Accounting Chapter 9

bad debt expense

accounts receivable that are uncollectible.

accounting for notes receivables

-A promissory note may be received by a company from a customer to replace an account receivable. In such cases, the promissory note is recorded as a note receivable. -If the maker of a note fails to pay the note on the due date, the note is a dishonored note receivable.

classified as a current asset if:

-converted to cash or used up within the year If its more than a year its a long term asset

Other types of receivables

Interest receivable, taxes receivable, and receivables from officers or employees. Other receivables are normally reported separately on the balance sheet. If they are expected to be collected within one year, they are classified as current assets. If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption Investments.

Notes and accounts receivable that result from sales transactions

Notes may also be used to settle a customer's account receivable. Notes and accounts receivable that result from sales transactions are sometimes called trade receivables.

2 methods used for estimating uncollectibles

The allowance method requires an estimate of uncollectible accounts at the end of the period. -This estimate is normally based on past experience, industry averages, and forecasts of the future. The two methods used to estimate uncollectible accounts are as follows: -Percent of sales method -Analysis of receivables method(process is called aging the receivables)

Accounts receivable

The most common transaction creating a receivable is selling merchandise or services on account (on credit). The receivable is recorded as a debit to Accounts Receivable. Such accounts receivable are normally collected within a short period, such as 30 or 60 days. They are classified on the balance sheet as a current asset.

Notes Receivable

amounts that customers owe for which a formal, written instrument of credit has been issued. If expected to be collected within a year, classified on the balance sheet as a current asset. -A note has some advantages over an account receivable. By signing a note, the debtor recognizes the debt and agrees to pay it according to its terms. Thus, a note is a stronger legal claim.

recievables

includes all money claims against other entities, including people, companies, and other organizations. (usually a significant portion of the total current assets.)

Two financial measures that are especially useful in evaluating efficiency in collecting receivables are the following:

the accounts receivable turnover the days' sales in receivables

The two methods of accounting for uncollectible receivables are as follows

-The direct write-off method records bad debt expense only when an account is determined to be worthless. -The direct write-off method is often used by small companies and companies with few receivables. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period. -Footnote Generally accepted accounting principles (GAAP), however, require companies with a large amount of receivables to use the allowance method. As a result, most well-known companies such as General Electric, Pepsi, Intel, and FedEx use the allowance method.

indications that an account may be uncollectible include the following:

-The receivable is past due. -The customer does not respond to the company's attempts to collect. -The customer files for bankruptcy. -The customer closes its business. -The company cannot locate the customer. -If a customer doesn't pay, a company may turn the account over to a collection agency. After the collection agency attempts to collect payment, any remaining balance in the account is considered worthless.

characteristics of a prommisory note

-maker -payee -face amount -insurance date -due date/maturity date -term -interest rate(skated as annual rate)

Notes Receivable

-note that a customer signs agreeing to pay a certain point -more formal-usually sign and have agreement that includes insurance -if it is formalized in writing its a promissory note -amounts that customers owe for which a formal, written instrument of credit has been issued. -classified as a cuurent asset or long term if more than a year

characteristics of a promissory note

A promissory note is a written promise to pay the face amount, usually with interest, on demand or at a date in the future. -maker -payee -face amount -insurance date -due date/maturity date -term -interest rate(stated as annual rate)

other receivables

Other receivables include -interest receivable -taxes receivable -receivables from officers or employees. Other receivables are normally reported separately on the balance sheet. If they are expected to be collected within one year, they are classified as current assets. If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption **Investments.

the direct write off method for uncollectable accounts

Under the direct write-off method, -Bad Debt Expense is not recorded until the customer's account is determined to be worthless. At that time, the customer's account receivable is written off.

Allowance Method for Uncollectible Accounts

allowance method estimates the uncollectible accounts receivable at the end of the accounting period. Based on this estimate, Bad Debt Expense is recorded by an adjusting entry. -you will usually credit Allowance for doubtful accounts(a contra account-these are usually used as an asset so it usually has a credit balance) To illustrate, assume that ExTone Company began operations on August 1. As of the end of its accounting period on December 31, 20Y7, ExTone has outstanding accounts receivable of $200,000. This balance includes some past due accounts. Based on industry averages, ExTone estimates that $30,000 of the December 31 accounts receivable will be uncollectible. However, on December 31, ExTone doesn't know which customer accounts will be uncollectible. Thus, specific customer accounts cannot be decreased or credited. Instead, a contra asset account, Allowance for Doubtful Accounts, is credited for the estimated bad debts. -on the balance sheet, the value of the receivables is reduced to the amount that is expected to be collected or realized. -net realizable value of recievables-revenue-estimated lost cash or income