transfer goods or services to a customer today while bearing the risk of collecting payment from that customer in the future

Receivables Turnover Ratio

•Number of times during a year the average accounts receivable balance is collected = Net credit sales/ average accounts receivable *The more frequently a business is able to "turn over" its average accounts receivable, the more effective a company is at granting credit to and collecting cash from its customers.

Nontrade receivables

•receivables that originate from sources other than customers --> Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees

Sales Allowances

••Customer does NOT return a product (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account **occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's good or service. **record the sales allowance in a contra revenue account—Sales Allowances.

Sales Return

••Customer returns goods previously purchased (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account **We reduce revenue for sales returns using a contra revenue account—Sales Returns.