Accounts Receivable

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average collection period

measures the number of days on average between making a sale on credit and collecting cash from customers

accounts receivable turnover

measures the number of times on average the company collects the accounts receivable/ "turning over"

3/10 n/30

three ten net thirty 3% discount allowed on all payments within 10 days, after 10 days there is no discount and the remaining balance is due in 30

accrued revenue

sale of goods or performance of services occurring before the receipt of cash - accts receivable is recorded

why do people do discounts

speeds up cash collection, minimizes bad debts, increases sales

a write off represents

the actual bad debt expense of a company (actual amount)

when is bad debt expense recorded

the same year they generate revenue (matching concept)

when the company determines a specific customer will not pay then they will....

write off the customers accounts receivable

accounts receivable represents

-cash owed to the company -comes when the company makes a credit sale

Bad debt expense

-classified as an -expense account found on the income statement -reduces net income

allowance for doubtful accounts

-decrease in assets -classified as a CONTRA ASSET -normal balance is a credit - found on the balance sheet as a decrease to the accounts receivable - represents the amount of accounts receivable the company estimates it will not collect

allowances, returns, discounts are all a:

-CONTRA REVENUE -Debit normal balance -decreases revenue

since we dont know in year 1 what will be collected in year 2 BDE is an... and we need:

-Estimate -Allowance for Doubtful accounts

2 methods to estimate bad debt expense

1. net credit sales 2. aging method

two adjustments to sales revenue

1.returns and allowances 2. discounts

average collection period (equation)

365/ acts receivable turnover

when the customer pays their bill after the company has written off accounts receivable it is called

A recovery

net credit sales method

BDE is based on a % of current credit sales estimated to be uncollected - percentage is based on past experiences

write offs do not effect

Bad Debt Expense Net Realizable Value (NRV)

BDE=

Net credit sales * expected uncollectable

accts receivable turnover

Net sales rev/ avg acts receivable

accounts receivable is

accounting for the sale of our product

the aging schedule provides the allowance for doubtful accounts

an ending balance

why does a write off not effect BDE

because we do not want to double account for the amount already estimated in BDE so we reduce the allowance and eliminate accounts receivable

recoveries debit

cash and credit allowance

returns

customers dissatisfied with merchandise and returns the goods to sellers for a refund

allowances

customers dissatisfied with merchandise and the seller allows a reduction from the selling price (not returned)

in average collection period is higher or lower better

lower

accounts receivable follows the realization principle

earnings process is virtually complete when the goods are sold or services are preformed even if cash is not collected

Bad debt expense is an

estimate

in accounts receivable turnover is higher or lower better

higher, because we are collecting cash faster

financial statements affected

income statement 1. Sales revenue 2. Cost of goods soled balance sheet 1. accts receivable 2. inventory

why does a write off not effect NRV

it reduces both accounts receivable and allowance for doubtful accounts therefore there is no change

average accts reveivable

jan1+jan31/2

issue with accounts receivable

not everyone pays their bills!

discounts

offers a cash discount to credit a customer for the prompt payment of balance due

aging schedule

placed in categories by age and assign a % uncollected to each category

sales revenue

represents revenue earned from selling inventory

aging method

requires an analysis of accounts receivable balances by the length of the time they have been unpaid (longer the debt is outstanding, the less likely it is to be paid

financial statement ratios related to accounts receivable

turnover average collection period


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