Aging method of accounts receivable/Uncollectible accounts

What is the aging method? – Explanation The aging method is based on determining the desired balance in the account Allowance for Uncollectible Accounts. The accountant attempts to estimate what percentage of outstanding receivables at year-end will ultimately not be collected; ‘this amount becomes the desired ending balance in the Allowance for Uncollectible Accounts, and …

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Cash and Cash Equivalents

Definition Cash In financial accounting, cash is defined as the sum of (1) currency and coins, (2) balances in checking accounts, and (3) items acceptable for deposit in these accounts, such as checks received from customers. Cash Equivalents Cash equivalents are those short-term investments that can be converted quickly to cash. They include such things …

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Checking account

A special checking account simplifies the reconciliation of the general account by avoiding a large number of relatively small outstanding checks. It also simplifies recordkeeping in that a separate cash disbursements journal can be maintained for each account. When it is necessary for a company to write a large number of checks for a particular …

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Restricted cash

GAAP call for the presentation of information about restricted cash balance. These restrictions may include amounts set aside in escrow accounts which can be used only for a specified purpose. These amounts should be excluded from cash and from current assets if appropriate. There may be an informal restricted cash arising from management intent to …

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Cash equivalents

The accountant has two concerns in reporting on cash equivalents: measurement of income and disclosure of the amount on the balance sheet date. The carrying value is the original amount invested plus accrued income. Depending on the amount of detail needed or desired for the report, highly liquid savings accounts or money market fund holdings …

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Accounts Receivable

Accounts receivable – Definition Accounts receivable result from the credit sales, and for many retailing firms, accounts receivable represents a substantial portion of their current assets. The function of the credit department is to establish and enforce credit policies. Credit policies should protect the firm against excessive bad debts but should not be so restrictive …

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Trade and nontrade receivables

Trade Receivables Definition and Explanation Trade receivables can take the form of either open accounts or notes. They are almost always classified as current because their normal collection period is part of, and therefore less than, the operating cycle. In general, receivables should be recorded at the present value of the future cash flows, using …

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Treatment of Cash discounts

Practice and theory are both unsettled with respect to the treatment of cash discounts. These reductions can be taken by the customer if the account balance is paid within a relatively short period. Cash discounts might be viewed first of all as rewards offered for prompt payment. Alternatively, cash discounts missed by customers may be …

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Recording uncollectible accounts expense and bad debts

The risk of extending credit arises from the possibility that the customer will not pay. This risk impacts both the measurement of income and the description of the receivables held by the seller. The accountant’s task involves consideration of these three issues: 1. What is the nature of the loss? 2. When does the loss …

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Factor accounts receivable

Definition and explanation The original holder obtains cash at once in return for the proceeds collected in the future, except that the collection process is handled by a third party (often known as a factor). If the assigned receivables are insufficient to repay the factor because of bad debts, the original holder must transfer additional …

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Discount on notes receivable

Definition of discount on notes receivable Notes receivable can also be used to obtain immediate cash. This is done by giving a discount on notes receivable to a bank or other lender prior to their maturity date. Explanation Discounting means selling or pledging a customer’s note receivable to the bank at some point prior to …

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Using receivables to generate cash

Under many normal situations, the management of a firm may decide that it would rather have cash at once than wait for the receivables to be collected. There are two broad approaches to generating cash from receivables. In one, the receivables are pledged as collateral for a loan. In the other, the receivables are assigned …

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