Accounting Chapter 8

Bad debt expense

Reports the estimated amount of this period’s credit sales that customers will fail to pay

Benefit of extending credit

Increases sales relative to a cash-only policy

Cost of extending credit

Customers may fail to pay some or all of the amount they owe, credit losses are considered an operating expense and are debited to an account called Bad Debt Expense

allowance for doubtful accounts

a contra-asset account that estimates the portion of accounts receivable a company expects will not be collected, has a normal credit balance

Percentage of credit sales

estimates bad debts based on the historical percentage of sales that lead to bad debts losses, credit sales * % = bad debts

Aging of accounts receivable method

estimates uncollectible accounts based on the age of each account receivable, uses more detailed data and is more accurate, aging buckets that show the risk of customers not paying

Interest formula

I = P*R*T

Receivables turnover

the process of selling and collecting on account, determined the average number of times this process occurs during the period, higher ratio means faster collection turnovers, low turnover may indicate that you’re giving customers too much time to pay