ABA Accounts Payable & Receivable Management 1 — Questions and Answers
Question 1: What is the normal balance of an Accounts Receivable account?
- Credit
- Debit (Correct answer)
- Zero
- Contra
Correct answer: Debit
Accounts Receivable is an asset account, and asset accounts carry a normal debit balance.
Question 2: Which document typically initiates the accounts payable process when a company purchases goods?
- Check request
- Purchase order (Correct answer)
- Remittance advice
- Credit memo
Correct answer: Purchase order
A purchase order is issued by the buyer to the vendor to formally request goods or services, initiating the AP cycle.
Question 3: Under the accrual basis of accounting, when is accounts receivable recorded?
- When cash is collected
- When the invoice is mailed
- When goods or services are delivered (Correct answer)
- When the customer places an order
Correct answer: When goods or services are delivered
Accrual accounting requires revenue—and the related receivable—to be recognized when the earnings process is complete (delivery of goods or services).
Question 4: The Allowance for Doubtful Accounts is classified as which type of account?
- Liability
- Contra-asset (Correct answer)
- Expense
- Revenue
Correct answer: Contra-asset
Allowance for Doubtful Accounts is a contra-asset account that reduces the gross Accounts Receivable balance to its net realizable value.
Question 5: Under the direct write-off method, bad debt expense is recorded when:
- A sale is made on credit
- An allowance is estimated at period end
- A specific account is determined to be uncollectible (Correct answer)
- Cash is received from a previously written-off account
Correct answer: A specific account is determined to be uncollectible
The direct write-off method recognizes bad debt expense only when a specific receivable is identified as uncollectible, which can violate the matching principle.
Question 6: A vendor issues a credit memo to a buyer. What effect does this have on the buyer's accounts payable balance?
- Increases it
- Decreases it (Correct answer)
- Has no effect
- Converts it to a note payable
Correct answer: Decreases it
A credit memo from the vendor reduces the amount owed, thereby decreasing the buyer's accounts payable balance.
Question 7: Net realizable value of accounts receivable is calculated as:
- Gross AR minus Allowance for Doubtful Accounts (Correct answer)
- Gross AR plus Allowance for Doubtful Accounts
- Gross AR minus sales discounts only
- Gross AR divided by average collection period
Correct answer: Gross AR minus Allowance for Doubtful Accounts
Net realizable value equals gross accounts receivable less the allowance for doubtful accounts, representing the amount the company expects to collect.
ABA Accounts Payable & Receivable Management 1
What is the normal balance of an Accounts Receivable account?