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.
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What are examples of other receivables?
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What are reasons why an account may be uncollectible?
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What does the direct write-off method do?
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What is the allowance method?
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What happens when an account is written off to the allowance account?
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What is the percent of sales method?
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What does the analysis of receivable method assume?
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What does accounts receivable turnover measure?
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What is the number of days sales in receivables?
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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.
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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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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.