Accounts Receivable
Uncollectible Account
written-off (asset is moved) and an expense is recognized
What are some advantages of Percentage of Sales Approach?
simplicity and good matching
Allowance method
splits accounting into TWO entries (1. record an estimate of bad debt expense) (2. write-off receivables when they become uncollectible)
What is the problem with the Direct-Write off method?
violates GAAP
Three approaches to Allowance Method
(1) percentage of sales (2) percentage of receivables (3) aging of Accounts Receivable
Net Realizable Value
Accounts receivable - allowance account (represents an estimate of the cash value of accounts receivable)
What are the two methods for accounting for uncollectible accounts?
Direct write-off and allowance
Equation for Net Credit Sales
Gross Credit Sales - Sales Discounts - Sales Returns and Allowances = Net Credit Sales
-Estimates the amount of uncollectible from existing accounts -Allowance account is adjusted to reflect this balance
Percentage of Receivables and Aging of Receivables
-Varies with volume of business -for most companies, is between 1-2% of credit sales
Percentage of Sales
Sometimes customers are offered a ________ to encourage early payment
Sales Discount
Another name for an Accounts Receivable is a
Trade receivable
Accounts Receivable
amount owed by a customer
Direct-write off method
bad debt expense is realized when account is written off
Maker of the note
borrower that will pay principal and interest
Payee
company that will receive principal and interest
Allowance Account
contra-account with a credit balance
Sales Discount
contra-revenue account
Sales Returns and Allowances
contra-revenue account (its balance is subtracted from Sales Revenue)
What is the disadvantage of Percentage of Sales Approach?
no consideration for resulting balance in Allowance account