Receivables and Payables
This chapter covers accounting for uncollectible accounts receivable under the allowance method, recording credit card sales, and defining current and long-term liabilities. It explains clearly determinable, estimated, and contingent liabilities, and accounting for notes receivable and payable, including interest calculations and receivables turnover analysis for the business.
Uncollectible accounts and credit card sales
Under the allowance method, a business estimates in advance the portion of its accounts receivable it expects will never be collected, recording that expense in the same period as the related sales rather than waiting until a specific account is finally known to be uncollectible. The chapter also covers recording sales made through credit cards and the processing fees that come with them.
Types of liabilities among receivables and payables
Liabilities are classified as current or long-term based on when they fall due, and further as clearly determinable, estimated, or contingent depending on how certain their amount and existence actually are. A contingent liability, for example, depends on the outcome of some future event and is disclosed rather than formally recorded unless it becomes both probable and reasonably estimable.
Notes receivable and payable
Notes receivable and payable involve a formal written promise to pay a specific amount, often with interest, by a specific future date. The chapter shows how to calculate that interest and account for both interest-bearing and non-interest-bearing notes, and closes with turnover ratios used to analyze how efficiently a company is collecting on its receivables.