Chapter 8: Receivables, Bad Debt Expense, and Interest Revenue

It encourages the customer to buy more goods or services, so revenue goes up.

It encourages the customer to buy more goods or services, so revenue goes up.

An advantage of extending credit is:

Increase in wage costs, bad debt expense, and delays receipt of cash

Disadvantages to extending credit includes:

Increase is wage costs

________ is caused by having to hire more employees to see if someone is credit worthy, see how much money people owe, and to collect from customers.

Bad debt costs

________ is due to the fact that sometimes people don't pay what they owe.

Delays receipt of cash

________ means cash may be received in 30-60 days.

bad debt

When accounts receivables aren't fully paid off, it results in ________.

"net realizable value"

Accounts Receivable is recorded at the value that is expected to be collected, aka ________.

expense recognition principle (matching)

You must record Sales Revenue and Bad Debt Expense in the same period of the sale. This is called ________.

allowance method

A(n) ________ is estimating bad debts that may not be collected and adjusting these estimations later.

Allowance for Doubtful Accounts

________ is a contra account to Accounts Receivable and has a normal credit balance.

written off

When an account can not be collected, the account must be ________.

Income Statement

Write offs DO NOT appear on the ________.

Debit Allowance for Doubtful Accounts Credit Accounts Receivable

Journal entry for write offs:

Net Receivable Value =

Debit Accounts Receivable Credit Sales Revenue

Journal entry to record sales on account:

Debit Bad Debt Expense Credit Allowance for Doubtful Accounts

Journal entry to record estimate for bad debts:

Percentage of Credit Sales Method Aging of Accounts Receivable

The two methods to calculate the estimate of bad debt:

Percentage of Credit Sales Method

________ is also known as the Income Statement Account. It estimates Bad Debt Expense for the period, but is not precise.

Equation for estimating bad debt expense (% of Credit Sales Method):

Aging of Accounts Receivable

________ is also known as the Balance Sheet Method. It estimates the ending balance in the Allowance for Doubtful Accounts. It is more accurate.

The steps for the Aging of Accounts Receivable

Prepare an aged listing of accounts receivable. Estimate the bad debt loss percentages for each category. Compute the total estimated bad debts.

Revising estimates

________ is when a company revises their bad debt estimates for the current period.

Accounts recovery

________ is reviving written off accounts.

recovery

There are always 2 journal entries for a ________.

Debit Accounts Receivable Credit Allowance for Doubtful Accounts

Journal entry for reversing the write off (first recovery entry):

Debit Cash Credit Accounts Receivable

Journal entry for the collection of the account (second recovery entry):

notes receivable

A ________ is reported when a promissory note is used for a transaction. It has a stronger legal claim.

charge interest

Notes receivables ________ from the date they are created to when they are due.

maturity date

The day the Notes Receivable is due is called the ________.

Loaning money. Receiving extended payment. Switching from Accounts Receivable to Notes Receivable.

A company may use a Notes Receivable for:

Equation for calculating interest =

Principal

The amount of the Note Receivable.

Interest Rate

The interest percentage charged on the note.

Time Period

The amount of time covered in the interest.

Debit Notes Receivable Credit Cash

Journal entry for establishing a Note Receivable:

Debit Interest Receivable Credit Interest Revenue

Journal entry for accruing interest earned but not received (use interest formula):

Debit Cash Credit Interest Receivable Credit Interest Revenue

Journal entry for recording interest payments received (adjusting journal):

Debit Cash Credit Note Receivable

Journal entry for the principal payments received:

receivables turnover analysis

A(n) ________ helps see the effectiveness of a companys credit- granting and collection activity.

increase

Selling goods or services make the receivables balance ________.

decrease

Collecting the money from customers makes the receivables balance _______.

Receivables turnover

________ is the constant selling and collecting cycle.

receivables turnover ratio

The ________ indicates how many times the cycle is repeated during the accounting period.

A higher ratio means a faster collection of receivables. Low ratios mean companies give their customers too long of a period to pay.

Higher vs lower receivables turnover ratio

Days to collect

________ is the number of days to collect receivables. A higher ratio means it takes more days to collect. We want a low ratio.

Equation for Receivable Turnover Ratio: Receivable Turnover Ratio =

365/Receivables Turnover Ratio

Equation for Days to Collect: Days to Collect =

Credit cards

________ speed up cash collection and make it less likely to receive bad checks from customers.

Credit terms

________ is an agreement between the buyer and seller about the timings and payment to be made for the goods bought on credit.

factor

A ________ is when you sell outstanding accounts to a different company. By doing so, your company is paid for the receivables it sells to the factors. A factoring fee must be considered.