Ch 5 Receivables and Sales

Credit sales- transfer goods or services to a customer today while bearing the risk of collecting payment from the customer in the future 

• Accounts receivable- amounts owed to a company by its customers from the sale of goods or services on account 

• Revenue- even though no cash is received at the time of the credit sale, the seller records revenue immediately once goods or services are provided to the customer, and future collection from the customer is probable 

Companies record an asset ( accounts receivable) and revenue when they sell goods or services to their customers in the future 

Once the receivable is collected the balance of accounts receivable is reduced 

Nontrade receivables- receivables that originate from sources other than customers

Notes receivable- formal credit arrangements evidenced by written debt instruments 

Companies offer discounts and guarantees that can reduce the amount of cash the company is entitled to receive from customers

• Trade discounts

• Sales return 

• Sales allowance

•  Sales discounts 

Net revenues equal total revenues less any amounts for returns, allowances, and discounts 

Reduction in the list price of a product or service 

• Used to provide incentives to larger customers or consumer groups to purchase from the company 

Discount terms such as 2/10, and n/30, are a shorthand way to communicate the amount of the discount and the period within which it is available 

The revenue recognition standard requires a company to report revenues equal to the amount of cash the company “expects to be entitled to receive” 

Customers accounts receivable we no longer expect to collect are referred to as uncollectible accounts or bad debts 

GAAP requires that we account for uncollectible accounts using the allowance method 

• Estimate the amount of current accounts receivable that will prove to be uncollectible in the future 

• Report this estimate as a contra asset to its accounts receivable (report this estimate as a contra asset to its accounts receivable) 

Companies report their estimate of future bad debts using an allowance for uncollectible accounts 

We report the allowance for uncollectible accounts in the asset section of the balance sheet, but it represents a reduction in the balance of accounts receivable 

The difference between total accounts receivable and the allowance for uncollectible accounts equals net accounts receivable 

The write-off 

• Reduces the balance of accounts receivable 

• Reduces the balance of the contra accounts allowance for uncollectible accounts 

The write-off does not affect total assets (balance sheet) or total expenses (income statement) 

Percentage of receivables method- is a method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected 

The older the account the less likely it is to be collected 

Subsidiary ledger- contains a group of accounts associated with a particular general ledger control account 

Notes receivables are assets