Chapter 8 Accounts receivable

What are the three types of receivables?

Accounts Receivable, Notes Receivable, and Other Receivables

When does a service organization recognize accounts receivable?

When it performs a service on account

When does a merchandiser recognize accounts receivable?

At the point of sale of merchandise on account

What is a sales return?

A reduction in accounts receivable when merchandise is returned

What type of account is Allowance for Doubtful Accounts?

A contra-asset account

What is the purpose of the Allowance Method?

To estimate and match bad debts to the period of sale and report receivables at cash realizable value

What is the journal entry to write off an uncollectible account using the allowance method?

Debit Allowance for Doubtful Accounts, Credit Accounts Receivable

Does a write-off under the allowance method affect the income statement?

No, it only affects balance sheet accounts

What happens when a previously written-off account is recovered?

Reverse the write-off and record the cash collection

What is the direct write-off method?

Recognizes bad debt only when a specific account is deemed uncollectible

Why is the direct write-off method not GAAP-compliant?

It does not match expenses to revenues and doesn't report net realizable value

What is the aging schedule used for?

Estimating the allowance for doubtful accounts based on the age of receivables

What are common reasons companies sell their receivables?

To get cash quickly and avoid collection costs

What is factoring?

Selling receivables to a finance company or bank for immediate cash (minus a service fee)

How are national credit card sales treated in accounting?

As a form of factoring with a service fee

What is a promissory note?

A written promise to pay a specific amount of money with interest at a future date

How do you calculate interest on a note?

Principal × Rate × Time (in years)

What is the maturity date of a note?

The date the note is due, excluding the issue date and including the due date

What happens when a note is honored?

The borrower pays the note and interest in full at maturity

What happens when a note is dishonored but expected to be collected later?

Reclassify it to accounts receivable

What happens when a note is dishonored and not expected to be collected?

Write off the note using the allowance account

How are receivables presented on the balance sheet?

As current assets, shown as gross receivables minus the allowance for doubtful accounts

Where is bad debt expense reported on the income statement?

Under Selling Expenses in the operating section

What is the accounts receivable turnover ratio?

Net Credit Sales ÷ Average Net Accounts Receivable

What does the average collection period measure?

The average number of days it takes to collect receivables (365 ÷ turnover)

How is data analytics used in receivables management?

To predict late payments, assess credit risk, and optimize collection efforts

What is the "cookie jar" accounting tactic?

Reducing the allowance to boost net income artificially