Accounting Chapter 9

Interest period

The period of time during which interest is computed. It extends from the original date of the note to the maturity date. Also called the note term

Days' Sales in Receivables

The ratio of average net accounts to one days' sales. The ratio tells how many days it takes to collect the average level of accounts receivable. 365 days / Accounts receivable turnover ratio.

Interest

The revenue to the payee for loaning the money. Interest is an expense to the debtor and revenue to the creditor.

Maturity Value

The sum of the principal plus interest due to maturity. Maturity value is the total amount that will be paid back.

Gross method

The total sale is deposited daily within a few days of the actual sale date. The processing fees for all transactions processed for the month are deducted from the company's bank account by the processor, often on the last day of the month.

Net method

The total sale less the processing fee assessed equals the net amount of cash deposited by the processor, usually within a few days of the sale date.

Accounts receivable

represent the right to receive cash in the future from customers for goods sold or for services required.

Promissory note

A written promise to pay a specified amount of money at a particular future date, usually with interest.

Acid-Test Ratio

Acid-test ratio- the ratio of the sum of cash, cash equivalents, short-term investments, and net current receivables to total current liabilities. The ratio tells whether the entity could pay all its current liabilities if they came due immediately. (Cash including cash equivalents + Short term investments + Net current receivables) / Total current liabilities.

Maturity Date

As stated earlier, this is the date when final payment of the note is due

Dishonor a note

Failure of a note's maker to pay a note receivable at maturity. Because the not has expired, it is no longer in force. The payee can transfer the note receivable amount to Accounts Receivable.

Pledging Receivables

In a pledging situation, a business uses its receivables as security for a loan. The business borrows money from a bank and offers its receivables as collateral

Principal

The amount loaned by the payee and borrowed by the maker of the note.

Bad Debts Expense

The cost to the seller of extending credit. It arises from failure to collect from some credit customers.

Maturity date

The date when a note is due.

Maker of the note

The entity that signs the note and promises to pay the required amount; the maker of the note is debtor

Payee of the note

The entity to whom the maker promises future payment; the payee of the note is the creditor. The creditor is the company that loans the money.

Net realizable value

The net value a company expects to collect from its accounts receivable. Accounts Receivable less Allowance for Bad Debts

Interest rate

The percentage rate of interest specified by the note. Interest rates are almost always stated for a period of one year.

Allowance for Bad Debts

A contra asset account, related to accounts receivable, that holds the estimated amount of uncollectible accounts.

Allowance Method

A method for accounting for uncollected receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from.

Direct Write-Off Method

A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer's account receivable is uncontrollable.

Percent-of-receivables

A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on a percentage of accounts receivable.

Aging-of-receivables

A method of estimating uncollectible receivables by determining the balance of the Allowance of Bad Debts account based on the age of individual accounts receivable.

Percent-of-sales method

A method of estimating uncollectible receivables that calculates bad debts expense based on a percentage of net credit sales.

Receivable

A monetary claim against a business or an individual

Accounts Receivable Turnover Ratio

A ratio that measures the number of times the company collects the average accounts receivable balance in a year. Net credit sales/ Average net accounts receivable

Notes receivable

A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future

Factoring Receivables

When a business factors its receivables, it sells its receivables to a finance company or bank

Debtor

the party to a credit transaction who takes an obligation/payable

Creditor

the party who receives a receivable