Chapter 8 Vocab

Days' Sales in receivables

The ratio of average net accounts receivable to one day's sales. Tells how many days it takes to collect the average level of accounts receivable.

Acid-Test Ratio

The ratio sum of cash, cash e., short-term investments, and net current receivables divided by its current liabilities. The ratio tells whether the entity could pay all its current liabilities if they came due immediately.

Interest

The revenue to the payee (creditor) for loaning money-- the expense to the debtor.

Accounts Receivable

The right to receive cash in the future from customers for goods sold or for services performed.

Control Accounts Balance

The sum of all balances in subsidiary accounts receivable.

Maturity Value

The sum of the principal plus interest due at maturity.

Dishonors a Note

Failure of note's maker to pay a note receivable at maturity.

Matching Principle

Requires that the expense of uncollectible accounts be matched with the related revenue.

Subsidiary Accounts

Separate customer accounts receivable.

Principal

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

Bad Debts Expense

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

Maturity Date

The date when a note is due.

Net Realizable Value

The net value a company expects to collect from its accounts receivable.

Interest Period

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

Acid-Test Ratio Formula

(Cash/ Cash equivalents + Short term Investments + Net current receivables) / Total Current Liabilities

Debtor

The party to a credit transaction who takes on an obligation or payable.

Interest Rate

The percentage rate of interest specified by the note.

Promissory Note

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

Allowance for Bad Debts

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

Allowance Method

A method of accounting for uncollectible 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 it deems a customer's account receivable is uncollectible.

Percent-of-Sales Method

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

Percent of Receivables Method

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 Method

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

Receivable

A monetary claim against a business or individual

Accounts Receivable Turnover Ratio

A ratio that measures the number of times the company collects the average accounts receivable balance in a year.

Notes Receivable

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