Accounting for Receivables Practice Flashcards

This set of vocabulary flashcards covers key concepts of accounts receivable, bad debt accounting methods (direct write-off and allowance), note receivable calculations, and efficiency ratios.

Accounts Receivable

Amounts owed by customers from credit sales for which payment is required; a separate account must be maintained for each customer to track purchases, payments, and balances due.

Bad Debts

Uncollectible amounts from customers who do not pay their accounts.

Direct Write-Off Method

A method of accounting for bad debts that records the loss from an uncollectible account at the time it is determined to be uncollectible; it does not usually best match sales and expenses.

Expense Recognition Principle

Requires expenses to be reported in the same accounting period as the sales they helped produce.

Materiality Constraint

States that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions.

Allowance Method

A method of accounting for bad debts that matches estimated losses from uncollectible accounts against the related sales and reports accounts receivable at their estimated realizable value.

Realizable Value

The expected amount of cash to be collected; for accounts receivable, it is calculated as total accounts receivable minus the allowance for doubtful accounts.

Percent of Sales Method

An income statement approach to estimating bad debts where Bad Debts Expense is computed as a percentage of credit sales for the period.

Percent of Receivables Method

A balance sheet approach where the desired balance for the Allowance for Doubtful Accounts is calculated as ext{Year-end Accounts Receivable} imes ext{Bad Debt %}.

Aging of Receivables Method

A method of estimating bad debts by classifying each receivable by how long it is past due and applying specific uncollectible percentages to each age group.

Promissory Note

A written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.

Maturity Date

The day a note, including both principal and interest, must be repaid.

Banker's Rule

A convention used for interest computation that bases a year on $360$ days when the note period is expressed in days.

Interest Formula

The calculation for interest earned on a note, expressed as ext{Principal} imes ext{Annual Interest Rate} imes rac{ ext{Time}}{360} when based on the banker's rule.

Honored Note

A note that is paid in full (principal and interest) by the maker on its maturity date.

Dishonored Note

A note where the maker fails to pay the principal and interest at maturity; this does not relieve the maker of the obligation to pay.

Accounts Receivable Turnover

A ratio used to evaluate management efficiency in granting credit, calculated as $rac{ ext{Net Sales}}{ ext{Average Accounts Receivable, net}}$.

Installment Sales

Credit sales for which payment is required in periodic amounts over an extended period, usually involving interest charges.