Chapter 7 Review. Accounts Receivable

Financial Accounting

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Keys Terms Chapter 7 I. Accounts Receivable A receivable is an amount due from another party. The two most common receivables are accounts receivable and notes receivable. Other receivables include interest receivable, rent receivable, tax refund receivable, and receivables from employees. Accounts receivable are amounts due from customers for credit sales. It includes receivables that occur when customers use credit cards issued by third parties and when a company gives credit directly to customers. When a company does extend credit directly to customers, it (1) maintains a separate account receivable for each customer and (2) accounts for bad debts from credit sales. I- A. Recognizing Accounts Receivable A. a. Sales on Credit Credit sales are recorded by increasing (debiting) Accounts Receivable. A company must also maintain a separate account for each customer that tracks how much that customer purchases, has already paid, and still owes. This information provides the basis for sending bills to customers and for other business analyses. To maintain this information, companies that extend credit directly to their customers keep a separate account receivable for each one of them. The general ledger continues to have a single Accounts Receivable account along with the other financial statement accounts, but a supplementary record is created to maintain a separate account for each customer. This supplementary record is called the accounts receivable ledger . 1
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Keys Terms Chapter 7 Point: Receivables, cash, cash equivalents, and short-term investments make up the most liquid assets of a company . A.b. Credit Card Sales Many companies allow their customers to pay for products and services using third- party credit cards such as Visa , MasterCard , or American Express , and debit cards (also called ATM or bank cards). This practice gives customers the ability to make purchases without cash or checks. Once credit is established with a credit card company or bank, the customer does not have to open an account with each store. Customers using these cards can make single monthly payments instead of several payments to different creditors and can defer their payments. Sellers allow customers to use third-party credit cards and debit cards instead of granting credit directly for several reasons. 1. First, the seller does not have to evaluate each customer’s credit standing or make decisions about who gets credit and how much. 2. Second, the seller avoids the risk of extending credit to customers who cannot or do not pay. This risk is transferred to the card company. 3. Third, the seller typically receives cash from the card company sooner than had it granted credit directly to customers. 4.
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Chapter 7 Review. Accounts Receivable - Keys Terms Chapter...

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