Receivables

Receivables
Nature Accounting for Doubtful or Uncollectible Accounts
Represents rights to received cash in the future for goods and services sold on When a credit is extended, it is to be expected that a certain amount of these
credit and for lending money now. receivables will not be collected. Uncollectible accounts should be anticipated
and the value of accounts receivable should be reduced by the estimate of
Treated as assets and measured at net realizable value. The two most common uncollectible accounts. There are two methods of accounting for uncollectible
receivables are: accounts – direct method and allowance method.
 Accounts Receivables;
The direct method does not attempt to anticipate uncollectible accounts.
 Notes Receivables
Uncollectible accounts are written off as an expense in the accounting period
Accounts Receivable when the account is determined to be uncollectible.
 Are amounts to be collected from customers for sales made on credit.
The allowance method requires that the accountant estimate uncollectible
 A control account in the general ledger that summarizes all individual
accounts in the accounting period when the credit sales are made. The estimate
customer receivables.
is based on the entity’s own experience or that of other companies within the
Notes Receivable
same industry.
 The right to receive cash in the future from a customer or other party
which is evidenced by a formal and written promise to pay called the The allowance account is a contra-asset account and is deducted from accounts
promissory note. receivable in the balance sheet. The allowance account is credited instead of
Internal Control and Receivables accounts receivable because the entity does not actually know which specific
For a good internal control, the application for credit should be evaluated by accounts are uncollectible and besides the amount involved is only an estimate.
the credit department. The credit handlers should not receive cash from the
customers as they can pocket the same and label the accounts receivable as
uncollectible. Write-offs should also be approved by appropriate level of
management.
 Accounting for Doubtful (Uncollectible) Accounts
Comparison of the Two Methods

Transaction Direct Method Allowance Method

A. Total sales on account, P50,000 Accounts Receivable 50,000 Accounts Receivable 50,000
Sales 50,000 Sales 50,000
B. Amount estimated to be uncollectible, P6,000 No entry Doubtful Accounts Expense 6,000
Allowance for doubtful accounts 6,000
C. Actual amount ascertained to be worthless, Doubtful Accounts Expense 2,000 Allowance for doubtful accounts 2,000
P2,000 Accounts Receivable 2,000 Accounts Receivable 2,000
D. P1,500 worth of accounts receivable Accounts Receivable 1,500 Accounts Receivable 1,500
(previously written off) is to be recovered Recovery of Accts Written off 1,500 Allowance for doubtful accounts 1,500
(no collection yet)
E. Collection of accounts previously written off, Cash 1,500 Cash 1,500
P1,500 Accounts Receivable 1,500 Accounts Receivable 1,500
 Accounting for Doubtful (Uncollectible) Accounts
Methods of Estimating Doubtful Accounts
A. Percent of Sales or Income Statement Method
This method apportions a percent of sales during a given period as estimated uncollectible or doubtful accounts. This is usually used in
preparing interim financial reports.
Assume the following data from Highland Enterprises for
COMPUTATION
December 31, 2019:
Sales P3,000,000
Multiply by percentage 1%
 Sales --------------------------------------- P3,000,000
Estimated Doubtful Accounts 30,000
 Accounts Receivable ------------------- 800,000
 Allowance for Doubtful Accounts--- 5,000
ADJUSTING ENTRY
It is estimated that 1% of sales is deemed uncollectible. Doubtful accounts expense 30,000
Prepare adjusting entry to recognize doubtful accounts. Allowance for doubtful accounts 30,000

Accounts Receivable P 800,000

Less: Allowance for Doubtful Accounts (5,000+30,000) 35,000
Accounts Receivable - Net Realizable Value 765,000
 Accounting for Doubtful (Uncollectible) Accounts
Methods of Estimating Doubtful Accounts
B. Percent of Accounts Receivable (Balance Sheet Approach)
This method apportions a percent of adjusted ending accounts receivable as estimated uncollectible accounts. This is generally used in
preparing year-end financial reports. The amount of allowance for doubtful accounts computed using this method is the required allowance
to be reported as a contra-account against the accounts receivable account.

Assume the following data from Highland Enterprises for

December 31, 2019: COMPUTATION
 Sales --------------------------------------- P3,000,000
 Accounts Receivable ------------------- 800,000 Accounts Receivable 800,000
 Allowance for Doubtful Accounts--- 5,000 Multiply by percentage 5%
Required Allowance for Doubtful Accounts 40,000
It is estimated that 5% of accounts receivable is deemed Less: Allowance for Doubtful Accounts (Beg) 5,000
uncollectible. Prepare adjusting entry to recognize doubtful Doubtful Accounts Expense 35,000
accounts.

ADJUSTING ENTRY Accounts Receivable P 800,000

Doubtful accounts expense 35,000 Less: Allowance for Doubtful Accounts (required) 40,000
Allowance for doubtful accounts 35,000 Accounts Receivable - Net Realizable Value 760,000
 Accounting for Doubtful (Uncollectible) Accounts
Methods of Estimating Doubtful Accounts
C. Aging of Accounts Receivable
 This method calculates more accurate and scientific computation of the allowance for doubtful accounts because it is based on the
classified past due accounts receivables covering a period, which is multiplied by its specific estimated uncollectible percentage based on
the enterprise’s experience of doubtful accounts.
 This is also known as Balance Sheet Approach and generally used in preparing a year-end financial reports.
 The amount of allowance for doubtful accounts computed using this method is also the required allowance to be reported as contra-
account against the accounts receivable. Ages of Accounts Receivable Balance Collectible
Percentage

Assume the following data from Highland Enterprises for Not due P250,0000 98%
December 31, 2019: 1 – 60 days 200,000 95%
 Sales --------------------------------------- P3,000,000
 Accounts Receivable ------------------- 700,000 61 – 120 days 100,000 90%
 Allowance for Doubtful Accounts--- 33,000
121 – 180 days 75,000 88%
Assume that the ages of accounts receivable and their 180 – 365 days 50,000 70%
corresponding percentage of collection are on the righ:
More than 365 days 25,000 60%
 Accounting for Doubtful (Uncollectible) Accounts
Methods of Estimating Doubtful Accounts
C. Aging of Accounts Receivable COMPUTATION

Ages of Accounts Balance Uncollectible Required Required Allowance for Doubtful Accounts 59,000
Receivable Percentage Allowance Less: Allowance for Doubtful Accounts (Beg) 33,000
Doubtful Accounts Expense 26,000
Not due P250,0000 2% 5,000
1 – 60 days 200,000 5% 10,000
61 – 120 days 100,000 10% 10,000 ADJUSTING ENTRY
121 – 180 days 75,000 12% 9,000 Doubtful accounts expense 26,000
Allowance for doubtful accounts 26,000
180 – 365 days 50,000 30% 15,000
More than 365 days 25,000 40% 10,000
Accounts Receivable 700,000
700,000 59,000
Less: Allowance for Doubtful Accounts (required) 59,000
Accounts Receivable - Net Realizable Value 641,000
 Notes Receivables
Nature Entries
When a person obtains a loan, the person is usually required to sign a not Receipt of promissory note
evidencing a firm commitment to pay the indebtedness. The issuance of Notes Receivable xx
notes may also arise from normal sales and extension of payment period on Cash xx
accounts receivables.
Promissory Notes Accrual of interest income
A promissory note is unconditional promise to pay in writing made by one Interest receivable xx
person to another, signed by the maker, engaging to pay on demand, or at a Interest income (P*r*n) xx
fixed or determinable future time, a sum certain in money to order or to
bearer (Negotiable Instruments Law). Collection of note without accrued interest
Cash xx
Essential Elements of Promissory Notes Notes Receivable xx
 Maker – the party who made the promise to pay
 Payee – the party who is entitled to receive the money Collection of note with accrued interest
 Principal – the amount borrowed Cash xx
 Simple Interest Rate – the annual rate of interest appearing on the Interest income xx
face of the note. Notes Receivable xx
 Term – the period of time during which interest should be computed.
 Issue date – the date when the note was signed and issued.
 Maturity Date – the date when maturity value should be paid
 Notes Receivables
Discounting of Notes
2. Count the number of months or days of the discount period. The time
Prior to maturity date of the note, the payee or creditor may take the note
used to compute the proceeds is reckoned from the date the note is
to a bank and sell it. This is a convenient way for a business or individual to
cash in on a note at a time before maturity. This process is known as discounted to the maturity date. The unexpired term of the note is the
discount period. In the illustration, the discount period is 2 months – 5
discounting a note.
months less the 3 months that had lapsed.
When a note is discounted at a bank, the original payee receives the
proceeds of the discounted note. The bank – the new payee- will receive the 3. Solve for the bank discount. Discount is the amount of interest deducted
maturity value of the note at maturity. To receive cash on the note before by the bank in advance and is computed on the maturity value of the note.
maturity, the seller is willing to accept significantly discounted price.
Example of Discounting a Note Bank Discount = Maturity Value x Discount Rate X Time
= 157,500 x .14 x 2/12
On July 1, 2019, ABC Company received P150,000 simple interest not for 5
= 3,675
months at 12% interest from XYZ Company. After 3 months, ABC
4. Compute for the proceeds. ABC received P153,825 as proceeds from the
Company needed cash so it discounted the note at the IBP Universal Bank
discounting of notes.
at a discount rate of 14%.
Proceeds = Maturity value – Bank Discount
Solution: = P157,500 – P3,675
1. Determine the maturity value of the original note. = P153,825
Maturity Value = Principal + Interest
= Principal + (Principal x Rate x Time)
= P150,000+(150,000 x.12 x 5/12)
= P150,000+7,500
= P157,500
 Notes Receivables
Journal Entries Internal Control of Receivables
July 1 Notes Receivable 150,000  Maintenance of subsidiary records and ledgers for receivables.
Accounts Receivables 150,00  Personnel who maintain the accounts receivable subsidiary ledger msut
not have access to the cash receipts. They must not have authority to
October 1 Interest Receivable 4,500 issue credit memorandum or to write off uncollectible accounts
Interest Income 4,500  Proper approval of all credit sales by an authorized officer.
(150,000 x 12% x 3/12)  Proper authorization of all sales discounts, sales returns and allowances
and write-offs.
October 1 Cash 153,825  Effective collection procedures to ensure timely collection of recivables
Loss on discounting of notes 675  Monthly statements sent to all customers.
Notes Receivable Discounted 150,000
Interest Receivable 4,5000

December 1 Notes Receivable Discounted 150,000

Notes Receivable 150,000

Face Value P150,000

Add: Accrued interest on notes 4,500
Book Value of notes discounted P154,500
Proceeds from discounting of notes 153,825
Loss on discounting of notes 675
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