Comprehensive Accounting: Information Systems, Internal Controls, Cash Governance, and Receivables

Vocabulary flashcards covering accounting information systems, special journals, subsidiary ledgers, internal controls, cash governance, bank reconciliations, promissory notes, and methods of accounting for receivables.

Accounts Receivable

Amounts due from customers for credit sales that track what each customer purchases, has already paid, and still owes.

Direct Write-Off Method

A method of accounting for bad debts that records Bad Debts Expense only when a specific customer's account is determined to be uncollectible, directly crediting Accounts Receivable.

Allowance Method

An accounting method for bad debts that matches estimated uncollectible accounts expense with sales recorded during the same period and reports accounts receivable on the balance sheet at estimated realizable value.

Allowance for Doubtful Accounts

A contra asset account with a normal credit balance used under the allowance method to reduce the gross balance of Accounts Receivable to its net realizable value.

Realizable Value of Accounts Receivable

The estimated net amount of accounts receivable expected to be collected in cash, calculated on the balance sheet as gross Accounts Receivable minus the Allowance for Doubtful Accounts.

Percent of Sales Method

An income statement method that calculates estimated bad debts expense as $\text{Current Period Sales} \times \text{Bad Debt \%} = \text{Estimated Bad Debts Expense}$, without considering any existing unadjusted balance in the Allowance for Doubtful Accounts.

Percent of Receivables Method

A balance sheet method that calculates the desired ending balance of the Allowance for Doubtful Accounts as $\text{Year-end Accounts Receivable} \times \text{Estimated Bad Debt \%}$, requiring an adjustment that factors in the allowance account's unadjusted balance to find Bad Debts Expense.

Aging of Receivables Method

A balance sheet approach that groups accounts receivable by how long they are past due, applies higher estimated uncollectible percentages to older age brackets, and totals the results to calculate the target ending balance of the Allowance for Doubtful Accounts.

Promissory Note

A written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.

Maturity Date of a Note

The specific date on which the principal and interest of a promissory note must be repaid in full.

Banker's Rule

A standard commercial convention that calculates interest on a note expressed in days by basing the year on $360$ days.

Interest Computation Formula

The formula used to compute interest on a note: $\text{Principal of the note} \times \text{Annual interest rate} \times \text{Time expressed in fraction of year} = \text{Interest}$.

Dishonoring a Note

The failure of a note's maker to pay the principal and interest due on the maturity date, which does not relieve the maker of the obligation and causes the total amount due to be charged back to Accounts Receivable.

Factoring Receivables

The disposal of accounts receivable by selling them to a buyer (factor) for immediate cash less a specified factoring fee.

Pledging Receivables

A financing arrangement where a company borrows money by assigning its accounts receivable as security or collateral for a note payable while retaining title and collection responsibilities.

Accounts Receivable Turnover

A financial metric assessing management efficiency in granting credit and collecting cash, calculated as: $\text{Accounts receivable turnover} = \frac{\text{Net sales}}{\text{Average accounts receivable, net}}$.

Internal Control System

The policies and procedures used by management to monitor and control business activities in order to protect assets, ensure reliable accounting, uphold company policies, and promote efficient operations.

Sarbanes-Oxley Act (SOX)

Legislation requiring managers and auditors of public companies to document and certify internal control systems, subject to oversight by the Public Company Accounting Oversight Board (PCAOB) and penalties of up to $25$ years in prison with fines for violations.

Bonding

An internal control procedure where a company purchases an insurance policy against losses caused by theft by employees who handle large amounts of cash or other assets.

Separation of Duties

A fundamental internal control principle dividing responsibility for related transaction steps among two or more individuals so that the work of one serves as an independent check on another.

Fraud Triangle

A model identifying three factors that induce human fraud: opportunity, pressure, and rationalization.

Cost-Benefit Constraint

A limitation of internal control stating that the cost of establishing and operating an internal control procedure must not exceed its expected benefits.

Cash

Currency, coins, deposits in bank accounts, customer checks, cashier checks, certified checks, and money orders.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to a known cash amount and sufficiently close to their maturity date that their value is not sensitive to interest rate changes.

Liquid Assets

Assets such as cash and cash equivalents that can be readily used to pay off existing liabilities.

Cash Over and Short

An income statement account used to record differences between actual cash counts and cash register or petty cash receipts; debited when cash is short and credited when cash is over.

Voucher System

A set of procedures establishing formal approval for verifying, approving, and recording liabilities for eventual cash disbursement and issuing checks.

Petty Cash Fund

A small amount of cash kept on hand to pay for minor expenditures such as parking, printing, postage, and low-cost supplies.

Bank Reconciliation

A report prepared periodically to explain and resolve differences between the cash balance reported on the bank statement and the cash balance in the company's accounting records.

Deposit in Transit

Cash receipts that have been recorded in the company's books and deposited in the bank but have not yet cleared or appeared on the bank statement.

Outstanding Checks

Checks written, signed, and recorded in a company's ledger that have not yet been presented to or cleared by the bank.

Days' Sales Uncollected

A liquidity ratio estimating how many days are likely to pass before cash is collected from credit sales, calculated as: $\text{Days' sales uncollected} = \frac{\text{Accounts receivable}}{\text{Net sales}} \times 365$.

Accounting Information System (AIS)

A system that collects and processes transaction and event data, organizes them into reports, and communicates results to decision makers.

Control Principle (AIS)

An AIS system principle requiring internal controls that help managers monitor and control business activities to prevent wrong data entry.

Relevance Principle (AIS)

An AIS system principle requiring that the accounting system report useful, understandable, and timely information for decision making.

Compatibility Principle (AIS)

An AIS system principle requiring that the system conform with a company's activities, personnel, and organizational structure.

Flexibility Principle (AIS)

An AIS system principle requiring the accounting system to adapt to changes in the company, the business environment, and the needs of decision makers.

Cost-Benefit Principle (AIS)

An AIS system principle dictating that the benefits generated by an accounting system activity must outweigh the costs of that activity.

Special Journal

A journal designed to record and post transactions of a similar type, allowing specialized recordkeeping and division of labor.

Controlling Account

A general ledger account whose ending balance equals the sum of all individual account balances in a corresponding subsidiary ledger.

Subsidiary Ledger

A listing of individual accounts with a common characteristic, such as amounts due from individual customers or owed to individual suppliers.

Sales Journal

A special journal used exclusively to record credit sales of merchandise, debiting Accounts Receivable and crediting Sales while simultaneously debiting Cost of Goods Sold and crediting Inventory.

Cash Receipts Journal

A special journal used to record all transactions in which a business receives cash, including credit collections, cash sales, loans, and interest.

Purchases Journal

A special journal used exclusively to record credit purchases of inventory, supplies, or other assets on account.

Cash Payments Journal

A special journal used to record all transactions involving disbursements of cash.

Footing

The accounting process of adding a single vertical column of numbers to compute its total.

Crossfooting

The accounting procedure of adding debit column totals and credit column totals across a journal to verify that total debits equal total credits.

Schedule of Accounts Receivable

A listing of each customer and the balance owed from the accounts receivable subsidiary ledger, prepared to prove that total balances equal the Accounts Receivable controlling account.

Schedule of Accounts Payable

A listing of each supplier and the balance owed from the accounts payable subsidiary ledger, prepared to prove that total balances equal the Accounts Payable controlling account.

Days' Payable Outstanding (DPO)

A metric assessing how long a company takes to pay its suppliers, calculated as: $\text{Days' payable outstanding} = \frac{\text{Accounts payable}}{\text{Cost of goods sold}} \times 365$.