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Accounts Receivable and Sales Return

Accounts Receivable and Sales Return

a. What is account receivable? Credit sales, sales on account b. How do accounts receivable differ from notes receivable? Notes Receivable arises when the seller asks for a note to replace an Accounts Receivable when the customer requests additional time to pay a past-due account. A promissory note is a written promise to pay a specific amount of money, usually including interest, at a future date. c. What is a contra asset? An account which offsets another account. A contra-asset account has a credit balance and offsets the debit balance of the corresponding asset.

A contra-liability account has a debit balance and offsets the credit balance of the corresponding liability. Provisions for bad and doubtful debts: Allowance of uncollectible accounts receivable Provisions for sales returns: estimate sales return Managers will consider past experience, credit quality of the buyer, the age of the receivable and the economy for these accounts d. Two approaches for estimating uncollectible accounts: Percentage of sales: It is based on prior experience of the business.

It is computed as a percentage of credit sales. It ignores the current balance of the allowance account. Aging of accounts: Analyzed according to the length of time they remain outstanding e. Why did the company extend credit to customers? They would not have extended credit if they knew which companies would eventually not pay. Nikki Ko-Wei Chen ACCT 610 Gamma 6 Case 8: Pearson plc Nikki Ko-Wei Chen ACCT 610 Gamma 6 Case 8: Pearson plc f. Provision for bad and doubtful debts i. T-account for bad and doubtful debts ii.

Journal entries for Bad and doubtful debts expense 2009 Bad and doubtful debts expense4 Provision for Bad and doubtful debts expense4 Write-off of accounts receivable Provision for Bad and doubtful debts 20 Accounts Receivable20 iii. Bad and doubtful debts expense is included in the operating expenses g. Provision for sales return iv. T-account for sales return v. Journal entries for: 2009 Estimated sales returns Sales return Expense 425 Provisions for sales return425 Amount of actual book returns Provisions for sales return443

Accounts Receivable443 vi. Sales return is deducted in the accounts receivable h. T-account for total or gross trade receivables Sales on Account Accounts Receivable5624 Sales5624 Accounts Receivable Collection Cash5216 AR5216 i. Uncollectible accounts by age j. ART and ACP k. How can Pearson reduce average collection period? Better screen the customers Negotiate advance or progress payment Bank letters or other procedures to obviate billing Improve administration of past-due accounts to provide more timely notices