Accounts Receivable

Front 1

Realization principle states to record revenue when

Back 1

the earning process is complete or virtually complete AND there is reasonable certainty as to the conductibility of the asset to be received

Front 2

Two adjustments to the sales revenue are

Back 2

1. Sales Returns & Allowances
2. Sales Discounts

Front 3

Sales Returns result when

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goods are sold, but then returned to the seller

Front 4

Sales Allowance result when

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customers are dissatisfied with merchandiser and the seller allows a reduction from the selling price. Goods are not returned.

Front 5

Sales Discounts

Back 5

Offer a cash discount to a credit customer for the prompt payment of a balance due

Front 6

3/10, n/30

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3% discount if paid within 10 days; otherwise due in 30 days

Front 7

Sales Returns & Allowances; Sales Discounts characteristics

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Contra revenue account. Results in decrease to sales revenue. Normal balance is debit.

Front 8

Bad Debt Expense

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Customers who do not pay their bills. Estimate due to the matching concept.

Front 9

To record the bad debt expense estimate

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Debit - Bad Debts Expense,
Credit - Allowance for Doubtful Accounts.

Estimated at the end of every year. adjust entry.

Front 10

Allowance for doubtful accounts characteristics

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CONTRA ASSET ACCOUNT. Causes a decrease in assets. Normal balance is credit. Found on the balance sheet as a decrease to the accounts receivable.

Front 11

Allowance for doubtful accounts represents

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the amount of accounts receivable the company estimates it will not collect.

Front 12

Write off (define, journal entry)

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when company stops trying to collect the debt. Represent the actual bad debts of the company.

Debit allowance, credit accounts receivable
(Increases contra asset, decreases asset) no effect overall

Front 13

Write off char

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Can occur at any time in the year.
Debit Allowance for Doubtful Accounts
Credit Accounts Receivable

Front 14

Write off effect on bad expense

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The write off does NOT effect the bad debt expense. We simply eliminate the account receivable and reduce the allowance fir doubtful accounts.

Front 15

Write off effect on NRV

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NONE. Entry reduces both accounts rec and allowance, leaving the difference unchanged.

Front 16

NRV formula

Back 16

accounts rec - allowance

Front 17

Net Realizable value

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net amount the company expects to receive in cash from receivables

Front 18

Allowance for Doubtful Accounts is (at the end of the year)

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not closed

Front 19

Allowance t thing

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Debit: Write offs
Credit: Beginning balance, recoveries, bad debt expense

Front 20

Two methods in estimating bad debt expense

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Percentage of sales
Percentage of receivables

Front 21

Percentage of sales (also called..) + def

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Net credit sales method.

Bad debt expense is based on the % of current credit sales estimated to be uncollectible where the % is based on past experience/historic pattern.

Front 22

Bad debt expense =
(Net credit sales method)

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Net credit sales X % expected uncollectible

Front 23

Percentage of receivables (also called..; definition)

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aging method. Requires an analysis of accounts receivable balances by the length of time they have been unpaid. Put the accounts receivable into categories by age, and assign a % expected to be unncollectible to each category (aging schedule)

Front 24

The total number from the aging schedule

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Represents the required credit balance in the allowance for doubtful accounts. Does not represent the bad debt expense estimate.

Front 25

T account for allowance with the aging schedule number

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Credit:Write offs
Debit:Beginning balance, recoveries, Bad debt expense(x)

Bottom Credit:
Ending balance (from aging schedule)

Front 26

Unlike the net credit sales method, an existing balance in the allowance for doubtful accounts will

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effect the current years bad debt expense estimate

Front 27

Accounts Receivable turnover

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Measures the number of times, on average, the company collects its accounts receivable. How many times old receivables are collected and replaced by new receivables. Higher is better.

Front 28

Accounts receivable turnover formula

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Net sales revenue/Average accounts receivable

Front 29

Average collection period

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measures the number of days on average between making a sale on credit and collecting our cash from the customer. Lower is better

Front 30

Average collection period formula

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365/ accts receivable turnover ratio.

Front 31

Company returned $2000 worth of merchandise

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debit: sales returns and allowances $2000
credit: accounts receivable $2000

Front 32

Company paid bill (credit sale) of $4000 w a discount of $80
(3920)

Back 32

debit: cash $3920
sales discounts $80
credit: accounts receivable $4000

Front 33

After an effort, $2500 account receivable was written off as uncollectible.

+ effects

Back 33

debit: allowance for doubtful accounts $2500
credit: accounts receivable $2500

NO EFFECT ON NRV; cash flows, ni

Front 34

Based on past experienced, the company estimated that 1% of the years credit sales of $246,000 will be uncollectible
($246,000*.01=$2460)

+ effects

Back 34

debit: bad debt expense $2460
credit: allowance for doubtful accounts $2460

ni- decrease
nrv - decrease
cash - none

Front 35

Company paid the $2500 accounts previously written off
(recovery)

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debit: cash $2500
credit: allowance for doubtful accounts $2500

ni - none
nrv- decrease
cash - increase