Accounts Receivable

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Introduction to Accounting

Accounts Receivable

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1.  A receivable is recorded because

a.  revenues are recognized when cash is collected
b.  revenues are recognized when earned
c.  the customer pays before the service is provided
d.  expenses are incurred before cash is paid

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B.  A receivable occurs when revenue is earned when the customer receives goods/services and pays in a later period.  Revenues are always recognized when earned regardless of when the cash is received. (c.) is an unearned revenue. (d.) is a payable.  With (a.) no receivable occurs. 
2.  A sales discount is offered to customers to

a.  encourage the customer to pay sooner than 30 days
b.  gives the customer a lower price
c.  improve competitive position
d.  increase the profits of the company

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A.  A sales discount is a discount for early payment.  It costs the company and does not increase profits. (d.)  A sales discount is not a reduction in the price of goods. (b. & c.)
3.   The term  2/15, n60 means

a.  15% discount if pay within 2 day, full payment due in 60 days
b.  2% discount if pay within 15 days, if not, full payment is due in 60 days
c.  13% discount if pay within 60 days
d.  2% discount if pay within 60 days

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B.  The first number is the % discount that can be taken if payment is made within the number of days after the slash.  If payment is not made in 15 days, the full amount is due in 60 days.
4.   A sales discount is reported 

a.  net of accounts receivable on the balance sheet
b.  net of sales on the balance sheet
c.  net of sales on the income statement
d.  as an operating expense on the income statement

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C.  A sales discount is a contra sales account.  It is recorded on the income statement as a reduction to sales.  Sales discounts are not reported on the balance sheet.
5.  When a customer takes a sales discount, the journal entry to record this will

a.  debit sales discount and credit cash
b.  debit sales discount and credit accounts receivable
c.  debit accounts receivable and credit sales 
d.  debit accounts receivable and credit sales discount

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B.  A customer takes a sales discount when payment is made within the discount period.  When payment is made, cash is received (debit) and the sales discount is recorded with a debit, and accounts receivable is credited (decreased) because the customer does not owe anymore.
6.  Net accounts receivable reported on the balance sheet is always

a.  net of the allowance for uncollectible accounts
b.  net of sales discounts
c.  the gross amount customers owe the company
d.  the total amount of current period sales

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A.  Accounts receivable is always reported net of the allowance for uncollectible accounts.  Accounts receivable is what is owed the company, the allowance is what is not expected to be collected, and the net balance that is reported is the amount the company expects to collect.  (c) is the balance in the accounts receivable account only. Accounts receivable is a cumulative account which includes amounts owed from all periods (d).
7.  The balance in the “allowance for uncollectible accounts” account represents

a.  only sales in the current period not expected to be collected
b.  only the bad debt expense for the current period
c.  the amount the company does expect to collect from customers
d.  the amount the company does not expect to collect from customers

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D.  The allowance account represents amounts the company does not expect to collect from customers even though they owe the company.  It is a cumulative balance related to all current and prior year sales.
8.  A write-off of accounts receivable is recorded when

a.  the bad debt expense is estimated
b.  the company determines which customer won’t pay and how much won’t be collected
c.  the company expects some of its customers will not pay
d.  the bad debt expense exceeds the company estimate

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B.  Write-offs occur when the company determines which customer won’t pay and exactly how much won’t be collected.  (a.) & (c.) is the estimate for bad debt expense that is recorded in the period sales occur (matching). (d.) requires additional bad debt expense to be recorded and the allowance account to be increased.  A write-off decreases the allowance account and decreases accounts receivable.
9.   Estimated bad debt expense recorded during the period is based on

a.  the historical experience of the company
b.  the amount not collected last period
c.  what is not collected on this period’s sales
d.  the amount the company determines will be collected this period

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A.  Bad debt expense is an estimate.  It is based on past experiences of the company.   Bad debt is estimated using the % of sales method or the % of accounts receivable (aging) method.
10.  Which transaction is recorded with a credit to accounts receivable

a.  sales on credit this period
b.  collections this period
c.  write-offs this period
d.  both b. and c.

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D.  A credit to accounts receivable is a decrease.  Accounts receivable decreases when cash is collected from a customer and an account is written off.   Credit sales for this period increase accounts receivable (debit).
11.  “Allowance for uncollectible accounts” 

a.  decreases when estimating bad debt expense using % sales method
b.  Increases or decreases when estimating bad debt expense using % of accounts receivable method
c.  Increases when an account is written off 
d.  Increases when goods are provided to customers

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B.  The allowance for uncollectible accounts changes with two things: 1) when bad debt expense is estimated (it increases or decreases when using the % of accounts receivable method and increases only when using the % sales method (a)  or 2) it decreases when an account is written off (c). The allowance account does not change when goods are provided to customers (d).
12.  The allowance account represents

a.  the exact amount the company knows it will not collect
b.  the estimated amount the company does not expect to collect
c.  the amount of confirmation of non-collection this period
d.  always 5% of accounts receivable

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B.  The allowance account balance is the estimated amount the company does not expect to collect, however, the company does not know who will not pay or exactly how much won’t be paid.  (a. & c.) will cause a write-off to be recorded. The balance will vary with collection experience (d.).
13.  Bad debt expense is recorded when

a.  an account is written off
b.  an estimate of uncollectible amounts is made
c.  in the period before the sales occur
d.  a customer pays after the due date

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B.  Bad debt expense is estimated in the same period the sale occurs (matching).

The expense represents the amount that is not expected to be collected.  Accounts are written off much later than the period of sale (c.) A customer who pays is not a bad debt expense. (d.)

14.  Accounts receivable

a.  increases with sales and decreases with bad debt expense
b.  increases with write-offs and decreases with collections
c.  increases with sales and decreases with write-offs and collections
d.  increases with collections and decreases with write-offs

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C.  Accounts receivable will change with three transactions: 1) increases with credit sales and 2) decreases when the customer pays and 3) decreases when a write-off occurs. 
15.  The account bad debt expense can be credited if

a.  credit sales are higher than expected this period
b.  payments from customers are received before expected
c.  the company overestimated bad debt expense in prior periods
d.  write-offs are higher than expected

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C.  The only time an expense can be credited (decreased) is when the company overestimated the expense in a prior period.  This is also true for bad debt expense.  

A credit to bad debt expense can occur using the % of accounts receivable method which is based on cumulative amounts in accounts receivable.  When write-offs are higher than expected bad debt expense must be debited, increased (d). Higher credit sales will most likely lead to higher bad debt expense, a debit (a).