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ACCTG 211 EX 2 Study Guide

ACCTG 211 EX 2 Study Guide - ACCTG 211 EX 2 Study Guide...

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ACCTG 211 EX 2 Study Guide Chapter 8 Types of Receivables Accounts Receivable: are amounts customers owe on account.  They result from the sale of  goods and services.  Companies generally expect to collect  accounts receivable within 30 to 60 days.  They are usually the  most significant type of claim held by a company. Notes Receivable: represent claims for which formal instruments of credit are issued as  evidence of the debt.  The credit instrument normally requires the  debtor to pay interest and extends for time periods of 60-90 days  or longer. Other Receivables: include non-trade receivables such as interest receivable, loans to  company officers, advances to employees and income taxes  refundable.  These do not generally result from the operations of  the business.  Thus, they are classified and reported as separate  items in the balance sheet. Accounts Receivable Recognizing A/R: A service organization records a receivable when it provides service on  account.  A merchandiser records accounts receivable at the point  of sale of merchandise on account.  When a merchandiser sells  goods, it increases both the Accounts Receivable and Sales  accounts. Valuing A/R: Companies report A/R on the balance sheet as an asset.  Determining the  amount to report is sometimes difficult because some receivable  will become uncollectible.  The seller debits such credit losses to 
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Bad Debts Expense (or Uncollectible Accounts Expense).  (Adjusting Entry Process) Most practical method for uncollectible  is allowance method. Allowance Method: Involves estimating uncollectible accounts at the end of each period.  This  provides better matching of expenses with revenues on the  income statement.  It also ensures that receivables are stated at  the net amount a company expects to receive in cash (Cash (net)  realizable value). 3 Essential Features Companies  estimate uncollectible A/R  and match them  against revenues in the same accounting period in which  the revenues are recorded. Companies  record   estimated uncollectibles as an increase  (debit) to Bad Debts Expense and an increase (credit)  Allowance for Doubtful Accounts (contra asset account)  through an adjusting entry at the end of each period.  (ESTIMATE) Bad debts expense $XXX Allowance for uncollectible accounts $XXX Companies  debit actual uncollectibles   to Allowance for  Doubtful Accounts and credit them to A/R at the time the  specific account is written off as uncollectible.  (FINAL) Allowance for uncollectible accounts $XXX Accounts receivable $XXX *Note that Bad Debts Expense is not involved since we don’t want to  double count it.
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