CHAPTER 4
ACCOUNTS RECEIVABLE
represents contractual right to receive cash or another financial asset from another entity
TECHNICAL KNOWLEDGE
To know the classification and presentation of receivables.
To know the initial and subsequent measurement of
accounts receivable.
To identify the adjustments necessary in determining the
net realizable value of accounts receivable.
To understand the gross method and net method of
recording credit sales.
To know the accounting for doubtful accounts, worthless
accounts written off and recoveries of accounts written
off.
TRADE AND NONTRADE RECEIVABLES
for retailers or manufacturers
Trade receivables refer to claims arising from
sale os
merchandise or services in the ordinary course of businegs
Trade receivables include accounts receivable and notes
receivable.
Accounts receivable are open accounts arising from the sale
of goods and services in the ordinary course of business and
not supported by promissory notes.
Other names of accounts receivable are customers’ accounts,
trade debtors, and trade accounts receivable.
Notes receivable are those supported by formal promises to pay
in the form of notes.
Nontrade receivables represent claims arising from sources
other than the sale of merchandise or services in the ordinary
course of business. yung hindi normal na paninda or services ang pinapabili
Classification
Trade receivables which are expected to be realized in cash
within the normal operating cycle or one year, whichever is
longer, are classified as current assets.
Nontrade receivables which are expected to be realized in cash
within one year, the length of the operating cycle notwithstanding,
are classified as current assets.
If collectible beyond one year, nontrade receivables are classified
as noncurrent assets.
The classifications are in accordance with PAS 1, Presentation
of Financial Statements, paragraph 66, which states:
“An entity shall classify an asset as current when the entity
expects to realize the asset or intends to sell or consume it 2
the entity's normal operating cycie, or when the entity expect®
to realize the asset within twelve months after the reportiné
period."
Presentation
Trade receivables and nontrade receivables which are currently
collectible shall be presented on the face of the statement of financial
position as one line item called trade and other receivables.
However, the details of the total trade and other receivables
shall be disclosed in the notes to financial statements.
Acccunts receivable 5,000,000
Allowance for doubtful accounts ( 200,000)
Notes receivable | 1,000,000
Accrued interest on note receivable 150,000
Advances to officers and employees 100,000
Dividends receivable 250,000 ,
Total trade and other receivables 6,300,000
Examples of nontrade receivables
a. Advances to or receivables from shareholders, directors, officers
or employees. If collectible in one year, such advances or
receivables ‘should be classified as current assets.
Advances to affiliates are noncurrent investments.
Advances to supplier are current assets.
_ Subscriptions receivable should be shown preferably as
a deduction from subscribed share capital unless
collectible currently.
Creditors’ accounts with debit balances as a result of
overpayment or returns and allowances are classified
as current assets:
Special deposits on contract bids normally are classified as
noncurrent assets because such deposits are likely to remain
outstanding for a considerable long period of time.
Dividend receivable, accrued rent receivable, accrued
royalties receivable and accrued interest receivable are
usually classified as current assets.
Claims receivable such as claims against common
carriers for losses or damages, claim for rebates
and tax
refunds are normally classified as current asse
ts.
Customers’ credit balances
t balanc es in accounts
Customers’ credit balances are credi ents, returns ang
receivable resulting from overpay r customers.
allowances, and advance payments 1r0
liabiliti
Customers’ credit balances are classified at Ssiatainag
rl fo ntilbean,
and are not offset against the debit balances
accounts, except when the same 18 not ms sented.
only the net accounts receivable may be pre
eiv abl e con tro ingng account nt
lli
For example, the accoun ts rec
reports a balance of P500,000.
Examination of the subsidiary ledgers reveals the following
details in the customers’ accounts:
E.g
Customer A Trade AR customer B a
eon
Trade AR customer A
Customer B Bal. 100k Collect. 110k |
Customer C Bal. 100k : 50k
Collect.
10k
( 50,000)
(current liability)
50k
Accounts receivable control 500,000
The credit balance in the account of Customer C resulted from
overpayment.
Understandably, this credit balance in the account of Customer
C is a liability of the entity to Customer C.
The accounts receivable should be presented as current asset
at P550,000 representing the accounts of A and B.
The credit balance in the account of C is classified as current
lability and not offset against the debit balances in the accounts
of A and B. *
canceled for sales and cash settlemen
t,
But an adjustment may be made 0 :
meaning, not formally journaliz nly for workshee t purposes,
ed and posted to the ledger.
Accounts receivable
Customers’ credit balances 50,000
50,000
[Initial measurement of accounts receivable
PFRS 9, paragraph 5.1.1, provides that a financial asset shall
be recognized initially at fair value plus transaction costs
that are directly attributable to the acquisition.
The fair value of a financial asset is usually the transaction
price, meaning, the fair value of the consideration given.
For short-term receivables, the fair value is equal to the face
amount or original invoice amount. ?
Cash flows relating to short-term receivables are not
discounted because the effect of discounting is usually
immaterial.
Accordingly, accounts receivable shall be measured initially
at face amount or original invoice amount.
With respect to accounts receivable, transaction costs are
not normally incurred because the accounts simply arise from
the act of selling goods in the ordinary course of business.
Subsequent measurement
In accordance with PFRS 9, paragraph 5.2.1, after initial
recognition, accounts receivable shall be measured at
amortized cost.
The amortized cost is actually the net realizable value of
accounts receivable.
The term amortized cost has more relevance in long-term note
receivable.
Thus, ; the term net realizable value is preferably sed
used i
relation to accounts receivable. ” me
The
f net realz.izable value 0 of accounts rece eceivable is
Ls the amount
o en, Sapected to be collected or
the estimated recoverable
Net realizable value
ivable sh
The initial amount recognized for accounts seer Eauyee
reduced by adjustments whic h in the oF ble from the
business will reduce the amou nt recovera |
customer.
principle that assets
This: is based on theat esta blis hed basi c
shall not be carr ied abov e their recoverable amount.
in esti mati ng the net real izab le value os trade
Accordingly, are made:
accounts receivable, the following deductions
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful acccounts
Terms related to freight charge
In order to give proper accounting recognition to freight
charge in relation to accounts receivable, the following terms
should be understood — FOB destination, FOB shipping point,
freight collect and freight prepaid.
sino dapat mag
The term FOB destination means that ownership of the goods
bayad
purchased is vested in the buyer upon receipt thereof.
habang hindi pa nakarating kay buyer ang goods si seller parin ang may ari nun.
Accordingly,.the seller shall be responsible f ;
charge up to the point of destination: or ‘the ‘freight
gris porchated i vised 'in the bape ap ship
The term FOB shipping point means that o se:
thereof. si buyer na ang may ari habang ginabyahe/ in transit palang ang goods
Thus, it is incumbent upon th :
‘transportation charge from the pain: paves to pay for the
of destination. pment to the point
sino nag bayad ng actual
shipped is not yet paid. The com :
same from the buyer. Thus, under thie mo shall collect the
actually paid by the buyer. » the freight charge 15
The term freight prepaid me ,
-oods shipped is already nae by thot freight charge on the
er.
Accounting for freight charge
Sometimes, goods are sold FOB destination but shipped
freight collect with the understanding that the buyer will pay
for the freight charge and deduct the same when remittance
is made by him.
On the part of the seller, the freight charge is recorded by
debiting freight out and crediting allowance for freight
charge.
For example, an entity has a P100,000 account receivable at
the end of accounting period.
The terms are 2/10, n/30, FOB destination and freight
collect. The customer paid freight charge of P5,000.
1. To record the sale:
Accounts receivable 100,000
Freight out 5,000
Sales | | ~ 100,000
Allowance for freight charge 5,000
2. To récord the collection within the discount period:
Cash 93,000
Sales discount 2,000
Allowance for freight charge 5,000
Accounts receivable 100,000
Allowance for sales returns
The measurement of accounts receivable shall also recognize
the probability that some customers will return goods that
are unsatisfactory or will make other claims requiring
reduction in the amount due as in the case of shipment
Shortages and defects.
For example, an amount of P50,000 of the total accounts
receivable at year-end represents selling price of goods that
will probably be returned. The journal entry to recognize the
Probable return is:
Sales return | 50,000
Allowance for sales return 50,000
Sales discount
dit customers. A
to atehe
cre :
Entities usually offer cash disco unts price by reason
cash discount is a reduction from an 1?
of prompt payment.
ton the part of the
A cash discount is known as sales d
iscoun
he par t of the buy
er.
seller and a purchase discount on t
sed as 5/10,- n/30. This
A cas h dis cou nt may be exp res discount if
means that the customer is entl tled to a 5%
e in 10 day s fro m t he invoice date.
paymen t is mad
If the customer fails to pay within the 10-day Le
paid within 30
price must be
the gross amount of the invoice
days from the invoice date.
Methods of recording credit sales
a. Gross method — The accounts receivable and sales are
recorded at gross amount of the invoice. The gross method
is the common and widely used method because it is simple
to apply.
b. Net method — The accounts receivable and sales are
recorded at net amount of the invoice, meaning the invoice
price minus the cash discount whether taken or not taken.
Illustration - Gross method |
1. Sale of merchandise for P100,000, terms 5 / 10, n/ 30
Accounts receivable
Sales ° | 100,000
, 100,000
2. Assume collection is. | made with;
ithin the dis
: count P period.
Cash
Sales discount 95,000
Accounts receivable 5,000
Assume collection is made beyond tha al 100,000
3.
Cash Scount period
Accounts receivable . 100,000
Illustration —- Net method
1. Sale of merchandise foy P100,000, terms 5/10, n/30
. °
Accounts receivable
95,000
Sales’
| 95,000
2. Assume collection is made within the discount period.
Cash 95,000
Accounts receivable 95,000
)
3. Assume collection is made beyond the discount period.
Cash 100,000 |
Accounts receivable | 95,000
Sales discount forfeited 5,000
The sales discount forfeited account is classified as other
income.
Allowance for sales discount
If customers are granted cash discounts for prompt payment,
then, conceptually estimates of cash discounts on open
accounts at the end of the period based on past experience
shall be made.
For example, of the accounts receivable of P1,000,000 at the
end of the period, it is reliably estimated that discounts to
be taken will amount to P50,000.
/
The adjustment to record the expected sales discount is:
Sales discount 50,000
Allowance for sales discount a 50,000
The adjustment may be reversed at the beginning of the next
Period in order that discounts can then be charged normally
. to sales discount account.
Accounting for bad debts
| only for cash to
Business entities sell on credit rather a ncome.
increase total salesand thereby increas
‘However, an entity that sells on ore assumes the risk that
dit n
some customers will not pay their
accounts
lectitible, the entity has
When an account becomes uncollec
sustained a bad debt loss. This loss is simply one of the costs
of doing business on credit.
Two methods are followed in accounting for this bad debt
loss, namely:
‘1. Allowance method
2. Direct writeoff method
Allowance method
The allowance method requires recognition of a bad debt loss
if the accounts are doubtful of collection. The-journal entry
to recognize the doubtful accounts is:
Doubtful accounts xx
Allowance for doubtful accounts xx
The “allowance for doubtful accounts” is deduction from
accounts receivable.
If the doubtful accounts are subsequently found to be
worthless, the accounts are written off as uncollectible
Allowance for doubtful accounts :
Accounts receivable s
xXx
Moreover, accounts receiva bl
at net realizable value. © Would be Properly measured
Recoveries of accounts written off
If a collection is made on account previously written off as
uncollectible, the customary procedure is first to recharge the
customer's account with the amount collected and possibly with
the entire amount previously charged off if it is now expected
that collection will be received in full.
The collection is then recorded normally by debiting cash and
crediting accounts receivable.
The recharging of the customer’s account is usually followed
because it is an evidence of the attempt of the customer to
reestablish his credit with the entity.
What account should be credited when the customer’s account is
recharged?
The generally accepted approach is to simply reverse the original
entry of writeoff regardless of whether the recovery is during
the year of writeoff or subsequent thereto.
Illustration —- Allowance method .
1. Accounts of P30,000 are considered doubtful of collection.
Doubtful accounts ‘30,000
Allowance for doubtful accounts 30,000
2. The accounts are subsequently discovered to be worthless
or uncollectible.
Allowance for doubtful accounts 30,000
Accounts receivable 30,000
3. The same accounts that are previously written off are
unexpectedly recovered or collected.
Accounts receivable 30,000
Allowance for doubtful accounts 30,000
Cash 30,000
Accounts receivable 30,000
The effect of the recovery of accounts written off is zero on
accounts receivable because the recharging and collection
are offsetting. However, the allowance for doubtful accounts
18 Increased by the recovery.
123
Direct writeoff d
end of a bad debt
The direct writeoff method requires recogm! te n worthless -or.
loss only when the accounts proved to
uncollectible.
bad debts and
Worthless accounts are recorded by debiting 0:nly doubtful of
crediting accounts receivable. If the accounts are
collection, no adjustment is necessary.
roa ch is oft en use d by sma ll bus ine sse s bec ause it is
This app
simple to apply.
As a matter of fact the Bureau of Internal Revenue recognizes
only this method for income tax purposes.
However, the direct writeoff method violates the matching
principle because the bad debt loss is often recognized in later
accounting period than the period in which the sales revenue
was recognized.
The direct writeoff method is not permitted under IFRS.
Illustration — Direct writeoff method
1. Accounts of P30,000 are considered doubtful of collection.
No entry is necessary.
2. The accounts proved to be worthless.
Bad debts 30 000
A ccountsts receivable
ivabl \ ; 30,000
3. The same accounts that are pre
worthless are recovered or sae, ee Written off as
Accounts receivable
Bad debts 30,000
Cash 30,000
Accounts receivable 30,000
30,000
If the recovery is subsequent to
writeoff method is used, the recoyeYear of Wruteoff and the direct
to other income. TY May simply be credited
Doubtful accounts in the income statement
1. Distribution cost
If the granting of credit and collection of accounts are
under: the charge of the sales manager, doubtful accounts
shall be considered as distribution cost.
9. Administrative expense
If the granting of credit and collection of accounts are
under the charge of an officer other than sales manager,
doubtful accounts shall be considered as administrative
expense.
In the absence of any contrary statement, doubtful
accounts shall be classified as administrative expense.
