Acct. Chapter 6

aging schedule

A listing of accounts receivable by their ages.

receivables turnover ratio

compares a company's credit sales during a period to its average receivables balance during that period. It is calculated by credit sales divided by average receivables

Accounting for notes receivable requires to record these entries

1. Issuance of the note 2. Interest earned on the note 3. collection of the note

Two methods to account for bad debt expense

1. direct write-off method 2. allowance method

the two approaches of estimating bad debt expense

1. percentage-of-sales approach 2. percentage-of-receivables approach

promissory note

A written promise to pay a specific sum of money on demand or at some specific date in the future

note receivable

An asset created when a company accepts a promissory note

direct write-off method

Method in which bad debt expense is recorded when a company determines that a receivable is uncollectible and removes it from its records

allowance method

Method in which companies use two entries to account for bad debt expense-- one to estimate the expense and a second to write off receivables

percentage-of-receivables approach

Method that estimates bad debt expense as a percentage of receivables. It is calculated in two steps. The first step is to calculate what the balance in the Allowance for bad debts accounts should be, by multiplying accounts receivable by a percentage set by the company. The second step is to adjust the allowance account to that calculated balance. The amount of the adjustment is bad debt expense for the period.

Percentage-of-sales approach

Method that estimates bad debt expense as a percentage of sales. It is calculated by multiplying sales for the period by some percentage set by the company

Net realizable value

The amount of cash that a company expects to collect from its total accounts receivable

payee

The company that will receive the principal and interest

maker

The customer or borrower who will pay the interest and principal

Allowance for bad debts

The dollar amount of receivables that a company believes will ultimately be uncollectible

bad debt expense

The expense resulting from the inability to collect accounts receivable

Accounts receivable

an amount owed by a customer who has purchased the company's product or service

allowance ratio

compares the allowance account to gross accounts receivable to determine the percentage of receivables that are expected to be uncollectible. It is calculated by allowance for bad debts divided by Gross Accounts Receivables. Gross accounts receivable is calculated by net accounts receivable+ allowance for bad debts

days-in-receivables ratio

divides the receivables turnover ratio into 365 days to express, in days, how long it takes a company to generate and collect its receivables

Calculate interest

interest= Principal (face value of the note)* Annual rate of Interest* Time outstanding

allowance

the amount that a company does not expect to collect