Chapter 7

Accounts Receivable

Amounts due from customers for credit sales

Bad Debts

Uncollectible Accounts

Accounts of customers who do not pay what they have promised to pay

Direct Write-Off Method

Records the loss/bad debt expense when an account is determined to be uncollectible

Allowance Method

Matches estimated loss from uncollectible accounts receivable against the sales they helped produce

Allowance for Doubtful Accounts

Contra asset account with a balance approximating uncollectible accounts receivable

Realizable Value

Expected proceeds from converting an asset into cash

Percent of Sales

Uses a percent of credit sales for the period to estimate bad debts

Percent of Accounts Receivable

Uses a percent of total accounts receivable to estimate bad debts

Aging of Accounts Receivable

Applies increasing percentages to accounts receivable (classified by days past due) to estimate bad debts

Promissory Note

Written promise to pay a specified amount, usually with interest either on demand or a stated future date

Principal of a Note

Amount the signer of a note agrees to pay back when it matures, not including interest

Maker of the Note

Entity who signs a note and promises to pay it at maturity

Payee of the Note

Entity to whom a note is made payable

Interest

Charge for using the money until its due date

Borrower=Expense

Lender=Revenue

Banker’s Rule

Treat a year as 360 days

Factoring (Selling) Receivables

Accounts receivable are sold to a bank and the seller is charged a factoring fee

Pledging of Receivables

Borrowing money by pledging receivables as security for a loan

Borrower discloses pledging in notes to financial statement

Quality of Receivables

Likelihood of collection without loss

Liquidity of Receivables

Speed of collection

Accounts Receivable Turnover

Measure hows often, on average, receivables are collected during the period