Receivables Overview and Accounting Practices

Receivables Overview

• Receivables refer to all monetary claims against various entities, such as individuals and businesses.

Accounts Receivable

• Accounts Receivable is generated from sales made on credit, representing a company's claim to payment from customers.

Accounts Receivable Turnover

• This metric indicates how often accounts receivable are converted to cash during a year, calculated as net sales divided by average net accounts receivable.

Aging Receivables

• Aging involves classifying accounts receivable into different age brackets based on their due dates, facilitating the analysis of collectibility.

Allowance for Doubtful Accounts

• A contra asset account that offsets accounts receivable, reflecting the estimated uncollectible amounts.

Allowance Method

• An accounting approach that anticipates uncollectible accounts by recognizing related expenses before actual write-offs occur.

Bad Debt Expense

• Represents operating expenses incurred from uncollectible receivables.

Direct Write-Off Method

• This method recognizes bad debt expense only when an account is deemed worthless.

Dishonored Note Receivable

• A note that is not paid by the maker by its due date.

Maturity Value

• The total amount due when a note reaches its maturity date.

Net Realizable Value

• The expected selling price of inventory after deducting direct disposal costs, like sales commissions.

Notes Receivable

• A formal written promise by a customer to pay a specified amount of money, potentially including interest.

Number of Days' Sales in Receivables

• A ratio calculated by dividing net accounts receivable by average daily sales, indicating the average time it takes to collect receivables.

Current Asset Classification

• Accounts receivable is classified as a current asset on the balance sheet.

Notes for Credit

• Notes are typically used in credit transactions that exceed 60 days.

Trade Receivables

• Consist of notes and accounts receivable arising from sales transactions.

Other Receivables

• Include receivables like interest or taxes and those owed by officers or employees.

Reporting of Other Receivables

• Receivables due within a year are classified as current assets; those due beyond a year are recorded as non-current assets labeled "investments."

Factoring Receivables

• The process of selling receivables to another party for cash.

Buyer of Receivables

• Known as a factor, this entity purchases receivables from sellers.

Indicators of Uncollectible Accounts

• Accounts showing signs of uncollectibility include:
  • Past due status
  • Customer non-responsiveness
  • Bankruptcy filings
  • Closure of business operations
  • Inability to locate the customer

Uncollectible Receivables Accounting Methods

• Two primary methods: direct write-off and allowance method.

Small vs. Large Companies

• The direct write-off method is commonly used by small companies, while larger firms typically adhere to the allowance method under GAAP.

Account Write-Offs

• When a customer's account is recognized as uncollectible, it is written off using the allowance account.

Allowance Account Balances

• The allowance account maintains a credit balance if write-offs are less than the beginning balance, while excessive write-offs over the beginning balance would result in a debit balance.

Estimating Uncollectible Accounts

• Regular estimates of uncollectible accounts are made using two methods:
  • Percent of sales method
  • Analysis of receivables method

This quiz covers key concepts related to receivables, including accounts receivable, turnover metrics, aging methods, and the allowance for doubtful accounts. Test your understanding of how businesses manage their monetary claims and assess collectibility. Ideal for accounting students looking to master these essential topics.