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Chapter 6 - Chapter 6 Receivables and Inventory Classifying...

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Chapter 6: Receivables and Inventory
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Classifying Receivables Accounts Receivable Short-term credit 30–60 days Notes Receivable Longer terms Usually bears interest Other Receivables
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Uncollectible Receivables A. What if a customer does not pay the balance owed to the company? B. Companies must recognize an operating expense for accounts that are not collectible. It is called Bad Debt Expense.
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Bad Debt Expense Two Methods: Direct Write-Off Method Allowance Method
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Direct Write-Off Method Bad Debt Expense is recorded and the receivable written off when the account is determined to be worthless.
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If payment is collected after the write-off, the write-off entry is reversed and the cash collection is recorded.
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Allowance Method Required by GAAP for companies with large accounts receivable. Estimates the accounts receivable that will not be collected and records bad debt expense for this estimate at the end of each period using an allowance account.
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$40,000 Estimate of Uncollectible Accounts Receivable If the total accounts receivable balance is $1,000,000, the new net realizable value is $960,000.
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Chapter 6 - Chapter 6 Receivables and Inventory Classifying...

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