Chapter 8: Accounting for Receivables

Accounts receivable represent...

money owed to a company from credit sales of goods or services to customers in the normal course of business

Journal entry: make sale on account

DR A/R, CR sales revenue

Journal entry: collect cash on account

DR cash, CR A/R

Credit losses

The losses arising from extending credit to customers who do not pay for the goods or services

We recognize credit losses in an account called...

bad debt expense, or uncollectible accounts expense, an operating expense included as either selling or administrative expenses

To achieve proper matching of revenues and expenses, we need to...

estimate bad debt expense for the period instead of waiting until the accounts prove to be uncollectible

We record bad debt expense using an _______ at the end of the period.

adjusting entry

Journal entry: using the allowance method to estimate bad debt expense at the end of the period

DR BDE, CR AFDA

Allowance for doubtful accounts, or allowance for uncollectible accounts, is a...

contra-asset account that is contra to A/R on the balance sheet

Formula: Accounts Receivable, Net

A/R - AFDA

Journal entry: write-off account

DR AFDA, CR A/R

Percentage-of-sales uses...

credit sales to estimate BDE. The ending balance of AFDA is calculated using t-account math.

Percentage-of-sales is an...

income statement approach because it prioritizes the calculation of the income statement item, BDE, and the balance sheet amount follows

Aging-of-receivables uses...

A/R to estimate the ending balance of AFDA. BDE is calculated using t-account math.

Aging-of-receivables is a...

balance sheet approach because it prioritizes the calculation of the balance sheet item, AFDA, and the income statement amount follows

An unadjusted debit balance means that...

our write-offs exceeded our beginning balance

An unadjusted credit balance means that...

our write-offs were less than our beginning balance

Our business would record revenue at _______ and _______ the credit card fee.

full amount; expense

Journal entry: to record sale and credit card fee

CR sales revenue, DR credit card discount expense and cash

Creditor/lender

The party to whom money is owed

Debtor

The party that borrowed and owes money on the note

Interest

The cost of borrowing money, stated as an annual percentage rate

Maturity date

The date on which the debtor must pay the note

Principal amount

The amount of money borrowed by the debtor and lent by the creditor

Term

The length of time from when the note was signed by the debtor to when the debtor must pay the note

Formula: simple interest

PrincipalInterest ratetime (fraction of a year)

A 2-month note issued on March 1st is due on _______.

May 1st

Journal entry: to record note

DR note receivable, CR sales revenue

Journal entry: to record receipt of principal and interest

CR note receivable and interest income, DR cash

Journal entry: loaned funds

DR notes receivable, CR cash

Journal entry: accrue interest income for the period

DR interest receivable, CR interest income

Journal entry: to collect note and interest at maturity

CR note receivable and interest receivable and interest income, DR cash