Accounts Payable & Receivable Management Flashcards
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Read the first 7 Accounts Payable & Receivable Management flashcards as text
Which entry correctly records the write-off of a $500 uncollectible account under the allowance method?
Answer: Debit Allowance for Doubtful Accounts $500; Credit Accounts Receivable $500
Under the allowance method, writing off a specific account debits Allowance for Doubtful Accounts and credits Accounts Receivable—bad debt expense was already recorded when the allowance was established.
How does a Notes Receivable differ from Accounts Receivable?
Answer: Notes receivable are supported by a formal written promise and typically bear interest
Notes Receivable involve a formal promissory note signed by the debtor and usually carry an interest rate, whereas Accounts Receivable arise from ordinary trade credit with no separate interest agreement.
A company's Days Payable Outstanding (DPO) increases significantly. Which interpretation is most accurate?
Answer: The company is taking longer to pay its suppliers
DPO measures the average number of days a company takes to pay invoices; a rising DPO means the company is extending the time before paying suppliers.
When a previously written-off account is unexpectedly collected under the allowance method, the first step is to:
Answer: Reinstate the receivable by reversing the original write-off entry
Best practice requires first reinstating the receivable (debit AR, credit Allowance) and then recording the cash receipt (debit Cash, credit AR), providing a full audit trail.
Which method of estimating bad debt expense is based on the balance in Accounts Receivable categorized by age?
Answer: Aging-of-receivables method
The aging-of-receivables method applies different uncollectibility percentages to AR grouped by how long the balances have been outstanding, producing a target balance for the allowance account.
Under the percentage-of-sales method for estimating bad debts, the adjusting entry amount is based on:
Answer: A percentage of net credit sales for the period
The percentage-of-sales method multiplies net credit sales by a historical bad-debt percentage to determine bad debt expense for the period, focusing on the income statement.
A purchase return in the accounts payable system is best documented by:
Answer: A debit memo issued by the buyer
When a buyer returns goods, it issues a debit memo to notify the vendor that the AP balance is being reduced, which the vendor then acknowledges with a corresponding credit memo.