Describe accounts receivable and how they occur and are recorded. Accounts receivable are amounts due from customers for credit sales. A subsidiary ledger lists amounts owed by each customer. Credit sales arise from at least two sources: (1) sales on credit and (2) credit card sales. Sales on credit refers to a company's granting credit directly to customers. Credit card sales involve customers' use of third-party credit cards.

Describe a note receivable and the computation of its maturity date and interest. A note receivable is a written promise to pay a specified amount of money at a definite future date. The maturity date is the day the note (principal and interest) must be repaid. Interest rates are normally stated in annual terms. The amount of interest on the note is computed by expressing time as a fraction of one year and multiplying the note's principal by this fraction and the annual interest rate.

Explain how receivables can be converted to cash before maturity. Receivables can be converted to cash before maturity in three ways. First, a company can sell accounts receivable to a factor, who charges a factoring fee. Second, a company can borrow money by signing a note payable that is secured by pledging the accounts receivable. Third, notes receivable can be discounted at (sold to) a financial institution.

Compute accounts receivable turnover and use it to help assess financial condition. Accounts receivable turnover is a measure of both the quality and liquidity of accounts receivable. The accounts receivable turnover measure indicates how often, on average, receivables are received and collected during the period. Accounts receivable turnover is computed as net sales divided by average accounts receivable.

Summary Apply the direct write-off and allowance methods to account for accounts receivable. The direct write-off method charges Bad Debts Expense when accounts are written off as uncollectible. This method is acceptable only when the amount of bad debts expense is immaterial. Under the allowance method, bad debts expense is recorded with an adjustment at the end of each accounting period that debits the Bad Debts Expense account and credits the Allowance for Doubtful Accounts. The uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts.

Estimate uncollectibles using methods based on sales and accounts receivable. Uncollectibles are estimated by focusing on either (1) the income statement relation between bad debts expense and credit sales or (2) the balance sheet relation between accounts receivable and the allowance for doubtful accounts. The first approach emphasizes the matching principle using the income statement. The second approach emphasizes realizable value of accounts receivable using the balance sheet.

Record the receipt of a note receivable. A note received is recorded at its principal amount by debiting the Notes Receivable account. The credit amount is to the asset, product, or service provided in return for the note.

Record the honoring and dishonoring of a note and adjustments for interest. When a note is honored, the payee debits the money received and credits both Notes Receivable and Interest Revenue. Dishonored notes are credited to Notes Receivable and debited to Accounts Receivable (to the account of the maker in an attempt to collect), and Interest Revenue is recorded for interest earned for the time the note is held.