Chapter 8 Receivables 373Direct write-off methodThe method of accounting for
uncollectible accounts that recognizes the expense only when
accounts are judged to be worthless.Dishonored note receivableA note that the maker fails to
pay on the due date.Maturity valueThe amount that is due at the maturity or
due date of a note.Net realizable valueThe amount of cash expected to be re-
alized in the future from a receivable.Notes receivableAmounts customers owe, for which a for-
mal, written instrument of credit has been issued.Number of days’ sales in receivablesAn estimate of
the length of time the accounts receivable have been
outstanding.ReceivablesAll money claims against other entities, includ-
ing people, business firms, and other organizations.GLOSSARY
Compare the direct write-off and allowance methods
of accounting for uncollectible accounts.The two
methods of accounting for uncollectible accounts are recorded
differently in the accounts and presented differently in the fi-
nancial statements. Under the direct write-off method, bad
debt expense is equal to the amount of accounts receivable
written off during the period. Alternatively, under the
allowance method, bad debt expense is estimated based on
either a percent of sales or an analysis of receivables.
Describe the nature, characteristics, and accounting for
notes receivable.A note is a written promise to pay a
sum of money on demand or at a definite time. Characteristics
of notes that affect how they are recorded and reported in-
clude the due date, interest rate, and maturity value. The
due date is the date a note is to be paid, and the period
of time between the issuance date and the due date is
normally stated in either days or months. The maturity
value of a note is the sum of the face amount and the
interest.
A note received in settlement of an account receivable
is recorded as a debit to Notes Receivable and a credit to
Accounts Receivable. When a note matures, Cash is
debited, Notes Receivable is credited, and Interest Revenue
is credited. If the maker of a note fails to pay the debt on the
due date, the note is said to be dishonored. The holder of a
dishonored note debits an accounts receivable account for
the amount of the claim against the maker of the note.
Accounts receivableA receivable created by selling mer-
chandise or services on credit.
Accounts receivable turnoverMeasures how frequently
during the year the accounts receivable are being converted
to cash.
Aging the receivablesThe process of analyzing the ac-
counts receivable and classifying them according to various
age groupings, with the due date being the base point for
determining age.
Allowance for Doubtful AccountsThe contra asset ac-
count for accounts receivable.
Allowance methodThe method of accounting for uncol-
lectible accounts that provides an expense for uncollectible re-
ceivables in advance of their write-off.
Bad debt expenseThe operating expense incurred because
of the failure to collect receivables.
Describe the reporting of receivables on the balance
sheet.All receivables that are expected to be realized in
cash within a year are presented in the Current Assets sec-
tion of the balance sheet. It is normal to list the assets in the
order of their liquidity, which is the order in which they can
be converted to cash in normal operations. In addition to
the allowance for doubtful accounts, additional receivable
disclosures include the market (fair) value and unusual
credit risks.Describe the principles of managing accounts receiv-
able.Businesses grant credit in order to earn additional
profits from customers who would otherwise not purchase
the company’s goods or services. Thus, the overall objective
of managing accounts receivable is to help the company
earn profits. The basic steps in managing accounts receiv-
able include (1) screening customers, (2) determining credit
terms, and (3) monitoring collections.Compute and interpret the accounts receivable
turnover and the number of days’ sales in receivables.
The accounts receivable turnover is net sales divided by
average accounts receivable. It measures how frequently ac-
counts receivable are being converted into cash. The number
of days’ sales in receivables is the end-of-year accounts
receivable divided by the average daily sales. It measures
the length of time the accounts receivable have been
outstanding.