ac101_ch7 - Revised July 2008 ACC101 CHAPTER 7 Accounting...

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Revised July 2008 Page 1 of 15 ACC101 – CHAPTER 7 Accounting for Receivables
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Revised July 2008 Page 2 of 15 Key Terms and Concepts to Know Accounts Receivable: Result from sales on account (credit sales), not cash sales. May also result from credit card sales if there is a delay between when sale is made and when the cash is received from the credit card company. Accounting for Uncollectible Accounts: Not all sales on account result in cash being collected from the customer. The Allowance Method debits bad debt expense in the period when the sale is recorded and credits a contra-asset account, Allowance for Uncollectible Accounts. When a specific account is determined to be uncollectible, the Allowance is debited and Accounts Receivable is credited. The Direct Write-off Method debits bad debt expense and credits Accounts Receivable in the period when a specific account is determined to be uncollectible. The Direct Write-off Method violates the matching principle because it does not match revenues and expenses in the same period. Determining the Amount of Uncollectible Receivables and Bad Debt Expense: The Percent of Sales Method uses one income statement account, Sales, to estimate the change in another income statement account, Bad Debt Expense, for the period. This is the amount of the adjusting entry required. The balance in the Allowance account is then the balance in the ledger before adjustment plus the adjusting entry for bad debt expense. The Percent of Receivables Method uses the balance in one balance sheet account, Accounts Receivable, to estimate the balance in another balance sheet account, Allowance for Uncollectible Accounts, at the end of the period. The adjusting entry for bad debt expense is the difference between the balance in the ledger before adjustment and the estimated balance in the allowance account. Accounts Receivable on the Balance Sheet: Allowance account is deducted from Accounts Receivable to determine Net Realizable Value. Notes Receivable: Notes Receivable may be accepted by the seller in payment for a sale or to replace an account receivable from a prior sale. Notes bear interest for their term which is paid at the end of the term, the maturity date. Interest rates are typically stated as a percent per annum, that is, as a yearly or annual rate. Interest revenue is earned as time passes, regardless of whether payment has been received. Interest revenue for outstanding notes receivable is typically accrued at the end of the year, although it may be accrued at the end of a quarter or month.
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Revised July 2008 Page 3 of 15 If the note is not paid or dishonored at maturity, the amount of the principal and interest is debited to accounts receivable because it is still payable to the seller by the buyer.
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ac101_ch7 - Revised July 2008 ACC101 CHAPTER 7 Accounting...

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