ACCTG 101 Lecture Notes - Lecture 7: Accounts Receivable, Net Income, Income Statement
Document Summary
Selling goods on account carries the risk that some customers will encounter financial difficult and will be unable to pay. Gaap recognizes this possibility and requires companies to estimate and report the value of uncollectible accounts. Aging analysis groups ars grouped by number of days past due in 30- or 60-day intervals and find a percentage within each range which it expects will be uncollectible. Recorded similarly to allowances; allowances for uncollectible accounts reduce the gross amount of receivables that are reported on the balance sheet. By setting up the allowance, the company has established a reserve, or a cushion, that it can use to absorb credit losses as they occur; write off. Write-offs in the current period may be applied against the setup allowance; future write-offs will reduce the allowance further, but each period, the company replenishes the allowance account and then draws it down for write-offs. Magnitude analysis (used to determine magnitude and quality of ars)
