Chapter 8 (Receivables)Short Summary

Fall 2022: ACCT2200 Principles of Accounting I (W01-W04) Instructor: Kunsu Park, Ph.D Chapter 8: ReceivablesWhat are common type of receivables and how are credit sales recorded? Areceivableis a monetary claim against abusiness or an individual.There are three major types of receivables:Accounts receivable- Represent the right to receive cash in the future from customers forgoods sold or for services performed.Notes receivable- Represents a writtenpromise that the customer will pay a fixedamount of principal plus interestby a certaindate in the future.Other receivables- A miscellaneous categorythat includes any other type of receivableswhere there is a right to receive cash in thefuture.A critical component of internal control over receivables is the separation of cash-handing andcash-accounting duties.A separation accounts receivable account (called asubsidiary account) must be maintained for each customer in order to account for paymentsreceived from the customer and amounts stillowed.The sum of balances in the subsidiary accounts receivable will equal a control account balance,Accounts Receivable.Sales by credit cards and debit cards are treated ascash sales and typically include a fee (Credit CardExpense) that is paid by the business to the creditcard processor.As a way to receive cash before receivables are collected, businesses can factor or pledge theirreceivables.What is the difference between accountsreceivable and notes receivable? Accounts receivablerepresent the right toreceive cash in the future from customers forgoods sold or for services performed. Accountsreceivable are usually collected within a shortperiod of time such as 30 or 60 days. Notesreceivableare usually longer in term thanaccounts receivable. Notes receivablerepresent a written promise that a borrowerwill pay a fixed amount of principal plusinterest by a certain date in the future.When dealing with receivables, give an exampleof a subsidiary account.A business must maintain a separate accountsreceivable account for each customer in orderto account for payments received from thecustomer and amounts still owed. All sales andcollections from that customer are tracked inthat account, along with the balance.What type of account must the sum of allsubsidiary accounts be equal to?The balance in all the subsidiary accountsreceivable accounts must equal the totalbalance of the control account, AccountsReceivable.What are some benefits to a business in acceptingcredit cards and debit cards?The benefits to a business of accepting creditcards and debit cards include the ability toattract more customers, not having to checkeach customer's credit rating, and not havingto keep accounts receivable records or make collections from the customer. What are two common methods used when accepting deposits for credit card and debit card transactions? Two common methods for deposits of proceeds from credit card sales are the net methodand the gross method. With the net method, the total sale less the processing fee assessed equals the net amount of cash deposited by the processor, usually within a few days of the sale date. With the gross method, the total sale is deposited daily, within a few days of the actual sale date. The processing fees for all transactions processed for the month are deducted from the company's bank account by the processor, often on the last day of the month What occurs when a business factors its receivable? When a business factors its receivables, it sells its receivables to a finance company or bank (often called a factor). The business receives cash less an applicable fee from the factor for the receivables. The factor, instead of the business, now collects the cash on the receivables. The business no longer has to deal with the recordkeeping and collection of the receivables. What occurs when a business pledges its receivable? In a pledging situation, a business uses its receivables as security for a loan. The business borrows money from a bank and offers its receivables as collateral. The business still is responsible for collecting on the receivables and uses the money collected to pay off the loan along with interest. In pledging, if the loan is not paid, the bank can collect on the receivables. How are uncollectibles accounted for when using thedirect write-off method? Writing off uncollectible accounts when using the direct write-off method involves a debit to Bad Debts Expense and a credit to Accounts Receivable. Recovery of accounts previously written off is recorded by reversing the write-off entry and then recording an entry to receive the cash.