chapter 8 receivables

allowance method

records bad debt expense by estimating uncollectible accounts at the end of the accounting period. GAAP require companies with a large amount of receivables to use t he allowance method. example: pepsi, intel, fedex, and general electric.

direct write-off method

records bad debt expense only when an account is determined to be worthless and at that time the customers account is written off. its used by small companies

notes receivables

amounts that customers owe for which a formal, written instrument of credit has been issued. if notes receivables are expected to be collected within a year, they are classified on the balance sheet as a current assets. if noes receivables are expected to be collected within one year. they are classified on the balance sheet as a current assets. maybe used to settle a customer's account receivable.

analysis of receivable method

based on assumption that the longer an A/R is outstanding, the less likely it is that it will be collected. process is called aging the receivables

receivables

includes all money claims against other entities, including people, companies and other organizations.

examples of other receivables

interest receivable, taxes receivable, and receivable from officers and employees.

number of days sales in receivables

is an estimate of the length of time the accounts receivable have been outstanding.

accounts receivable turnover

measures how frequently during the year the accounts receivable are being converted to cash. higher turnover means faster collection

other receivables

other receivables are normally reported separately on the balance sheet.

uncollectible receivables

there is no general rule for when an account become uncollectible. the operating expense recorded from uncollectible receivable is call bad debt expense.

reasons why an account may be uncollectible

1) the receivable is past due 2) the customer does not respond to the company's attempts to collect. 3) the customer files for bankruptcy 4) the customer closes its business 5) the company cannot locate the customer.

accounts receivable

The most common transaction creating a receivable is THE selling merchandise or services on account. The receivable is recorded as a debit to accounts receivable, classified on the balance sheets as a current asset, and normally collected within a short period such as 30 or 60 days.

percent of sales method

uncollectible accounts estimated as a % of credit sales. if the portion of credit sales to sales is relatively constant, the percent may be applied to total sales.

write off to the allowance account

when a customer's account is identified as uncollectible there's a debit made to allowance for doubtful account and it decreases and a credit is made to accounts receivable and that also decreases. credit balances when write-offs during the period are less than the beginning balance. debit balance when write-offs during the period exceed the beginning balance.