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Financial Accounting Chapter 9

Receivable
Occurs when a business sells goods or services to another party on account (on credit). A monetary claim against a business or an individual. It is the right to receive cash in the future from a currant transaction. An asset.
Accounts Receivable
Represent the right to receive cash in the future from customers for goods sold or for services performed.
Notes Receivable
Usually have longer terms than accounts receivable. A fixed amount of principal plus interest by a certain date in the future.
Maturity Date
Is the date on which the notes receivable is due.
Recording Sales on Credit
Businesses must maintain a separate accounts receivable account for each customer in order to account for payments received from the customers and amounts still owed.
Journal Entry for Recording Sales on Credit
Accounts Receivable (Asset = DR)
Service Revenue (Equity = CR)
Journal Entry for Receiving Cash from Sales
Cash (Asset = DR)
Accounts Receivable (Equity = CR)
Net
The total sale less processing fee assessed equals the net amount of cash deposited by the processor, usually within a few days of the sale date.
Gross
The total sale is deposited daily within a few days of the actual sale date. The processing fees for all transactions processed for the month are deducted from the company’s bank

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account by the processor, often on the last day of the month.
Recording Sales Revenue
Cash (Asset = DR)
Sales Revenue (Equity = CR)
Bad Debt Expense
Net Credit Sales x %
The cost to the seller extending credit. It arises from the failure to collect from some credit customers.
Direct Write-Off Method
A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer’s account receivable is uncollectible.
Recording and Writing-Off Uncollectible Accounts Journal Entry
Bad Debt Expense (Equity = DR)
Accounts Receivable (Asset = CR)
Recovery of Accounts Perviously Written-Off Journal Entry
Accounts Receivable (Asset = DR)
Bad Debt Expense (Equity = CR)

Cash (Asset = DR)
Accounts Receivable (Asset = CR)

Limits of Direct Write-Off Method
– Violates Matching Principle
– Only acceptable for companies with very few uncollectible receivables
Allowance Method
A method of accounting for uncollectible receivables in which the company estimates bad debt expense instead instead of waiting to see which customers the company will not collect from.
Allowance for Bad Debt
A contra asset, related to accounts receivable that holds the estimated amount of uncollectible accounts.
Recording Bad Debit Expense Journal Entry
Bad Debt Expense (Asset = DR)
Allowance for Bad Debt (Equity = CR)
Net Realizable Value
The net value a company expects to collect from its accounts receivable. Accounts Receivable less Allowance for Bad Debit.
Writing-Off Uncollectible Accounts Journal Entry
Allowance for Bad Debts (Asset = DR)
Accounts Receivable (Asset = CR)
Percent-of-Sales Method
A method of estimating uncollectible receivables that calculates bad debit expense based on percentage of net credit sales.
Estimating and Recording Bad Debit Expense Journal Entry
Bad Debit Expense (Equity = DR)
Allowance for Bad Debit Expense (Asset = CR)
Percent-of-Receivables Method
A method of estimating uncollectible receivables by detraining the balance of the Allowance for Bad Debt account based on a percentage of accounts receivable.
Age-of-Recivables Method
A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on the age of individual accounts receivable.
Principle
The amount loaned out by the payee and borrowed by the maker of the note.
Interest
The revenue to the payee for loaning the money – the expense to the debtor.
Maturity Value
The sum of the principal plus the interest due at maturity.
Accounts for Notes Receivable Journal Entry
Notes Receivable (Asset = DR)
Cash (Asset = CR)
Amount of interest
Principal x Interest Rate x Time
Accuring Interest Revenue and Recording Honored Notes Receivable Journal Entry
Notes Receivable (Asset = DR)
Service Revenue (Equity = CR)

Interest Receivable (Asset = DR)
Interest Revenue (Equity = CR)

Cash (Asset = DR)
Notes Receivable (Asset = CR)
Interest Principle (Asset = CR)
Interest Revenue (Equity = CR)

Recording Dishonored Notes Receivable
Accounts Receivable (Asset = DR)
Notes Receivable (Asset = CR)
Interest Revenue (Equity = CR)
Acid-Test Ratio
(Cash including cash equivalents + short-term investments + Net current receivables) / Total current liabilities
The ratio tells whether the entity could pay all its current liabilities if they came due immediately.
Accounts Receivable Turnover Ratio
Net Credit Sales / Average net accounts receivable
Measures the number of times the company collects the average accounts receivable balance in a year.
Days’ Sales in Receivables
365 Days / Accounts receivable turnover ratio
The ration of average net accounts receivable to one day’s sales. Tells us how many days it takes to collect the average level of accounts receivable.

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