Chapter+5-1 - I Accounting for receivables A Receivables...

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I. Accounting for receivables A. Receivables are monetary claims against businesses and individuals. 1. Trade receivables arise from sales to customers . Individual customer’s account balances may be found in the Account Receivable Subsidiary Record. 2. Notes receivable are written promises to pay a creditor a definite sum at a specific future date called the maturity date. a. Notes receivable due within one year or less are current assets . b. Notes receivable due beyond one year are long -term receivables. 3. Other receivables is a category that is used to report loans to employees and subsidiaries B. Uncollectible -account expense is the cost to the seller of extending credit and arises from the failure to collect from credit customers. The allowance method or The direct write-off method
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II. Allowance method for uncollectible receivables (accepted by GAAP) A. Accountants measure uncollectible -account expense by use of the allowance method or the direct write-off method. 1. Under the allowance method, an estimate of the total uncollectible-account expense for the period is made based on past collection experience. 2. The estimate of the uncollectible accounts is recorded in the account, Allowance for Uncollectible Accounts . The balance of this account represents the amount the business does not expect to collect . 3. The Allowance for Uncollectible Accounts is a contra-asset account (normal account balance of a Credit ) and is deducted from Accounts Receivable on the balance sheet as follows: Accounts receivable: XX Less: Allowance for uncollectible accounts XX Accounts receivable, net XX (Net Realizable Value/Net Receivables)
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B. Two methods of estimating uncollectible accounts are the percent-of-sales method and the aging-of- accounts receivable sometimes called (% of accounts receivable) method. 1. Percent-of-sales (the income statement approach): uncollectible-account expense is determined by multiplying the net sales by a percentage that is based on past collection experience . Politico, Inc. has ending Accounts Receivable of $400,000 and ending Allowance for Uncollectible Accounts of $2,000 (credit). Net sales for the year are $1,500,000. Politico, Inc. estimates that 4% of sales will be uncollectible. What is the uncollectible-account expense, the balance of the allowance for uncollectible accounts, and the net accounts receivable?
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