Questions and Answers
What is Accounts Receivable?
What is Accounts Receivable Turnover?
A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.
What is aging the receivables?
The process of analyzing the accounts receivable and classifying them according to various age groupings based on due date.
What is Allowance for Doubtful Accounts?
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What is the allowance method?
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What is Bad Debt Expense?
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What is the direct write-off method?
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What is a dishonored note receivable?
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What is maturity value?
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What is net realizable value?
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What are Notes Receivable?
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What is the number of days' sales in receivables?
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What are Receivables?
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What are the three classifications of receivables?
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What method of accounting for uncollectible receivables should Dan's Hardware use and why?
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What kind of account is Allowance for Doubtful Accounts?
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How are Accounts Receivable and Allowance for Doubtful Accounts reported on the balance sheet?
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Give two possible explanations for a large Allowance for Doubtful Accounts balance relative to Accounts Receivable.
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Which method of estimating uncollectibles provides the most accurate estimate of net realizable value?
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Who is the payee in the note receivable issued by Neptune Company to Sailfish Company?
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What is the title of the account used by Sailfish Company in recording the note?
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If a note provides for payment of principal of $85,000 and interest at 6%, will the interest amount to $5,100?
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What accounts should be debited and credited by the payee to record a dishonored note receivable?
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What entry should be made to record the receipt of payment for a dishonored note receivable?
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Study Notes
Accounts Receivable and Related Concepts
- Accounts Receivable refers to amounts expected to be received from the sale of goods or services.
- Accounts Receivable Turnover indicates liquidity, calculated by dividing net credit sales by average net accounts receivable.
- Analyzing and classifying accounts receivable based on age is known as aging the receivables, which assists in identifying overdue amounts.
- Allowance for Doubtful Accounts acts as a contra-asset account estimating uncollectible receivables.
- The allowance method estimates bad debts at the end of each period to account for potential losses.
- Bad Debt Expense records losses incurred from extending credit to customers.
- The direct write-off method charges Bad Debt Expense when a specific account is deemed uncollectible.
- A dishonored note receivable occurs when the maker fails to pay on the due date.
- Maturity value is the total amount owed on a note when it reaches its due date.
- Net realizable value is the expected cash amount a firm anticipates collecting from accounts receivable.
Notes Receivable and Sales Analysis
- Notes Receivable is a written promise for amounts to be received, documented with a formal instrument.
- Number of days' sales in receivables reflects the relationship between sales and accounts receivable, assessed by dividing net accounts receivable by average daily sales.
- Receivables encompass amounts due from customers, expected to be collected in cash.
Classification and Business Practices
- Receivables are classified into three categories: Accounts Receivable, Notes Receivable, and Other Receivables.
- For small businesses like Dan's Hardware, which has limited credit extention, the direct write-off method is suited due to fewer receivables to monitor.
Accounting Treatments and Reporting
- Allowance for Doubtful Accounts is classified as a contra asset with a normal credit balance.
- On a balance sheet, accounts receivable of $673,400 minus an allowance of $11,900 results in a net amount of $661,500, with disclosure required for the allowance.
- An excessive allowance balance may result from a high percentage used for estimates or carrying old noncollectable accounts.
Accurate Estimation of Receivables
- Estimation based on thorough analysis of receivables yields a more accurate current net realizable value of receivables.
Example Scenarios
- In a transaction between Neptune Company and Sailfish Company, Sailfish acts as the payee and records the transaction under Notes Receivable.
- For a $85,000 principal note at 6% interest, the interest totals $5,100 only if paid within one year.
- A dishonored $240,000 note requires debiting Accounts Receivable for $243,600 and crediting Notes Receivable for $240,000 and Interest Revenue for $3,600.
- Payment of a dishonored note including interest results in recording cash received of $245,427, debiting Accounts Receivable, and recognizing $1,827 in Interest Revenue.
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Description
Test your understanding of key accounting terms from Chapter 8. This quiz features essential words such as Accounts Receivable and Accounts Receivable Turnover. Review the definitions and concepts to excel in your accounting studies.
