ACG 2021 Chapters 4 & 5

Flashcards covering key definitions from Chapters 4 and 5 of ACG 2021, focusing on internal controls and accounting for receivables.

Internal Controls

A company’s plan to 1.) Safeguard the company’s assets, and 2.) Improve the accuracy and reliability of accounting information.

Framework for Internal controls

A framework used when designing internal controls systems that includes the control environment, risk assessment, control activities (preventative and detective), monitoring, and information and communication.

Separation of duties

The practice where authorizing transactions, recording transactions, and maintaining control of related assets are separated among different employees.

Bank reconciliation

An internal control that matches the balance of cash in the bank account with the balance of cash in the company’s own records.

Direct write-off method

A method of recording bad debt expense at the specific time an account is known to be uncollectible.

Allowance method

Recording an adjustment at the end of each period to allow for the possibility of future uncollectible accounts.

Percentage of Aging calculation

A method of estimating uncollectible accounts by applying a higher percentage to "old" accounts than to "new" accounts.

Percentage of receivables calculation

An estimate for uncollectible accounts based on the percentage of accounts receivable expected not to be collected.

Contra revenue account

An account with a balance that is opposite, or contra, to that of its related revenue account.

Net accounts receivable

The difference between total accounts receivable and the allowance of uncollectible accounts, calculated as $\text{Total Accounts Receivable} - \text{Allowance for Uncollectible Accounts}$.

Net revenues

The company’s total revenues less any discounts, returns, and allowances, calculated as $\text{Total Revenues} - (\text{Discounts} + \text{Returns} + \text{Allowances})$.

Uncollectible accounts

Customers’ accounts that are no longer considered collectible.

Cash

Liquid assets owned by the company (reported on the Balance Sheet).

Accounts Receivable

Amounts the company expects to collect from customers based on the delivery of service or products (reported on the Balance Sheet).

Allowance for uncollectible accounts

A contra asset account on the Balance Sheet representing the amount of accounts receivable that we do not expect to collect.

Sales allowance

A Contra Revenue account representing a seller reduction of a customer's balance owed or a partial refund due to a deficiency in the company’s product or service.

Sales discount

A Contra Revenue account representing a reduction in the amount to be paid by a credit customer if payment is made within a specified period of time.

Sales return

A Contra Revenue account used when a customer returns a product.

Bad Debt Expense

The amount of the adjustment to allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period (reported on the Income Statement).