Accounts Receivable and Credit Sales Quiz

Accounts receivable represent the amounts customers owe to a company for goods or services provided on credit.

Accounts receivable are reported on the balance sheet as an asset, representing the amount of money customers owe.

A credit memo is issued to decrease accounts receivable, acknowledging a reduction in the amount owed by a customer.

When a customer pays off their outstanding balance, accounts receivable decrease, reflecting the collection of the amount owed.

The typical credit period for credit sales is often 30 days, specifying the time customers have to pay their invoices.

Extending credit to customers increases the risk of bad debts, as some may fail to fulfill their payment obligations.

Credit sales are offered to attract new customers and boost sales by providing flexibility in payment terms.

The accounts receivable turnover ratio measures how quickly a company collects its receivables and is calculated as net credit sales divided by average accounts receivable.

DSO measures the average time it takes for a company to collect accounts receivable, indicating its efficiency in receivables management.

A credit sale is recorded by debiting Accounts Receivable (increasing assets) and crediting Revenue (recognizing the income).

Offering early payment discounts is a method to encourage prompt payment, accelerating the collection of accounts receivable.

Aging of accounts receivable helps analyze and manage the collection of receivables by categorizing them based on their age.

The quick ratio assesses the liquidity of a company by considering its ability to meet short-term obligations, including accounts receivable.

Accrual basis accounting recognizes revenue when earned, not necessarily when payment is received, providing a more accurate depiction of a company's financial position.

The allowance method estimates and records an allowance for bad debts, reflecting the potential non-collection of accounts receivable.

The aging method classifies accounts receivable based on the time they have been outstanding, helping assess the risk of non-collection.

Sales Returns is a contra account to accounts receivable, reflecting reductions in revenue due to returned goods.

The direct write-off method matches bad debt expenses with the revenues generated, providing a more accurate representation of financial performance.

Increasing the allowance for doubtful accounts decreases assets on the balance sheet, reflecting the potential reduction in the value of accounts receivable.

Accounts receivable are reported on the balance sheet under the net realizable value method, considering the estimated collectible amount.