Accounting Chapter 8: Receivables Flashcards
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Questions and Answers

What are receivables?

  • Only money owed by individuals
  • Claims against people and organizations (correct)
  • Only money owed by companies
  • None of the above
  • What is accounts receivable?

    The money owed from selling merchandise or services on account.

    What is notes receivable?

    Amounts owed by customers for which a formal, written instrument of credit has been issued.

    There is a general rule for when an account becomes uncollectible.

    <p>False</p> Signup and view all the answers

    What are examples of other receivables?

    <p>Interest receivable, taxes receivable, and receivables from officers and employees.</p> Signup and view all the answers

    What are reasons why an account may be uncollectible?

    <p>All of the above</p> Signup and view all the answers

    What does the direct write-off method do?

    <p>Records bad debt expense when an account is determined to be worthless.</p> Signup and view all the answers

    What is the allowance method?

    <p>Records bad debt expense by estimating uncollectible accounts at the end of the period.</p> Signup and view all the answers

    What happens when an account is written off to the allowance account?

    <p>A debit is made to allowance for doubtful accounts and a credit to accounts receivable.</p> Signup and view all the answers

    What is the percent of sales method?

    <p>Estimates uncollectible accounts as a percentage of credit sales.</p> Signup and view all the answers

    What does the analysis of receivable method assume?

    <p>The longer accounts receivable are outstanding, the less likely they are to be collected.</p> Signup and view all the answers

    What does accounts receivable turnover measure?

    <p>How frequently accounts receivable are converted to cash during the year.</p> Signup and view all the answers

    What is the number of days sales in receivables?

    <p>An estimate of the length of time accounts receivable have been outstanding.</p> Signup and view all the answers

    Study Notes

    Key Concepts of Receivables

    • Receivables: Money claims against entities, including individuals and organizations.
    • Accounts Receivable: Arise from credit sales of merchandise or services, recorded as current assets typically collectible within 30-60 days.
    • Notes Receivable: Formal credit instruments issued to customers; classified as current assets if collectible within a year, may replace accounts receivable.

    Uncollectible Receivables

    • Definition: Accounts deemed uncollectible; leads to bad debt expense. There is no strict rule for determining when an account becomes uncollectible.
    • Reasons for Uncollectibility:
      • Accounts past due
      • Lack of response from the customer
      • Customer bankruptcy
      • Business closure of the customer
      • Inability to locate the customer

    Methods for Recording Bad Debts

    • Direct Write-off Method: Records bad debt expense when an account is confirmed worthless, commonly used by small businesses.
    • Allowance Method: Estimates uncollectible accounts at the period's end in compliance with GAAP; required for companies with significant receivables.

    Writing Off Accounts

    • Write-off Process: When an account is uncollectible, a debit is made to the allowance for doubtful accounts, decreasing its balance; a credit is made to accounts receivable, reducing that balance as well.

    Estimation Methods

    • Percent of Sales Method: Estimates uncollectible accounts as a percentage of credit sales, applicable when sales patterns are consistent.
    • Analysis of Receivables Method: Assumes longer outstanding accounts are less likely to be collected; involves "aging" the receivables.

    Performance Metrics

    • Accounts Receivable Turnover: Measures how often receivables are converted to cash during the year; higher turnover indicates faster collections.
    • Number of Days Sales in Receivables: Estimates average time accounts receivable remain outstanding; used to gauge efficiency in collection processes.

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    Explore the key concepts of Chapter 8 on receivables with these flashcards. Understand vital terms such as 'receivables' and 'accounts receivable' that are critical for managing financial transactions. Test your knowledge and enhance your accounting skills.

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