Accounting Chapter 8

Allowance Method

A method of accounting that reduces accounts receivable (as well as net income) for an estimate of uncollectible accounts (bad debts)

Bad Debt Expense

Reports the estimated amount of this period’s credit sales that customers will fail to pay

Receivable Write-Off

The act of removing an uncollectible account receivable and its corresponding allowance from the accounting records

Percentage of Credit Sales Method

Estimates bad debts based on the historical percentage of sales that lead to bad debt losses. Also called the income statement approach.

Aging of Accounts Receivable Method

Estimates uncollectible accounts based on the age of each account receivable. Also called the balance sheet approach.

Principal

The amount of notes receivable

Interest Formula

I = P × R × T, where I = interest calculated, P = principal, R = annual interest rate, and T = time period covered in the interest calculation (number of months out of 12)

Receivables Turnover

The process of selling and collecting on account. The receivables turnover ratio determines the average number of times this process occurs during the period.

Days to Collect

A measure of the average number of days from the time a sale is made on account to the time it is collected

Direct Write-Off Method

Records bad debt expense only when accounts are written off; not allowed under GAAP.