Classification of Accounts Receivable

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Questions and Answers

What is a record of the increases and decreases in a specific asset, liability, equity, revenue, or expense known as?

Journal

Account (correct)

Posting

Trial balance

In accounting, how are accounts receivable classified?

Revenue

Equity

Assets (correct)

Liabilities

When a company purchases equipment on credit, what is the journal entry to record this transaction?

Debit to Equipment for $20,100; credit to Cash for $20,100

Debit to Cash for $20,100; credit to Equipment for $20,100

Debit to Equipment for $20,100; credit to Equipment Expense for $20,100

Debit to Accounts Payable for $20,100; credit to Equipment for $20,100 (correct)

Which financial statement is used to ensure that debits equal credits in the accounting records?

Trial balance Signup and view all the answers

What does an increase in account receivables indicate about a company?

Increase in assets Signup and view all the answers

In accounting, what does a credit to an account represent?

Increase in liabilities Signup and view all the answers

What is the internal document prepared by a department manager that lists the merchandise requested to be purchased?

Purchase requisition Signup and view all the answers

Which document does the purchasing department use to place an order with a vendor?

Purchase order Signup and view all the answers

What is the itemized statement of goods prepared by a vendor listing the customer's name, items sold, sales prices, and terms of the sale called?

Invoice Signup and view all the answers

Which of the following documents is typically prepared after the merchandise has been received and inspected?

Receiving report Signup and view all the answers

What type of document lists the merchandise requested to be purchased, but is not the document used by the purchasing department to place orders with vendors?

Purchase requisition Signup and view all the answers

Which document serves as approval for payment after an invoice has been verified?

Invoice approval Signup and view all the answers

In the periodic inventory system, which account is used that is not used in the perpetual inventory system?

Merchandise Inventory Signup and view all the answers

What is the expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases called?

Discounts lost Signup and view all the answers

What does the net method refer to in recording?

An invoice at its net amount (net of any cash discount) Signup and view all the answers

Which of the following is NOT an account used in the periodic inventory system?

Sales Signup and view all the answers

What does the net method of recording purchases involve?

Recording purchases without deducting any cash discounts Signup and view all the answers

Which expense results from not taking advantage of cash discounts in the net method of recording purchases?

Discounts lost Signup and view all the answers

Which of the following is NOT revealed by maintaining separate accounts receivable information for each customer?

Which customers still owe money. Signup and view all the answers

Why do sellers allow customers to use bank (or third-party) credit cards?

To be able to charge customers more due to fees and interest. Signup and view all the answers

What is a primary purpose of maintaining separate accounts receivable information for each customer?

To ensure the company sells on credit only to creditworthy customers. Signup and view all the answers

Why might sellers allow customers to use bank (or third-party) credit cards?

To avoid having to decide who gets credit and how much. Signup and view all the answers

What information does maintaining separate accounts receivable for each customer NOT provide?

Insight into the products each customer purchases. Signup and view all the answers

What is a significant benefit of maintaining separate accounts receivable information for each customer?

To facilitate targeted marketing based on individual purchase histories. Signup and view all the answers

What method is used for accounting for bad debts when a company writes off the debt after it is deemed uncollectible?

Direct write-off method Signup and view all the answers

When a note receivable is honored, what does it mean?

Paid in full Signup and view all the answers

What is the term used when a promissory note's maker fails to pay the amount due when it matures?

Dishonoring a note Signup and view all the answers

Which of the following methods involves estimating and setting aside an allowance for potential bad debts before they occur?

Adjustment method Signup and view all the answers

What is the name given to the process of reducing the recorded value of a promissory note in anticipation of potential losses?

Discounting a note Signup and view all the answers

Which method records bad debts only when they are confirmed as uncollectible, without prior estimation or provisioning?

Direct write-off method Signup and view all the answers

Study Notes

Accounting Basics

A record of increases and decreases in a specific asset, liability, equity, revenue, or expense is known as an account.
Accounts receivable is classified as a current asset in accounting.

Journal Entries

When equipment is purchased on credit, the journal entry involves debiting the Equipment account and crediting Accounts Payable.

Financial Statements

The trial balance is used to ensure that debits equal credits in the accounting records.

Accounts Receivable Insights

An increase in accounts receivable suggests that a company is extending more credit to customers, potentially indicating higher sales but also risking cash flow issues.
A credit to an account typically represents an increase in liabilities or decrease in assets.

Purchasing and Inventory Documents

An internal purchase requisition is prepared by a department manager and lists requested merchandise.
The document used by the purchasing department to place an order with a vendor is the purchase order.

Vendor Documentation

A vendor invoice is an itemized statement listing the customer's name, items sold, sales prices, and terms of sale.
A receiving report is typically prepared after merchandise has been received and inspected.

Inventory Systems

In the periodic inventory system, the Purchases account is used, which is not utilized in the perpetual inventory system.

Cash Discounts and Recording Methods

The expense from missing cash discounts when using the net method of recording purchases is known as lost cash discounts.
The net method refers to recording purchases at the amount after cash discounts are deducted.
The periodic inventory system does not use the Cost of Goods Sold (COGS) account.

Accounts Receivable Management

Maintaining separate accounts receivable information for each customer allows sellers to track payment performance and manage credit effectively.
Sellers allow customers to use bank (or third-party) credit cards to increase sales and facilitate easier transactions.

Bad Debts Accounting

The direct write-off method is used for accounting bad debts when the debt is deemed uncollectible after it has occurred.
When a note receivable is honored, it means the borrower has made the payment as promised.
When a promissory note's maker fails to pay the amount due at maturity, it is termed default.
The allowance method involves estimating and setting aside potential bad debts before they occur.
The process of reducing the recorded value of a promissory note in anticipation of potential losses is referred to as discounting.
The direct write-off method records bad debts only when confirmed as uncollectible, without prior estimation.

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Description

This quiz covers the classification of accounts receivable as assets and how they are increased by billings to customers. It also touches on the use of accounts in recording transactions.