Accounting Receivables

Accounting Receivables

Receivables

 

Accounting Receivables

Accounting Receivables

Receivable – right to receive cash in the future on a current transaction

 

Creditor- one who gets a receivable

Debtor- one who takes on a receivable

 

Accounts receivable (trade receivable) – serve as control account

Notes Receivable

Control Account- an account in the general ledger that summarizes all related subsidiary accounts

Subsidiary Ledger-  details by customer or individual account balance

 

Maturity Date- when a note has to be paid

Promissory note- serves as evidence of the indebtedness

 

Internal Control Over Receivables

Need to run credit check

 

Allowance Method- records uncollectible accounts expense in the same period as the expense.

 

Allowance for uncollectible accounts (allowance for doubtful accounts)- reduces accounts receivable

 

Two ways to estimate uncollectibles

 

Percent of sales- calculates uncollectible account expense as a percentage of net credit sales

 

Journalizing

Pre-set percentage

Uncollectible account expense debit 300

Allowance credit 300

 

Net realizable value- net value that the company expects to collect from its receivables

 

Aging of Accounts Method- also called balance sheet approach- focuses on the age of the accounts receivable and determines a target allowance balance from that age

 

Percent of sales method à Adjusts allowance for uncollectible accounts —–à By à

The amount of: Uncollectible Account expense (credit sales x % uncollectible)

 

Aging of accounts method à Adjusts allowance for uncollectible accounts à To à

The amount of: Uncollectible Accounts Receivable (target ending balance – current balance in allowance for uncollectible accounts)

Direct Write Off Method-

 

Notes Receivable

 

Maker of the note – debtor

Payee of the note- creditor

Principal- amount loaned

Interest- expense for taking a loan

Interest Period- time frame in which interest is accrued

Interest Rate

Maturity Date

Maturity Value- sum of the principal plus interest due at maturity

 

Principal x interest rate x time

Interest receivable debit

Interest revenue credit

 

Dishonored notes receivable are transferred to accounts receivable

 

 

Acid Test (Quick) Ratio = (Cash + Short term investments + net current receivables)/

Total current liabilities

 

Determines whether entity could pay its liabilities if they were due instantly

 

One Day’s Sales = Net sales/365

Day’s Sales in Receivables = average net accounts receivable/ one day’s sales

 

–          Shorter the collection period the more quickly cash is used

 

Accounts Receivable Turnover Ratio  = Net Credit Sales/ Average Net Accounts receivable

 

–          Number of times a company sells and collects the average receivables balance in a year

 

 

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