Chapter 5: Receivables and Revenues

Comprehensive vocabulary flashcards covering revenue recognition, credit sales, contra revenue accounts, notes receivable, uncollectible account estimation methods, and receivables turnover analysis.

Credit Sale

A transaction that occurs when a company provides goods or services to a customer on account rather than for immediate cash.

Accounts Receivable

Amounts owed to a company by its customers from the sale of goods or services on account.

Nontrade Receivables

Receivables that originate from sources other than customers, including tax refund claims, interest receivable, and loans by the company to stockholders or employees.

Notes Receivable

Formal credit arrangements evidenced by written debt instruments or promissory notes.

Net Revenues

Total revenues minus any amounts for trade discounts, sales returns, sales allowances, and sales discounts: $\text{Net Revenues} = \text{Total Revenues} - \text{Sales Returns} - \text{Sales Allowances} - \text{Sales Discounts}$.

Trade Discount

A reduction in the list price of a product or service offered to provide incentives to larger customers or consumer groups, recorded directly at the discounted transaction amount.

Sales Return

A transaction where a customer returns goods previously purchased, resulting in either a cash refund if the original sale was for cash or a reduction in accounts receivable if the original sale was on account.

Sales Allowance

A reduction in the balance owed or a partial refund granted to a customer due to a deficiency in the product or service, where the customer does not return the goods.

Contra Revenue Account

An account that is offset against a revenue account on the income statement, having a normal debit balance and reducing reported net revenues and net income.

Sales Discount

A reduction in the amount to be received from a credit customer if collection on account occurs within a specified period.

2/10, n/30

Discount terms indicating that the customer will receive a $2\%$ discount if the invoice is paid within $10\text{ days}$; otherwise, the full amount net of returns and allowances is due within $30\text{ days}$.

Uncollectible Accounts

Customers' accounts receivable that a company no longer expects to collect, also referred to as doubtful accounts.

Allowance Method

A GAAP-required accounting procedure where companies estimate future uncollectible accounts and record an allowance as a contra asset in the same period credit sales are recognized.

Allowance for Uncollectible Accounts

A contra asset account with a normal credit balance that represents the total estimated amount of accounts receivable not expected to be collected.

Net Accounts Receivable

The difference between total accounts receivable and the allowance for uncollectible accounts, representing the net amount of cash expected to be collected: $\text{Net Accounts Receivable} = \text{Accounts Receivable} - \text{Allowance for Uncollectible Accounts}$.

Bad Debt Expense

An operating expense reported on the income statement representing the cost of estimated future uncollectible credit sales.

Write-Off of Accounts Receivable

The formal reduction of a specific customer's uncollectible balance by debiting Allowance for Uncollectible Accounts and crediting Accounts Receivable, which results in no effect on total assets or total expenses.

Percentage-of-Receivables Method

A balance sheet approach to estimating uncollectible accounts based on applying an estimated percentage to the ending accounts receivable balance.

Aging Method

An estimation method that classifies accounts receivable based on their due date and applies higher uncollectible percentages to older past-due accounts.

Credit Balance in Allowance Before Adjustment

A condition indicating that the beginning balance of the allowance account was higher than actual bad debt write-offs during the year, meaning last year's estimate may have been too high.

Debit Balance in Allowance Before Adjustment

A condition indicating that actual write-offs during the year exceeded the beginning allowance balance, meaning last year's estimate of bad debts was too low.

Subsidiary Ledger

A group of individual customer accounts that tracks all increases and decreases for each customer, whose collective sum equals the general ledger accounts receivable control balance.

Direct Write-Off Method

A non-GAAP tax reporting method that records bad debt expense and reduces accounts receivable only when an account actually proves uncollectible, waiting rather than estimating future bad debts.

Promissory Note

A written debt contract where a debtor (the maker) promises to pay a stated face value plus interest to a creditor (the payee) by a designated due date.

Interest Revenue Formula

The formula used to compute interest earned on a note receivable: $\text{Interest} = \text{Face value} \times \text{Annual interest rate} \times \text{Fraction of the year}$.

Interest Receivable

A current asset account that reflects interest earned on a note receivable but not yet received in cash by the end of an accounting period.

Receivables Turnover Ratio

A financial metric that measures the number of times per year the average accounts receivable balance is collected: $\text{Receivables turnover ratio} = \frac{\text{Net credit sales}}{\text{Average accounts receivable}}$.

Average Collection Period

A liquidity ratio measuring the average number of days it takes a company to convert its receivables into cash: $\text{Average collection period} = \frac{365\text{ days}}{\text{Receivables turnover ratio}}$.

Percentage-of-Credit-Sales Method

An income statement approach that estimates uncollectible accounts by multiplying current credit sales by an estimated loss percentage, adjusting bad debt expense directly without considering the existing allowance balance.