Accounting chapter 8

The maturity date of a promissory note may be stated in one of three ways:

(1) on demand (2) on a stated date (3) at the end of a stated period of time. When it is stated to be at the end of a period of time, the parties to the note will need to determine the maturity date.

two methods for uncollectible accounts

(1) the direct write-off method, and (2) the allowance method

allowance method three essential features:

1. Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded. 2. Companies record estimated uncollectibles as an increase (a debit) to Bad Debt Expense and an increase (a credit) to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable. 3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible.

There are five issues in accounting for notes receivable:

1. Determining the maturity date. 2. Computing interest. 3. Recognizing notes receivable. 4. Valuing notes receivable. 5. Disposing of notes receivable.

Accounts receivable turnover

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

Direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

Allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. a company debits every bad debt write-off to the allowance account and not to Bad Debt Expense.

Percentage-of-receivables basis

A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.

Aging the accounts receivable

A schedule of customer balances classified by the length of time they have been unpaid.

Promissory note

A written promise to pay a specified amount of money on demand or at a definite time. (1) when individuals and companies lend or borrow money, (2) when the amount of the transaction and the credit period exceed normal limits, and (3) in settlement of accounts receivable.

Accounts receivable

Amounts customers owe on account.

Receivables

Amounts due from individuals and companies that are expected to be collected in cash

Bad Debt Expense

An expense account to record losses from extending credit.

Other receivable

Nontrade receivable such as interest receivable, own to company officers, advance to employees

Trade receivables

Notes and accounts receivable that result from sales transactions.

Average collection period

The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.

Cash (net) realizable value

The net amount a company expects to receive in cash from receivables.

ACCELERATING CASH RECEIPTS

These companies are referred to as captive finance companies because they are owned by the company selling the product. The purpose of captive finance companies is to encourage the sale of the company's products by assuring financing to buyers. Second companies may sell receivables because they may be the only reasonable source of cash. A final reason for selling receivables is that billing and collection are often time-consuming and costly.

Notes receivable

Written promise with interest and extends for the period of 60-90 days or longer