LOANS AND RECEIVABLE

MANAGEMENT
LEARNING OBJECTIVES

Upon finishing this session, the learner is expected to:

• Understand the current concept of receivables and its
parameters;
• See the importance of control measures to safeguard the
collectible status of the accounts;
• Classification of receivable; and
• Common misuses of receivable.
HOW DO WE DEFINE
RECEIVABLE?
LOANS AND RECEIVABLES

• PAS 39 defines loans and receivables as “non-derivative financial

assets with fixed or determinable payments that are quoted in
an active market” (Financial Accounting, 2008 edition by Valix
and Peralta)
• Receivables are financial assets that represent a contractual
right to receive cash or other financial assets from another
entity or customer
 EXAMPLES OF RECEIVABLES
Traditional accounts receivable or sometimes called trade debtors or trade
accounts receivable. This is not supported by a promissory note. This account
could either be:
 Trade Receivable – supported by a credit invoice issued by the company and
has credit terms
Notes Receivable – supported by a formal promise to pay in the form of a
note
Loans Receivable – receivable arising from banks and other financial institution
WHAT ARE THE OTHER
ACCOUNTING ELEMENTS
THAT AFFECT RECEIVABLE?
DISCOUNTS

TRADE DISCOUNT CASH DISCOUNT

• The discount granted to a • The discount given to
customer because of the customers when they pay on
bulk order that they made time (early or within the
• Normally expressed in terms credit terms)
of percentage • Also expressed in percentage
 RETURNS

1. Sales Returns – these are the goods, which the customers have physically
returned and may be due to wrong shipment, wrong deliveries, or sub-
standard / low quality
Too much sales returns should be analyzed because this could be an indicator of
a potential problem:
 problem on product quality  get accredited suppliers
 problem on control & inspection of shipment  check process flow and train
employees
 RETURNS

2. Sales Allowances – these are the goods which were delivered to customers
but defective. Instead of physically returning the merchandise, the customers
agree to accept the delivery at reduced prices.
This should also be analyzed deeper because it could be an indicator of a
potential problem:
 problem on product quality  get accredited suppliers
 problem on control & inspection of shipment  check process flow and train
employees
RISK EVALUATION

There is always an inherent risk in granting credit to our

customers.
Minimize the inherent risk by exercising best effort on –
a. Conducting field investigation or background check on the
customer’s behavior in settling his accounts
b. Asking for the customer’s financial report duly certified by a
CPA then prepare a financial analysis
RECEIVABLE ANALYSIS

1. Accounts Receivable Turnover:

𝑇𝑜𝑡𝑎𝑙 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑅 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
 ACCOUNTS RECEIVABLE TURNOVER EXAMPLE
The following selected information were taken from the records of Kristine
Joyce Enterprises:
2008 2007
Cash P 300,000 P 250,000
Accounts Receivable 240,000 260,000
Merchandise Inventory 150,000 180,000
Accounts Payable 120,000 150,000
Sales 2,950,000 2,650,000
Cost of Sales 1,770,000 1,590,000
Applying the formula, the turnover is 12 times.
RECEIVABLE ANALYSIS

2. Number of Days in Receivable:

365 𝑑𝑎𝑦𝑠
𝑁𝑜. 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

In the previous example, we can compute the number of days in

receivable as follows: 365 days / 12 times = 30 days
The company is able to collect their receivables in 30 days.
 ACCOUNTS RECEIVABLE TURNOVER EXAMPLE
The following selected information were taken from the records of Kristine
Joyce Enterprises:
2008 2007
Cash P 300,000 P 250,000
Accounts Receivable 240,000 260,000
Merchandise Inventory 150,000 180,000
Accounts Payable 120,000 150,000
Sales 2,950,000 2,650,000
Cost of Sales 1,770,000 1,590,000
 ACCOUNTS RECEIVABLE TURNOVER EXAMPLE
The following ratios were computed based on the information taken from
the records of Kristine Joyce Enterprises:
Receivable Turnover = P2,950,000 / 250,000 = 12 times
No. of Days in Receivable = 365 days / 12 times = 30 days
Inventory Turnover = P1,770,000 / 165,000 = 11 times
No. of Days in Inventory = 365 days / 11 times = 34 days
Payable Turnover = P1,770,000 / 135,000 = 14 times
No. of Days in Payable = 365 days / 14 times = 27 days
If the date of collection and the date of payment is 20 days and 27 days,
respectively, how would this kind of operation affect the cash flow?
 MANAGING RECEIVABLES

• There should be flexibility and mobility in managing account since the

primary motive is to improve bottom line figures (or net income) and
improve the inherent risk present in all business enterprises.
• Three ways to charge bad accounts:
a) If the company is operating performance focus
b) If the company is focused on realizing it receivables
c) If the company is aging accounts receivables
 MANAGING RECEIVABLES
• If the company is operating performance focus
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐵𝑎𝑑 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑥 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 %𝑎𝑔𝑒 𝑜𝑓 𝑏𝑎𝑑 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠

In the previous example, the net credit sales is P2,950,000. Assuming

that the balance of accounts receivable is P240,000 and the allowance
for doubtful account is P10,000. The company estimated that 2% of
credit sales will be considered bad account, so the bad accounts can be
computed as follows:
P2,950,000 x 2% = P59,000  the company’s A/R will be reduced by P59,000
 MANAGING RECEIVABLES
• If the company is focused on realizing its receivables
𝐸𝑠𝑡 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑥 𝐸𝑠𝑡 %𝑎𝑔𝑒 𝑜𝑓 𝑏𝑎𝑑 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 −
𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝑓𝑜𝑟 𝑑𝑜𝑢𝑏𝑡𝑓𝑢𝑙 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠

In the previous example, the net credit sales is P2,950,000. Assuming that the
balance of accounts receivable is P240,000 and the allowance for doubtful
account is P10,000. The company estimated that 6% of credit sales will be
considered bad account, so the bad accounts can be computed as follows:
P240,000 x 6% - P10,000 = P4,400  the amount of A/R the firm can collect
 MANAGING RECEIVABLES
• If the company is aging account receivables
Not yet due accounts 1-30 days P150,000 x 0% = P 0.00
31 to 60 days P 50,000 x 5% = P 2,500.00
61 to 90 days P 25,000 x 15% = P 3,750.00
Over 91 days P 15,000 x 40% = P 6,000.00
Total P240,000 P12,250.00
Less Allowance for doubtful accounts 10,000.00
Remainder to be charged to bad accounts P 2,250.00
 HOW TO COUNT THE AGE OF YOUR RECEIVABLES?

• When the credit terms is 2/10, n/30 and the buyer had purchased the
merchandise on Jan 1, this is due on Jan 31.
From Jan 1 – 31 31 days
Minus Jan 1 (the first day) 1 day
Difference 30 days
This account when unpaid on Feb 1 will be classified as 31 to 60 days overdue.
WHO HANDLES THE
RECEIVABLES?
 WHO HANDLES THE RECEIVABLES?

• Credit and Investigation Personnel or CI – evaluators of the

customers credit facility who will go and inspect the site of the
business applying for a credit facility and check if the business is really
there. They even observe how transactions were perfected during the
day. They will also ask the financial statement of the company and
analyze their paying capabilities to minimize the risk of uncollected
receivables.
 WHO HANDLES THE RECEIVABLES?

• The Sales Representative – the personnel that sell the products of the
company. They are the ones that have face to face contact with the
customers and motivate them to maximize their credit facility. For this
reason, the company will encounter collection problem.
 WHO HANDLES THE RECEIVABLES?

• The Collectors – the personnel that collect the accounts from the customers.
• The Cashiers – the personnel that receive money from the customers who
made the payment at the office and the money collected by the collectors.
• The Bookkeeper – the personnel that records the money from the customers
who made the payment at the office and the money collected by the
collectors
• The Auditor – the staff that checks the activities related to receivables.
HOW TO CONVERT YOUR
RECEIVABLE FASTER?
PLEDGING ASSIGNMENT FACTORING
 PLEDGING

• This is a way wherein a company can obtain cash using the company’s
receivable as a pledge or a collateral security for such loan payment.
• With the new loan, businesses are using its leverage in order to make more
business transactions thereby enhancing its operating surplus.
• Example: A company borrowed money from a bank amounting to P500,000
and pledge its P1.5 million accounts receivable to secure the loan.
• This type of transaction cannot be seen in the financial report but reflected
in the notes to financial statement.
 ASSIGNMENT
• This is a formal type of pledging since specific accounts receivable will serve
as collateral.
• Assignment could either be on non-notification or on notification basis.
• Two parties are concerned in this agreement: assignee (lender) and assignor
(borrower).
• Under the non-notification basis, customers are not notified about the
assignment. Under the notification basis, customers are advised about the
assignment and customers are advised to make payments directly to the
assignor (or lending company).
 FACTORING
• Under this method, the company selling its accounts receivables to a factor
(lender).
• Factoring could either be:
• Casual Factoring – a casual selling of assets wherein the difference between the
selling price and the book value of the assets sold represents gain or loss
• As a continuing agreement – this arrangement would mean that the factor
assumes the credit function as well as the collection function of the company.
So the seller can receive the cash and use it immediately in its operation.
• Credit Cards – customers may use their credit cards in purchasing various
merchandise from the company. The real transaction is between the cardholder
and the credit card company.
INDUSTRY PRACTICE
INDUSTRY PRACTICE

• Customers can now deposit their payment directly to the

banking system. This system cut some of the possibility of
losses: cost of collectors’ services, loses due to
misappropriations, and elimination of payment evidence.
• Automatic Debit Arrangement with the banking system. The
account of the customers will automatically be debited for the
amount they have to pay to the company
INDUSTRY PRACTICE

• Phone banking. Customers can now pay in the comforts of

their homes and within their time and convenience.
• Internet access. Some customers can have access to their bank
account in the internet and in so doing they can pay their
accounts.
HOMEWORK
Discuss the following in a one whole sheet of paper and submit
next meeting.
• What do you mean by Receivable?
• What are to be included in the Receivable account?
• Who handle Receivables and what are their various roles?
• How are Receivables measured?
• What are the various means of converting receivable to cash?