Exam 2 Accounting Chapter 7 Accounting for Receivables

Receivable

amount due from another party

Bad Debts

Some customers may not pay their account, uncollectible amounts

2 methods of accounting for bad debts

Direct Write-Off Method & Allowance Method

Allowance method

At the end of each period, estimate total bad debts expected to be realized from that period’s sales

Two advantages of allowance method

1. Recorded estimated bad debts expense in the period when the related sales are recorded

2. It reports accounts receivable on the balance sheet as the estimated amount of cash to be collected

Recovering a Bad Debt

To help restore credit standing, a customer sometimes pays all or part of the amount owed on an account even after it has been written off

Estimating Bad Debts Expense Methods

1. Percent of Sales Method (income statement method)

2. Balance Sheet Methods - A/r
   - Percent of A/R
   -Aging of A/R

Percent of Sales Method

Current Period Sales x Bad Debts % = Estimated Bad Debts Expense

Only credit sales not for cash sales

Percent of Receivables Method

Total Estimated Allowance for Doubtful Accounts - Previous Balance in Allowance Account = Current Bad Debts Expense

Promissory Note

Written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future time

Maturity date

The day the note (principal and interest) must be repaid

Interest Computation

Principal of the note x Annual interest rate x Time expressed in fraction of year = Interest

Past-Due Accounts Receivable

Customer invoices that remain unpaid after their agreed payment terms have expired
- seller may acceot a note receivable from an accounts receivable customer to allow an extension to pay a past-due accounts receivable

Honored note

the principal and interest of a note are due on its maturity date

Dishonored note

promissory note that the maker (borrower) fails to pay in full on its maturity date

Disposal of receivables account

accounting process of removing unpaid account receivables or notes receivable from a company’s balance sheet by converting the receivables into cash before they are due

Sales of Installment

Amount owed by customers from credit sales for which payment is required in periodic amounts over an extended time period. The customer is usually charged interest.