Chapter 8 — Reporting and Analyzing Receivables

What are receivables?

Amounts owed to a company by customers.

What are the main types of receivables?

Accounts receivable, notes receivable, and other receivables.

What are accounts receivable?

Amounts owed by customers from credit sales.

When are accounts receivable usually collected?

Within 30-60 days.

What is a note receivable?

A written promise to pay a specific amount plus interest.

What do notes receivable include that accounts receivable do not?

Interest.

What is the entry when goods are sold on account?

Dr Accounts Receivable, Cr Sales Revenue.

What is the entry when a customer pays?

Dr Cash, Cr Accounts Receivable.

What happens when a customer returns goods?

Dr Sales Returns and Allowances, Cr Accounts Receivable.

What do terms like 2/10, n/30 mean?

2% discount if paid within 10 days, otherwise full amount due in 30 days.

What is the formula for sales discount?

(Sales − Returns) × Discount %.

What is the formula for cash received?

(Sales − Returns) − Discount.

What are bad debts?

Accounts receivable that will not be collected.

Why must companies estimate bad debts?

To match expenses with revenue and avoid overstating assets.

What is the allowance method?

Estimating bad debts before they occur.

What is Bad Debt Expense?

Expense recognized when estimating uncollectible accounts.

What is Allowance for Doubtful Accounts?

Contra asset account that reduces accounts receivable.

What is the adjusting entry for bad debts?

Dr Bad Debt Expense, Cr Allowance for Doubtful Accounts.

What is Net Realizable Value (NRV)?

The amount expected to be collected from receivables.

What is the formula for NRV?

Accounts Receivable − Allowance for Doubtful Accounts.

What does the aging method focus on?

Estimating the ending balance of the allowance account.

How does aging work?

Older accounts are more likely to be uncollectible.

What does the percentage of sales method calculate?

Bad Debt Expense directly.

What is the entry to write off an uncollectible account?

Dr Allowance for Doubtful Accounts, Cr Accounts Receivable.

Does writing off affect net income?

No.

What is the principal?

The amount of the note.

What is the interest rate?

Percentage charged on the principal.

What is the maturity date?

Date the note is due.

What is the formula for interest?

Interest = Principal × Rate × Time.

What is the entry when a note is collected?

Dr Cash, Cr Notes Receivable, Cr Interest Revenue.

What is factoring?

Selling receivables to another company for cash.

Why do companies factor receivables?

To get cash quickly.

What happens in credit card sales?

Bank charges a fee.

What accounts are included in credit card sales entry?

Cash, Service Fee Expense, Sales Revenue.

What does AR turnover measure?

How many times receivables are collected per year.

What is the formula for AR turnover?

Net Credit Sales ÷ Average Accounts Receivable.

What does average collection period measure?

Number of days to collect receivables.

What is the formula for average collection period?

365 ÷ AR Turnover.