accounting
Most businesses today sell on credit to some customers
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Regardless of the care taken in granting credit, some customers will not pay the amounts owed.
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A credit balance in Allowance for Uncollectible Accounts before the adjusting entry is posted means that the aging of accounts receivable has not identified all the uncollectible accounts for the current year.
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Two methods used to estimate uncollectible accounts expense are the percentage of sales method and the percentage of uncollectible accounts receivable method.
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The difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts, is known as the book value of accounts receivable.
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The larger the accounts receivable turnover ratio, the fewer the average number of days for payment.
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The number of times the average amount of accounts receivable is collected during a specified period is known as the accounts receivable turnover ratio.
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Crediting the estimated value of uncollectible accounts to a contra account is known as the allowance method of recording losses from uncollectible accounts.
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From experience, businesses know that the longer an account is outstanding, the less likely it is to be collected.
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If customers do not pay promptly, a business may run out of cash needed to pay operating expenses.
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The Going Concern accounting concept is being applied when a business expects to make money and continue in business indefinitely.
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The accounts receivable turnover ratio is a measure of collection efficiency
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The percentage of accounts receivable method estimates a percentage of accounts receivable that will not be collected and updates the balance of Allowance for Uncollectible Accounts so that it equals the estimated amount.
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Using the allowance method, the estimated amount that will become uncollectible is recorded as an adjusting entry at the end of the fiscal period.
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When a customer's account is written off, its balance is reduced to zero.
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When a sale is made on account, the amount is recorded in Accounts Receivable. The amount remains in Accounts Receivable until the amount is paid or until it becomes uncollectible.
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When collection is made on an account that has been written off, two journal entries are made. One reopens the customer's account, and the other records the receipt of cash
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Applying the matching expenses with revenues concept, uncollectible accounts expense should be recorded in the same fiscal period in which the sales revenue is received.
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Canceling the balance of a customer account because the customer is not expected to pay is known as writing off an account.
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Collection of Uncollectible Accounts is an other revenue account used to record amounts collected after write-off under the direct write-off method.
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Uncollectible accounts are sometimes referred to as bad debts.
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Analyzing accounts receivable according to when they are due is known as aging net sales.
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If a business carefully checks credit ratings before granting credit to customers, the business will not experience any uncollectible accounts.
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If the average number of days for payment increases from 29 to 32, the trend is positive.
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Morton, Inc. estimates that 1% of its net sales will become uncollectible. The adjustment is made by debiting Uncollectible Accounts Expense and crediting Accounts Receivable.
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Recording uncollectible accounts expense at the time the amount is actually known to be uncollectible is called the allowance method of recording losses from uncollectible accounts
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Since uncollectible accounts can cause losses to a business, most businesses should avoid offering credit terms to new customers
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The accounts receivable turnover ratio equals net sales on account divided by the ending book value of accounts receivable.
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The book value of accounts receivable equals the total of Accounts Receivable plus Allowance for Uncollectible Accounts.
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An accounts receivable turnover ratio that increases from 6.5 to 7.5 is a positive trend.
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The direct write-off method reduces the account receivable to zero by debiting Allowance for Uncollectible Accounts and crediting Accounts Receivable.
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The estimated amount of uncollectible accounts using the allowance method is charged to Estimated Uncollectible Accounts Expense.
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Using the direct write-off method, no attempt is made to collect accounts that have been written off because the account no longer appears in the accounting records of the business.
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When a sale on account is made, the amount is recorded in Allowance for Uncollectible Accounts.
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When customers receive notices that their accounts have been written off, they no longer owe on the account receivable.
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