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Chapter 5Key Terms & ConceptsAccounts Receivable vs. Notes ReceivableAccounts ReceivableAllowance for Doubtful Accounts & Matching PrincipleUncollectible Accounts Expense (or Bad Debt Expense)Net Realizable Value*Net amount of reAccounts recievable balance - allowance for doubtful accounts = the amount that the company expects to collectWrite-off of an Account ReceivableRemove the amouContra account and it will add to the allowances Recovery of an Uncollectible AccountAllowance for Doubtful Accounts MethodsPercentage of Revenue MethodFocus on our credPercentage of total credit sales during period that the company does not expect to collectPercentage of Receivables MethodFocus on balance*Within that 30 day period - Current * 31-60 days outstanding - Over due* How long it has been outstanding* The more time that elaspses means the less likely the payment will be recevied Ratios:Accounts Receivable Turnover (ART)Sales/Account ReThe numbeThe higher the turnover the better Average Days to Collect Receivables365/ARTAverage nLower the The longerThe older the AR balance theless likely it is to be collectedNotes ReceivableMore fomalized…Principal amount = face value of loan …. Interest = economic gain from the loan usually done in average percentage…. Collateral = some kinda of assurance that the loaner gets from the loanee to make sure their money. Features of a Note ReceivableEntries to Record Note ReceivableEntries to Record Interest on Note ReceivableStatement of Cash Flows: Loan or Collection of Principal = Investing ActivityInterest Collection = Operating ActivityCredit Card SalesWhy do companies use credit card sales?Entries to record credit card sales
Example 5-1: Accounting for Uncollectible ReceivablesThe Solo Company was started on January 1, 2010. The following events occurred during 2010 and 2011.20101. Provided $4,000 of services on account.2. Collected $3,000 cash from accounts receivable.3. Estimated uncollectible accounts expense to be 1.5 percent of 2010 credit sales.20111. Wrote off $40 of accounts receivable that were deemed uncollectible.2. Provided $6,500 of services on account.3. Collected $5,400 cash from accounts receivable.4. Received $5 from a bad debt that had been previously written off. Reinstated the account.5. Recorded the $5 cash received from the receivable reinstated in Event No. 4.