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ADMS 2500 Module 7- Recievables.docx

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Administrative Studies
ADMS 2500
Brian Gaber

ADMS 2500 Oct.20.2011 Module 7- Receivables Receivables - inter-firm sales usually made by credit transaction, called sales on account Trade Receivables and Payable - receivables and payables that arise in the company’s transactions from customers and suppliers - advances to or from company should not be recorded under these accounts - should separate trade accounts from receivables and payable Installment Accounts - many businesses make sales on installment basis - customer signs contract to make down payment and plus installments - if installment contract informs to company’s normal trade practices then installment receivables is a current asset Losses from Uncollectible Accounts - sometimes companies liberalize credit policy to increase sales but this further could increase credit losses - most companies have departments to deal with credit policies - credit personnel may set credit limits, deal with unpaid credit and conduct investigations ~ could also establish collection procedure - credit losses are Dr to uncollectible accounts expense/bad debts expense ~ expense classified as selling expense on income statement Direct Write-Off Method- Writing Off Specific Accounts - two ways to recognize losses: (1) direct write off (2) allowance method (preferable) - direct write off uncollectable accounts charged to expense account for that particular period - disadvantages of write off: ~ is that credit losses are not matched with related sale ~ sale is in previous year and write off is in current year therefore, A/R is always overstated - write off method is disapproved by accountants - firm where credit losses are rare write off method is okay and better The Allowance Method- Estimating Uncollectible Accounts Expense - follows the matching principle and therefore estimates the amount of uncollectible accounts expense for the period - matches losses with the sale - estimate is adjusting entry Allowance for Uncollectible Account Expense- A Contra Account - in adjusting entry Cr made to allowance for uncollectible account rather than A/R - allowance for uncollectible accounts is contra assets account The Allowance Method- Writing Off Specific Accounts - credit manager authorizes write offs - write off entry doesn’t affect net income or total assets - expense reflected in same period as revenue - because allowance for uncollectible accounts deducted from A/R, net realizable amount of A/R doesn’t change by write off The Aging of Accounts Receivable - estimates of credit losses based on past experience - an aging schedule is an analysis that shows how long customers’ balances have remained unpaid Estimating Allowance for Uncollectible Accounts with Aging of Accounts Receivable - companies that analyze bad accounts based on exp
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