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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Receivables

Types of receivables

Accounts receivable, open accounts, or trade accounts are agreements by customers to pay for services received or merchandise obtained. Notes receivable are formalized obligations evidenced by written promissory notes. Other categories of receivables include trade acceptances, third‐party instruments, and amounts due from officers, shareholders, employees, or affiliated companies. The latter categories of receivables generally arise from cash advances but could result from sales of merchandise or the provision of services. The nature of amounts due from trade customers is often different from that of balances receivable from related parties, such as employees or shareholders. Thus, generally accepted accounting principles require that the different classes of receivables be separately identified either on the face of the balance sheet itself, or in the notes thereto.

Receivables due within one year (or one operating cycle, if longer) generally should be presented at outstanding face value (principal amount), adjusted for any write‐offs already taken and valuation allowances. Valuation allowances adjust the carrying amount of receivables downward because not all of those receivables will ultimately be realized as cash. For example, valuation allowances are reported for amounts estimated to be uncollectible and also for the estimated returns, allowances, and other discounts to be taken by customers prior to or at the time of payment. In practice, ...

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