College Accounting chapter 8

Receivables

all money claims against other entities, including people, business firms, and other organizations

Accounts receivable

selling merchandise or services on account (on credit)

Notes receivable

amounts that customers owe for which a formal, written instrument of credit has been issued

Trade receivables

notes and accounts receivable that result from sales transactions

Other receivables

include interest receivable, taxes receivable, and receivables from officers or employees

Investments

other receivables that are expected to be collected beyond one year that are classified as noncurrent assets

Factoring

selling receivables to a factor

Advantage of factoring

The company selling its receivables immediately receives cash for operating and other needs.

Bad debt/uncollectible accounts/doubtful accounts expense

the operating expense incurred because of the failure to collect receivables

Indications that an account may be uncollectible

• The receivable is past due.

• The customer does not respond to the company’s attempts to collect.

• The customer files for bankruptcy.

• The customer closes its business.

• The company cannot locate the customer.

Direct write-off method

the method of accounting for uncollectible receivables that recognizes an expense only when an account is determined to be worthless

Allowance method

the method of accounting for uncollectible receivables that recognizes an expense by estimating future uncollectible accounts at the end of the accounting period