AFM101 Chapter Notes - Chapter 7: Accounts Receivable
10 Jun 2018
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AFSA Education
Summary of Accounting Principles: Accounting for debts is a three-step process.
Notes:
- Trade Accounts Receivable (Gross):
o Total trade accounts receivable collectible & uncollectible.
- Allowance for Doubtful Accounts:
o Balance portion of trade accounts receivable balance the company estimates
to be uncollectible.
- Trade Accounts Receivable (Net):
o Reported on the Statement of Financial Position.
o Portion of the account the company expects to collect (estimated net realized
value).
ESTIMATING BAD DEBT EXPENSE:
The bad debt expense recorded in the end-of-period adjusting entry is often estimated based on
aging of trade receivables.
Aging of Trade Receivables Method
Estimates uncollectible accounts based on the age of each trade receivable.
- As Trade Receivables become OLDER and OVERDUE, they are usually less likely to
be collected.
- A company might split its receivables into categories and the management of the
company might then estimate probable bad debt rates
- Estimated Ending Balance total of the amounts estimated to be uncollectible under
the aging method is the balance that should be in the Allowance for Doubtful Accounts at
the end of the period.
The older a trade receivable becomes, the less likely to be collectible
Solve for bad debt
expense using estimated ending balance and beginning balance.
Actual Write-Offs Compared with Estimates:
- The amount of uncollectible accounts written off rarely equals the estimated amount
previously recorded taken into consideration when determining bad debt expense.
LO5 Computer and interpret the receivables turnover ratio and the effects of trade
receivables on cash flows.
(1) PRUDENCE IN THE VALUATION OF TRADE RECEIVABLES:
- Creditors & Analysts prefer reporting lower amount of Net Earnings & Assets, and
higher amounts of Liabilities.
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Document Summary
Summary of accounting principles: accounting for debts is a three-step process. Trade accounts receivable (gross): total trade accounts receivable collectible & uncollectible. Allowance for doubtful accounts: balance portion of trade accounts receivable balance the company estimates to be uncollectible. Trade accounts receivable (net): reported on the statement of financial position, portion of the account the company expects to collect (estimated net realized value). The bad debt expense recorded in the end-of-period adjusting entry is often estimated based on aging of trade receivables. Estimates uncollectible accounts based on the age of each trade receivable. As trade receivables become older and overdue, they are usually less likely to be collected. A company might split its receivables into categories and the management of the company might then estimate probable bad debt rates.
