Podcast Beta
Questions and Answers
What are receivables?
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.
Signup and view all the answers
What are examples of other receivables?
Signup and view all the answers
What are reasons why an account may be uncollectible?
Signup and view all the answers
What does the direct write-off method do?
Signup and view all the answers
What is the allowance method?
Signup and view all the answers
What happens when an account is written off to the allowance account?
Signup and view all the answers
What is the percent of sales method?
Signup and view all the answers
What does the analysis of receivable method assume?
Signup and view all the answers
What does accounts receivable turnover measure?
Signup and view all the answers
What is the number of days sales in receivables?
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
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.
