Chapter 8 Recievables

The term receivables includes all money claims against other entities, including people, companies, and other organizations. The receivables that result from sales on account are normally accounts receivable or notes receivable. Notes and accounts receivable that result from sales transactions are sometimes called trade receivables.

an amount due from another party.

A major issue of selling merchandise or services on account (on credit) is that some customers will not pay their accounts. That is, some accounts receivable will be uncollectible. Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense recorded from uncollectible receivables is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense.

The receivable is past due. The customer does not respond to the company's attempts to collect. The customer files for bankruptcy. The customer closes its business. The company cannot locate the customer.

direct write-off method allowance method

records bad debt expense only when an account is determined to be worthless. often used by small companies and companies with few receivables

records bad debt expense by estimating uncollectible accounts at the end of the accounting period. - Generally accepted accounting principles (GAAP) require companies with a large amount of receivables to use the allowance method.

Bad debt expense- D accounts receivable- C

At the end of each period, estimate total bad debts expected to be realized from that period's sales

1. It records estimated bad debts expense in the period when the related sales are recorded. 2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected

the write off does not affect the realizable value of accounts receivable

Because Allowance for Doubtful Accounts is based on an estimate, it will normally have a balance at the end of a period. The total write-offs to the allowance account during the period will rarely equal the balance of the account at the beginning of the period. - 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. -The allowance account will have a debit balance at the end of the period if the write-offs during the period exceed the beginning balance.

To help restore credit standing, a customer sometimes volunteers to pay all or part of the amount owed on an account even after it has been written off

percent of sales method & analysis of receivables method -The allowance method requires an estimate of uncollectible accounts at the end of the period. -`This estimate is normally based on past experience, industry averages, and forecasts of the future

Bad debts expense is computed current period credit sales x bad debt%= estimated bad debt expense

Compute the estimate of the Allowance for Doubtful Accounts. Year-end Accounts Receivable x Bad Debt %2. Bad Debts Expense is computed as total estimated bad debts expense - previous balance in allowance account = current bad debts expense

- Classify each receivable by how long it is past due - Each age group is multiplied by its estimated bad debts percentage. - Estimated bad debts for each group are totaled. - Based on assumption that the longer a receivable is outstanding, the less likely it is that it will be collected.

a written promise to pay a specified amount of money, usually with interest, either on demand or at a definite future date

The maturity date of a note is the day the note (principal and interest) must be repaid.

Notes receivable are usually recorded in a single Notes Receivable account to simplify recordkeeping. The original notes are kept on file, including information on the maker, rate of interest, and due date.

The principal and interest of a note are due on its maturity date

All receivables that are expected to be realized in cash within a year are reported in the Current assets section of the balance sheet