Accounting for Receivables and Bad Debts

These flashcards cover key concepts related to accounting for receivables, bad debts, and methods used to estimate uncollectibles, as discussed in the lecture notes.

What defines a receivable?

A receivable is an amount due from another party in the future, representing the right to collect cash from customers.

What are the two main types of receivables?

1. Accounts Receivable: Amounts due from customers for credit sales. 2. Notes Receivable: Written promises indicating receipt of a specified amount.

What does the Allowance for Doubtful Accounts represent?

It is a contra-asset account that represents the company's estimate of uncollectible accounts.

What is the Direct Write-Off Method?

A method to record bad debts by writing off specific accounts when it is determined they are uncollectible.

When should we use the Allowance Method?

When bad debts are significant, it should be used to estimate uncollectible accounts at the end of each period.

What is the Percent-of-Sales Method?

A method to estimate bad debts by multiplying sales by a percentage that reflects expected uncollectible accounts.

How is interest calculated on a notes receivable?

Interest is calculated using the formula: Interest = Principal x Interest Rate x Time.

What happens when a note is dishonored?

The note must be removed from Notes Receivable and recorded as an Accounts Receivable for tracking purposes.

What is the journal entry when writing off a specific account using the Allowance Method?

DR Allowance for Doubtful Accounts XX; CR Accounts Receivable XX.

What is the purpose of selling receivables (factoring)?

To obtain cash before receivables come due by transferring the risk of bad debts to a factor.

What is included in the maturity value of a note?

The maturity value is the sum of the principal amount and the interest due at maturity.

What is the journal entry to recognize bad debts under the Allowance Method?

DR Bad Debt Expense XX; CR Allowance for Doubtful Accounts XX.

What is the importance of estimating bad debts?

Estimating bad debts is crucial for matching revenues and expenses according to GAAP.

What is a promissory note?

A written promise from the maker to the payee to pay a specific amount on a specific date.

How do you account for a client payment on a previously written-off account?

Reinstate the receivable and record the cash: DR Accounts Receivable XX; CR Allowance for Doubtful Accounts XX; then record cash received.

What is the Allowance Method's second step after estimating uncollectible accounts?

When an A/R becomes bad for real, record the actual write-off.