Key Concepts in Accounts Receivable and Bad Debt Management

Accounts receivable

Amounts customers owe on account. (p. 8-3).

Accounts receivable turnover

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

Aging the accounts receivable

A schedule of customer balances classified by the length of time they have been unpaid.

Allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

Average collection period

The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.

Bad Debt Expense

An expense account to record losses from extending credit.

Cash (net) realizable value

The net amount a company expects to receive in cash from receivables.

Concentration of credit risk

The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.

Direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

Dishonored (defaulted) note

A note that is not paid in full at maturity.

Factor

A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.

Maker

The party in a promissory note who is making the promise to pay.

Notes receivable

Written promise (as evidenced by a formal instrument) for amounts to be received.

Other receivables

Nontrade receivables that generally do not result from the operations of the business such as interest receivable and income taxes refundable.

Payee

The party to whom payment of a promissory note is to be made.

Percentage-of-receivables basis

A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.

Promissory note

A written promise to pay a specified amount of money on demand or at a definite time.

Receivables

Amounts due from individuals and companies that are expected to be collected in cash.

Trade receivables

Notes and accounts receivable that result from sales transactions.