Session:9 Accounting for Receivables

Key Terms

Principles of Accounting, Volume 1: Financial Accounting | Leadership Development – Micro-Learning Session

Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-financial-accounting

accounts receivable

outstanding customer debt on a credit sale, typically receivable within a short time period

accounts receivable turnover ratio

how many times accounts receivable is collected during an operating period and converted to cash

accrual accounting

records transactions related to revenue earnings as they occur, not when cash is collected

allowance for doubtful accounts

contra asset account that is specifically contrary to accounts receivable; it is used to estimate bad debt when the specific customer is unknown

allowance method

estimates bad debt during a period based on certain computational approaches, and it matches this to sales

bad debts

uncollectible amounts from customer accounts

balance sheet aging of receivables method

allowance method approach that estimates bad debt expenses based on the balance in accounts receivable, but it also considers the uncollectible time period for each account

balance sheet method

(also, percentage of accounts receivable method) allowance method approach that estimates bad debt expenses based on the balance in accounts receivable

completed contract method

delays reporting of both revenues and expenses until the entire contract is complete

contra account

account paired with another account type that has an opposite normal balance to the paired account; reduces or increases the balance in the paired account at the end of a period

direct write-off method

delays recognition of bad debt until the specific customer accounts receivable is identified

earnings management

works within GAAP constraints to improve stakeholders’ views of the company’s financial position

earnings manipulation

ignores GAAP rules to alter earnings significantly to improve stakeholder’s views of the company’s financial position

income statement method

allowance method approach that estimates bad debt expenses based on the assumption that at the end of the period, a certain percentage of sales during the period will not be collected

installment sale

periodic installment payments from buyers

interest

monetary incentive to the lender, which justifies loan risk; interest is paid to the lender by the borrower

interest rate

part of a loan charged to the borrower, expressed as an annual percentage of the outstanding loan amount

issue date

point at which the security agreement is initially established

matching principle

(also, expense recognition principle) records expenses related to revenue generation in the period in which they are incurred

maturity date

date a bond or note becomes due and payable

net realizable value

amount of an account balance that is expected to be collected; for example, if a company has a balance of $10,000 in accounts receivable and a $300 balance in the allowance for doubtful accounts, the net realizable value is $9,700

note receivable

formal legal contract between the buyer and the company, which requires a specific payment amount at a predetermined future date, usually includes interest, and is payable beyond a company’s operating cycle

number of days’ sales in receivables

expected days it will take to convert accounts receivable into cash

percentage of completion method

percentage of work completed for the period divided by the total revenues from the contract

principal

initial borrowed amount of a loan, not including interest; also, face value or maturity value of a bond (the amount to be paid at maturity)

receivable

outstanding amount owed from a customer

revenue recognition principle

principle stating that company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided