Accounting Chapter 8: Receivables Flashcards

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.

False Signup and view all the answers

What are examples of other receivables?

Interest receivable, taxes receivable, and receivables from officers and employees. Signup and view all the answers

What are reasons why an account may be uncollectible?

All of the above Signup and view all the answers

What does the direct write-off method do?

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

What is the allowance method?

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

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

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

What is the percent of sales method?

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

What does the analysis of receivable method assume?

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

What does accounts receivable turnover measure?

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

What is the number of days sales in receivables?

An estimate of the length of time accounts receivable have been outstanding. 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.

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.