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Prin. Acct. Ch. 9

Terms and Definitions

QuestionAnswer
Accounts Receivable Amounts owed by customers on account.
Accounts Receivable Turnover Ratio A measure of the liquidity of accounts receivable; computed by dividing net credit sales by average net accounts receivable.
Aging the Accounts Receivable The analysis of customer balances by the length of time they have been unpaid.
Allowance Method A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Average Collection Period The average amount of time that a receivable is outstanding; calculated by dividing 365 days by accounts receivable turnover ratio.
Bad Debts Expense An expense account to record uncollectible receivables.
Cash (net) Realizable Value The net amount a company expects to receive in cash.
Direct Write-Off Method A method of accounting for bad debts that involves expensing accounts at the time they are determined to be uncollectible.
Dishonored Note A note that is not paid in full at maturity.
Factor A finance company or bank that buys receivables from businesses and then collects the payments directly from the customers.
Maker The party in a promissory note is making the promise to pay.
Notes Receivable Claims for which formal instruments of credit are issued as proof of the debt.
Other Receivables Various forms of non-trade receivables, such as interest receivables and income tax refundable.
Payee The party to whom the payment of a promissory note is to be made.
Percentage-of-Receivable Basis Management estimates what percentage of receivables will result in losses from uncollectible accounts.
Promissory Note A written promise to pay a specified amount of money on demand or at a definite time.
Receivables Amounts due from individuals and other companies.
Trade Receivables Notes and accounts receivable that result from sales transactions.