Study GuideAccounting Principles I–Receivables1.ReceivablesDefinedWhen a company sells something but doesn’t get paid right away, it creates areceivable.Areceivableis money the company expects to collect in the future.Think of it like this: the company has earned the revenue, but the cash hasn’t arrived yet.Accounts Receivable (A/R)Accounts receivableare amounts thatcustomers owethe company fromnormal credit sales.Example: A customer buys goods today and promises to pay later.Because most accounts receivable are collected withintwo months, they are considered acurrentasset.Where do accounts receivable appear on the balance sheet?Accounts receivable usually show up under current assets:•Below short-term investments•Above inventoryNotes ReceivableNotes receivableare amounts owed to the company by customers (or others) who have signed aformal promissory note.Apromissory noteis a written promise to pay a specific amount of money, usually on a certain date.Why are promissory notes important?Promissory notes make the debt more official andstrengthen the company’s legal claimifsomeone doesn’t pay as promised.Current vs. Long-Term Notes ReceivableStudy GuideSuppose at the end of the company’s first accounting period, it estimates that$5,000of receivableswill become uncollectible.Adjusting entry:•DebitBad Debts Expense … 5,000•CreditAllowance for Bad Debts … 5,000What this accomplishesAfter this entry:•The subsidiary ledger still shows each customer’sfull balance•The Accounts Receivable control account still matches the subsidiary ledger total•Allowance for Bad Debts now has acredit balance•The company can report receivables atnet realizable value•Bad debts expense is recorded in thecorrect period3.Writing Off a Specific Customer (Using the Allowance Method)Once the company identifies a customer who definitely won’t pay, it removes that customer’s balancefrom the books.Example: J. Smith’s balance of$225is uncollectible.
Study GuideImportant idea: Net realizable value does NOT changeUnder the allowance method, writing off an account doesnotchange the net realizable value ofAccounts Receivable.It simply reduces both accounts by the same amount.Posting reminderAny general journal entry that affects thecontrol account(Accounts Receivable) must also beposted to:•Thegeneral ledger Accounts Receivable
Study Guide•The correct customer account in thesubsidiary ledger(like J. Smith)What If a Customer Pays After Being Written Off?This happens more often than you might think!If a customer’s debt was written off and they later decide to pay, the company must record it properly.That requirestwo entries.
Preview Mode
This document has 24 pages. Sign in to access the full document!