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Chapter 7

MGT 11A Chapter Notes - Chapter 7: Accounts Receivable


Department
Management
Course Code
MGT 11A
Professor
John Hancock
Chapter
7

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CHAPTER 7: REPORTING AND ANALYZING RECEIVABLES
Sales on Credit
Accounts Receivable Ledger: a separate account for each customer in the
supplementary record
Sales on Store Credit Cards: can earn interest on any balance past due
Sales on Bank Credit Cards
Seller pays a fee when card is used by customer, ranging 1% to 5% of
card sales
DIRECT WRITE-OFF METHOD
Use 2 methods for uncontrollable accounts:
1) Direct Write-off Method: records the loss from an uncollectible account
receivable when it is determined to be uncollectible
Recovering a Bad Debt: sometimes an account written off is later
collected
Assessing the Direct Write-Off Method
1) Expense recognition requires expenses be reported in the
same period as the sales they helped produce
2) The materiality constraint permits use of the direct write-
off method when its results are similar to using the allowance
method
Otherwise, companies must use the allowance
method
2) Allowance Method: uses estimated losses in each accounting period
Has 2 advantages over the direct write-off method:
1) records estimated bad debts expense in period when
related sales are recorded
2) reports accounts receivable on balance sheet at
estimated amount to be collected
Recording Bad Debts Expense
Ex: At the end of the first year, $20,000 of credit sales were
uncollected. Based on the experience of similar businesses,
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