ACCO 20053 Lecture 6

2020-11-02

Classification for Receivables

Loans and receivables are financial assets within the scope of IFRS 9 Financial Instruments and
IFRS 7 Financial Instruments – Disclosures.
Loans = receivables maturing for more than one year.
Receivables = claims against customers maturing within twelve months.
a. Accounts Receivable – has no component of interest.
b. Notes Receivable – contain a note or a written promise to pay. They may be interest-
bearing or noninterest-bearing. When silent, a note receivable is also considered a
trade receivable.

Trade receivables: arise from the sale of goods and services in the normal course
of the business. They only occur when goods are delivered or when services have
been done. They are always part of current assets regardless of its maturity date.
Non-trade receivables: these arise from sources other than the sale of goods or
services in the normal course of the business. Examples include advances and loans
to certain individuals and claims for tax refunds (rebates) and losses and
damages.
Silent receivables are considered trade receivables unless otherwise stated. They are
always part of current assets regardless of maturity.
Trade receivables are always classified as current assets regardless of its maturity date. When
the maturity date extends beyond the normal operating cycle (beyond twelve months), that certain
amount must be disclosed and is still reported as part of current assets.
With regards to non-trade receivables, if they mature within the normal operating cycle, they are
considered current assets. For non-trade receivables that are expected to mature beyond the
normal operating cycle, they are considered non-current assets.

In summary:
Receivables under current assets:
Trade receivables maturing in the normal operating cycle or not.
Non-trade receivables maturing within twelve months from the end of the reporting
period.
Receivables under noncurrent assets:
Non-trade receivables maturing after 12 months from the end of the reporting
period.
Note that subscription receivables are deductions to shareholder’s equity.
It is to note the presentation of accounts receivable should be at its net realizable value or at
its amortized cost. The amount recognized for trade receivables is its transaction price.

Methods of Recording Receivables

Given: July 16 2019 list price is P100,000 with trade discounts of 10%, 10% and 5%. The credit
terms are 2/10; n/30 with FOB shipping point freight prepaid for P2,000.
Note: discounts are recorded based on invoice price.
Gross Price Method (when taken)
Here, the receivables and sales are initially recorded at the gross invoice price. At initial
recognition, no cash discount is recognized until it is taken. When the discount is taken, the
cash discount is debited to the sales discounts account
Entry at invoice
date:

作成した/終わった: 2020-12-02
Alcera, Vincent Luigil C.
 76,950.
Accounts Receivable 00
76,950.0
Sales 0

2,000.
Accounts Receivable 00
2,000.0
Cash 0

or

78,950.
Accounts Receivable 00
76,950.0
Sales 0
2,000.0
Cash 0

Journal Entry for payment on or before July 26, 2019:

77,411.
Cash 00
1,539.
Sales Discount 00
78,950.0
Accounts Receivable 0

Journal Entry for payment beyond July 26,

2019:

78,950.
Cash 00
78,950.0
Accounts Receivable 0

Note that when a discount is taken in the subsequent period, an adjusting entry
is made.

Sales Discount 1,539.00

Allowance for Sales Discount 1,539.00

Philosophy for adjusting: we make an adjustment if a cash discount is taken in the subsequent
period because sales revenue and accounts receivable would be overstated in the current period if
no adjustment is made. The said adjusting entry shall then be reversed in the beginning of the
subsequent period.
The allowance for sales discount is a contra asset account and a deduction to the accounts
receivable.
Net Price Method (when not taken)
Under the net price method, both receivable and sales are recorded at net price (sales –
sales discount). The sales discount is only recognized when it is not taken.

Entry at invoice date:

Accounts Receivable 75,411.00

Sales 75,411.00

Accounts Receivable 2,000.00

Cash 2,000.00

作成した/終わった: 2020-12-02
Alcera, Vincent Luigil C.
 or

Accounts Receivable 77,411.00

Sales 75,411.00
Cash 2,000.00

Journal Entry for payment on or before July 26, 2019:

Cash 77,411.00
Accounts Receivable 77,411.00

Journal Entry for payment beyond July 26, 2019:

Cash 78,950.00
Sales Discount Forfeited 1,539.00
Accounts Receivable 77,411.00

Note that when a discount is not taken in the subsequent period, an adjusting entry
is made.

Accounts Receivable 1,539.00

Sales Discount Forfeited 1,539.00

Philosophy for adjusting: if the discount is not taken and the sale will occur in the subsequent
period, an adjusting entry is made to prevent the receivable and revenue from being understated.
This means that if a discount was to occur in the subsequent period, no adjusting entry is to be
made.
The sales discount forfeited is reported as other operating income as profit or loss section on
the statement of comprehensive income.

Allowance Method (when offered)

Here, the Accounts Receivable is recorded at gross sales price, sales revenue at net
amount (invoice price – sales discount), and the available cash discount is recorded as a credit
in the valuation account with the title Allowance for Sales Discount. Not that the allowance for
sales discount, just like sales discount, is based on the invoice price. It is recorded instantly
when the discount is offered. And just like the sales discount, the allowance for sales discount
also reduces the accounts receivable to its amortized cost.

Entry at invoice
date:

76,950.
Accounts Receivable 00
1,539.0
Allowance for Sales Discount 0
75,411.0
Sales 0

2,000.
Accounts Receivable 00
2,000.0
Cash 0

or

78,950.
Accounts Receivable 00
Allowance for Sales Discount 1,539.0

作成した/終わった: 2020-12-02
Alcera, Vincent Luigil C.
 0
75,411.0
Sales 0
2,000.0
Cash 0

Journal Entry for payment on or before July 26, 2019:

77,411.
Cash 00
Allowance for Sales Discount 1,539.00
78,950.0
Accounts Receivable 0

Philosophy: since sales is recorded at net price, we assume that the discount is already
recognized through the allowance for sales discount. So, when the discount is taken for which it
was already recognized, revert the allowance for the discount incurred.

Journal Entry for payment beyond July 26,

2019:

Cash 78,950.00
Allowance for Sales Discount 1,539.00
Sales Discount Forfeited 1,539.00
Accounts Receivable 78,950.00

Philosophy: since the discount is forfeited, we cancel the allowance which recognized the
discount along with an entry to forfeited discounts to increase revenue to the amount that
should be received.

Notice that when the discount is taken, it was already recognized when offered, hence the
usage of the allowance for sales discounts. But when it was not taken, no sales discount
forfeited was recognized, therefore the said account must be utilized. We cancel the allowance
when it is not taken since the allowance for discount embodies the sales discount.

At initial recognition, we see that the accounts receivable and sales revenue is understated.
Therefore, we must adjust if no discount is to occur and the transaction is to take place in
the subsequent period.

Note that when a discount is already lapsed and the transaction will occur in the subsequent
period, an adjusting entry is made.

Allowance for Sales 1,539.

Discount 00
Sales Discount
Forfeited 1,539.00

Regardless of which method is used with the appropriate adjusting entries, the amortized cost of
the Accounts Receivable reported in the Financial Statements will be the same.

Subsequent Measurement of Accounts Receivable

Know that the accounts receivable is subsequently measured at its recoverable historical
cost or its net realizable value. The recoverable historical cost or its net realizable value is
the amount of cash expected to be recovered from the contractual cash flows of the receivable.

作成した/終わった: 2020-12-02
Alcera, Vincent Luigil C.
NRV = transaction price – subsequent repayments of principal – any reduction (through an
allowance account) for non-collection or impairment.

Estimating the recoverable historical cost of accounts receivable

To estimate the recoverable historical cost (net realizable value) of trade accounts
receivable, an entity considers the sales discounts and doubtful accounts.

Sales Discount
If a sales discount is offered, the amount of consideration may not be wholly recoverable
when the discount is availed.

Illustration: A list prices goes for P10,000 under credit terms of 20%, 10%, 2/10, n/30. It is
estimated that only 80% of the cash discount will be taken and concludes that it is highly
probable that a significant reversal in the cumulative amount of revenue recognized will not
occur as the uncertainty is resolved.

₱
List price 10,000.00
terms 20%, 10%
₱
Invoice price 7,200.00

₱
Invoice price 7,200.00
Multiply: sales Journal entries (gross method)
discount 2%
₱ Accounts Receivable 7,084.80
Initial sales discount 144.00 7,084.8
Multiply: portion Sales 0
taken 80%
Sales discount taken 115.2
₱
Sales 7,084.80

Assume then that the accounts receivable is not collected by the end of the period and the entity
changes the estimate of cash discount to be taken at 40%.

₱
Invoice price 7,200.00
Multiply: sales discount 2% Adjustment:
₱
Initial sales discount 144.00 Accounts Receivable 57.60
Multiply: estimated Sales 57.60
portion 40%
₱
Sales discount taken 57.60

₱
Invoice price 7,200.00
57.6
Less: sales discount 0
₱
Sales price 7,142.40

Adjustment to transaction:
₱
Subsequent sales price 7,142.40
作成した/終わった: 2020-12-02 7,084.8
Alcera, Vincent
Less: Luigil
initial salesC.
price 0
₱
Adjusted amount (increase) 57.60
Accounting for Uncollectible Accounts

Direct Write-Off Method

Bad Debts Expense xxx

Accounts Receivable xxx

To reinstate written-off accounts collected

Accounts Receivable xxx

Bad Debts Expense xxx

Cash xxx
Accounts Receivable xxx

Allowance Method or Reserve Method

Bad Debts Expense xxx

Allowance for Bad Debts xxx

Writing-off uncollectible accounts under the allowance method:

Allowance for bad Debts xxx

Accounts Receivable xxx

Philosophy: the expense for bad debts is already recorded by the adjusting entry when the
allowance was established. So, when writing-off an uncollectible amount. Debit the
allowance.

Reinstating a written-off amount under the allowance method:

Accounts Receivable xxx

Allowance for Bad Debts xxx

Cash xxx
Accounts Receivable xxx

Note that the current assets, working capital and current ratio is unaffected from the write-off
and recovery under the allowance method. Know that the allowance method is in accordance with the
PFRSs while the direct method is not.

Write-offs and recoveries affect profit, working capital and current ratio under the direct
method.

作成した/終わった: 2020-12-02
Alcera, Vincent Luigil C.