Ch 9 - Ch.8 The term receivables refers to amounts due from...

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Ch.8 The term receivables refers to amounts due from individuals and companies. Receivables are claims that are expected to be collected in cash. The management of receivables is a very important activity for any company that sells goods or services on credit. Receivables are important because they represent one of a company's most liquid assets. The relative significance of a company's receivables as a percentage of its assets depends on various factors: its industry, the time of year, whether it extends long-term financing, and its credit policies. To reflect important differences among receivables, they are frequently classified as (1) accounts receivable, (2) notes receivable, and (3) other receivables. Accounts receivable are amounts customers owe on account. Companies generally expect to collect accounts receivable within 30 to 60 days 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. Notes and accounts receivable that result from sales transactions are often called trade receivables . 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. Therefore, they are generally classified and reported as separate items in the balance sheet. Two accounting issues associated with accounts receivable are: 1. Recognizing accoun 2. Valuing accounts receivable. Recognizing Accounts Receivable is relatively straightforward. 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 . The seller may offer a discount. For example, terms of 2/10, n/30 provide the buyer with a 2% discount if it pays within 10 days. Sales returns also reduce receivables. The buyer might find some of the goods unacceptable and choose to return the unwanted goods. For example, if the buyer returns merchandise with a selling price of $100, the seller reduces Accounts Receivable by $100 upon receipt of the returned merchandise. Some retailers issue their own credit cards. When you use a retailer's credit card (JCPenney, for example), the retailer charges interest on the balance due if not paid within a specified period (usually 25–30 days). To illustrate, assume that you use your JCPenney Company credit card to purchase clothing with a sales price of $300. JCPenney will increase (debit) Accounts Receivable for $300 and increase (credit) Sales for $300. JCPenney charges 1.5% per month on the balance due, the adjusting entry to record interest revenue of $4.50 ($300 × 1.5%) is as follows. Accounts Receivable
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This document was uploaded on 11/02/2011 for the course ACCOUNTING ac 201 at Montgomery.

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Ch 9 - Ch.8 The term receivables refers to amounts due from...

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