Questions and Answers
What are receivables?
What is accounts receivable?
A claim against the customer created by selling merchandise or services on credit.
What does accounts receivable turnover measure?
How frequently during the year the accounts receivable are being converted to cash.
What is aging the receivables?
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What is the allowance for doubtful accounts?
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What is the allowance method?
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What is bad debt expense?
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What is the direct write-off method?
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What is a dishonored note receivable?
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What is maturity value?
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What is net realizable value?
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What are notes receivable?
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What is the number of days' sales in receivables?
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What is classified as a current asset on the balance sheet?
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Notes are often used for credit periods of more than 60 days.
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What are trade receivables?
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What are other receivables?
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Where are other receivables reported on the balance sheet?
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What is selling the receivables called?
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What is the buyer of a receivable called?
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What are signs an account is uncollectible?
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What are the two methods of accounting for uncollectible receivables?
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The direct write-off method is often used by small companies with few receivables.
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The allowance method is used by large companies per GAAP.
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When a customer's account is identified as uncollectible, it is written off against the allowance account.
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The allowance account will have a credit balance at the end of the period if the write-offs during the period are less than the beginning balance.
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It will have a debit balance if the write-offs exceed the beginning balance.
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What are the two methods used to estimate uncollectible accounts?
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Study Notes
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
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Description
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.
