MGMT 20000 Chapter Notes - Chapter 5: Accounts Receivable, Income Statement

• School: Purdue University
• Department: Management
• Course: MGMT 20000
• Professor: Frank Kane

Document Summary

The upside of extending credit to customers is that it boosts sales by allowing customers the ability to purchase on account and pay cash later. Companies have the right receive the cash later. This is why the accounts receivable account is an asset, reported in the company"s balance sheet. At the end of the initial year, establish an allowance by estimating future uncollectible accounts. During the subsequent year, write off actual bad debts as uncollectible. Not that actual write-offs may differ from the previous year"s estimate. At the end of the subsequent year, once again estimate future uncollectible accounts. The receivables not expected to be collected should not be counted in assts of the company. Allowance of uncollectible accounts-contra asset account representing the amount of accounts receivable not expected to be collected. We report the allowance for uncollectible accounts in the asset section of the balance sheet, but it represents a reduction in the balance of account receivable.