ACCOUNTING CHAPTER 8
The formula for number of days' sales are in receivable is:
365 days in a year / accounts receivable turnover.
Direct Write Off Method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.
THE ALLOWANCE METHOD:
A method of accounting for bad debts that involves estimating uncollectible accounts at the END of each period.
Allowance Method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
The net realizable value is :
Accounts Receivable of - Allowance for Bad Debts
A dishonored note should be moved to:
Accounts Receivable.
The ending balance in the allowance account equals:
Beginning balance - Accounts written off (debit Allowance) + Credit to Allowance for current year
What are some limitations that Champion Performance will encounter when using the direct write-off method?
Champion Performance will encounter limitations with the direct write-off method because it violates the matching principle. The matching principle requires that the expense of uncollectible accounts be matched with the related revenue. VIOLATES THE MATCHING PRINCIPLE !!!
The accounts receivable turnover is calculated by:
Net Credit Sales / Average Accounts Receivable.
** Interest is calculated using the formula:
Principal x interest x time
What is the acid test ratio?
The acid-test ratio is calculated by taking Cash+ Accounts Receivable and dividing by Current Liabilities
Which method of accounting for uncollectibles allows for a more accurate balance for assets on the Balance Sheet?
The allowance method
Pledging of receivables is when:
a business uses its receivables as security for a loan.
When a business factors its receivables, it sells its receivables to:
a finance company or bank (often called a factor). The business immediately receives cash less an applicable fee from the factor for the receivables.
Net Realizable Value Method
a method of allocating joint production costs to the joint products based on their proportionate share of eventual revenue - further processing costs.
The direct write off method does not use ________________ account
an allowance
The Allowance for bad debts account is a ___________________ account.
contra
To reverse a previous write off in the allowance method,
debit Accounts Receivable and credit Allowance for Bad Debt.
To record the adjusting entry for the expected amount of uncollectibles,
debit Bad Debts Expense and credit Allowance for Bad Debts.