ACC 210 - Chapter 5

Accounts Receivable

The amount of cash owed to a company by its customers from the sale of products or services on account

Net accounts receivable (net realizable value)

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

True or False: Both sales returns and sales allowances are classified as contra revenues.

True

True or False: Recording an allowance for uncollectible accounts correctly reports accounts receivable at their net realizable value.

True

True or False: Under the allowance method, companies are required to estimate future collectible accounts and record those estimates in the current year.

True

Notes receivable

When receivables are accompanied by formal credit arrangements made with written debt instruments (or notes)

sales allowance

When the customer doesn't return the product or service, but the seller reduces the customer's balance owed to provide at least a partial adjustment of the amount the customer owes

aging method

a method to estimate future uncollectible accounts - consider the various ages of individual accounts receivable, using a higher percentage for old accounts than for new accounts; the older the account, the less likely it is to be collected

Contra revenue account

an account with a balance that is opposite to that of its related revenue account

Important points to understand about adjusting entries to record estimated contra revenue accounts at the end of the year...

1. Revenues are reported for the amount of cash a company expects to be entitled to receive from customers for providing goods and services. 2. Total revenues are reduced by sales discounts, sales returns, and sales allowances that occur during the year. 3. Total revenues are further reduced by an adjusting entry at the end of the year for the estimate of additional sales discounts, sales returns, and sales allowances expected to occur in the future but that relate to the current year.

Net revenues

A company's total revenues less any amounts for discounts, returns, and allowances

Discount terms (i.e. 2/10, n/30)

A shorthand way to communicate the amount of the discount and the time period within which it's available. 2/10 = two percent discount if the amount is paid within 10 days. n/30 = if the customer does not take the discount, full payment net of any returns or allowances is due within 30 days.

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

Asset - Accounts receivable

We report the allowance for uncollectible accounts in the _____ section of the balance sheet, but it represents a _________ in the balance of accounts receivable.

Asset, reduction

Upside of extending credit to customers?

Boosts sales by allowing customers the ability to purchase on account and pay cash later.

Sales discounts is recorded as what account?

Contra revenue account

To use the allowance method, a company first estimates at the end of the _______ year how much in _____________ accounts will occur in the _________ year.

Current, uncollectible, following

Uncollectible accounts (also known as bad debts)

Customers' accounts that we no longer consider collectible

When recording a transaction, companies (do/don't) recognize trade discounts directly.

Don't - They recognize trade discounts indirectly by recording the sale at the discounted price

Notes receivable are classified as either current or noncurrent, depending on the ________ _________ ____.

Expected collection date - if the time to maturity is longer than one year, the note is a long-term asset

allowance for uncollectible accounts

contra asset account - represents the amount of accounts receivable we do not expect to collect - used to adjust for future bad debts

percentage-of-receivables method (balance sheet method)

estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

Interest calculation equation

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

Collection of notes receivables is recorded the same way as collection of accounts receivable, except that we also record interest earned as ________ _______ in the ______ _________.

interest revenue, income statement

Trade discounts

represent a reduction in the listed price of a product or service

sales discounts

represent a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time

bad debt expense

represents the cost of the estimated future bad debts

net realizable value

the amount of cash the firm expects to collect, form of accounts receivable

Credit Sales (also known as sales on account)

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

Sales return

when a customer returns a product

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 occur

True or False: The direct write-off method is allowed for financial reporting under GAAP.

False - It is only used in financial reporting if uncollectible accounts are not anticipated or are expected to be very small. Primarily used for tax reporting. Companies do not report a tax deduction for bad debts until those bad debts are actually uncollectible.

True or False: The receivables expected to be collected should not be counted as assets.

False - The receivables not expected to be collected should not be counted as assets.

allowance method

GAAP required method for accounting for uncollectible accounts. Involves allowing for the possibility that some accounts will be uncollectible at some point in the future. Used to accounts for bad debts that have not yet occurred, but are likely to occur.

Even though the seller does not receive cash at the time of the credit sale, when does the accounting firm record revenue?

Immediately once goods or services are provided to the customer and future collection from the customer is probable

Downside of extending credit to customers?

Not all customers will pay fully on their accounts.

Nontrade Receivables

Receivables that originate from sources other than customers

Estimated uncollectible accounts ______ assets and ________ expenses.

Reduce, increase

Notes receivable are ______ and therefore have a normal _____ balance.

assets, debit