Pearson plc has numerous accounts composing its balance sheet. One account in particular is especially important to the company’s operation—account receivable. An account receivable is an oral agreement from a customer to an entity that states the customer will repay the amount of goods purchased or services rendered. Other names for account receivables include trade receivables and nontrade receivables. Pearson refers to their account receivables from credit sales as trade receivables. Account receivables differ from notes receivables in a couple of ways. First, account receivables are oral promises, whereas note receivables are written promissory notes. Second, account receivables arise from credit sales, but notes receivables arise from the company lending a customer or other entity a certain amount of money and usually include interest on the amount borrowed (the principal). …show more content…
These accounts are called contra asset accounts and have a normal credit balance. . The two associated with Pearson are provisions for bad and doubtful debts and anticipated future sales returns. The provision for bad and doubtful debts is associated with customers failing to pay for the goods or services. Anticipated future sales returns are an estimate of the amount of goods that customers will return to the company. For the first account, managers may consider using a percentage-of-sales approach, a percentage-of-gross-receivables approach, or an aging balance approach. For the second account, they could also use the percentage-of sales as well as other underlying factors such as product issues to help better estimate this