accounting ch 5

discounts, returns, allowance

3 potential modifications to the terms that companies can use that affect the amount a company expects to collect

sales discounts

price reduction (percentage of selling price) that companies offer to encourage prompt payments

sales returns and allowances

occur when a customer returns goods as unsatisfactory

sales allowances

occurs when customer agrees to keep goods with minor defects for a price reduction

types of receivables

accts __ balances that customers owe as result of sales on account

notes __ written promise to receive specific amounts of money at a set date

trade receivable

acct receivable that is due from a customer purchasing inventory in the ordinary (normal) course of business

nontrade receivable

a receivable that arises from a transaction not involving inventory. Could include interest receivable

allowance for doubtful accounts

a contra- asset (not expected to be collected) that is established to “store” the estimate of uncollectable accts rcvble until specific accts are identified as uncollectable

bad debt expense

expense that results from rcvbls that are not expected to paid by the customer. Estimate in in period of sale

aging of accts method

at end of each acct period, accts rcvble grouped by age/ how long they have not paid. Use this to estimate collectable amt.

notes receivable

receivables that generally specify an interest rate and maturity date at which any interest and principal must be repaid by the borrower

includes principal and interest

principal

amt of money borrowed/lent and promised to be repaid by the borrower

interest

excess of total amt of money paid by the borrower to a lender over the amount borrowed

interest formula

principal x annual interest rate x time held in months/ 12 months

gross margin formula

net sales - cogs

net profit margin formula

net income/ net sales

accounts rcvble turnover formula

net sales/ avg net accts rcvble

receivable

money due from another business or individual