ch 5 accounting

accounts receivable

when a company allows a customer to “buy now pay later”, the company’s right to collect cash in the future

notes receivable

when a longer credit term is needed or when a receivable is large, the seller usually requires the buyer to issue a note reflecting a credit agreement between parties.

net realizable value of accounts receivable

represents the amount of receivables a company estimates it will actually collect. it is also the face value less an allowance for doubtful accounts. (also known as bad debt)

allowance for doubtful accounts

represents a company’s estimate of the amount of uncollectable receivables. (contra-asset account)

allowance method of accounting for uncollectible accounts

requires accountant to estimate the amount of uncollectible accounts. reporting accounts receivable at net realizable value

income statement approach

the percent of revenue method, with its focus on determining the uncollectible accounts expense

balance sheet approach

the percent of receivables method, focused on determining the best estimate of the allowance balance

promisor note

the parties frequently enter into a credit agreement, the terms are legally documented in this.

characteristics of notes receivable

1.) maker

2.) payee

3.) principal

4.) interest

5.) maturity date

6.) collateral

maker

the person responsible for making payment on the due date is the maker of the note. The maker may also be called the borrower or debtor.

payee

the person to whom the note is made payable is the payee. the payee may also be called the creditor or lendor. the payee loans money to the maker and expects the return of the principal and the interest due

principal

the amount of money loaned by the payee to the maker of the note is the principal

interest

the economic benefit earned by the payee for loaning the principal to the maker is interest, which is normally expressed as an annual percentage of the principal amount

maturity date

the date on which the maker must repay the principal and make the final interest payment to the payee

collateral

assets belonging to the maker that are assigned as security to ensure that the principal and will be paid when due are called collateral

first in first out (FIFO)

cost floe method requires that the cost of items purchase first be assigned to the cost of goods sold (HIGH)

last in first out (LIFO)

cost flow method requires that the cost of items purchase last be assigned to the cost of goods sold (LOW)

weighted average

first calculate the average cost per unit by dividing the total cost of the inventory available by the total number of units available