RECEIVABLES

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Accounts receivable (AR)
is the balance of money due to a firm for goods or
services delivered or used but not yet paid for by
customers. 

Accounts receivables are listed on the balance

sheet as a current asset. AR is any amount of money
owed by customers for purchases made on credit.
 Accounts receivable  Allowance for Doubtful Accounts

Beginning Write off Write off Beginning

Credit sales Collections Bad Debt Expense

Recoveries Sales returns Recoveries

and allowances

Sales discounts
Under the accrual basis of accounting a sale on
credit will:

1.Increase sales or sales revenues, which are reported

on the
income statement, and
2.Increase the amount due from customers, which is
reported as
accounts receivable—an asset reported on the
balance sheet.

If a buyer does not pay the amount it owes, the seller

will report:
2.A credit loss or bad debts expense on its income
statement, and
3.A reduction of accounts receivable on its balance
sheet.
Recording Sales of Goods on Credit
When a company sells goods on credit, it reports the transaction on
both its income statement and its balance sheet. On the income
statement, increases are reported in sales revenues, cost of goods
sold, and (possibly) expenses. On the balance sheet, an increase is
reported in accounts receivable, a decrease is reported in inventory,
and a change is reported in stockholders' equity for the amount of the
net income earned on the sale.
If the sale is made with the terms
 FOB Shipping Point, 
the ownership of the goods is
transferred at the seller’s dock.

If the sale is made with the terms 

FOB Destination, the ownership of
the goods is
transferred at the buyer's dock.
FOB SHIPPING
means the ownership of the goods is transferred to the
buyer at the seller's dock. This means that the buyer is
responsible for transporting the goods from Quality
Product's shipping dock. Therefore, all shipping costs
(as well as any damage that might be incurred during
transit) are the responsibility of the buyer.

FOB Destination
Means the ownership of the goods is transferred at the
buyer's dock. This means the seller is responsible for
transporting the goods to the customer's dock, and will f
actor in the cost of shipping when it sets its price for the
goods.
 CREDIT RISK
When a seller provides goods or services on credit, the resultant account
receivable is
normally considered to be an unsecured claim against the buyer's
assets. This makes the
seller (the supplier) an unsecured creditor, meaning it does not have a lien
on any of the
buyer’s assets—not even on the goods that it just sold to the buyer.

Sometimes a supplier's customer gets into financial difficulty and is

forced to liquidate
its assets. In this situation the customer typically owes money to
lending institutions
as well as to its suppliers of goods and services. In such cases, it's
the secured creditors
(the banks and other lenders that have a lien on specific assets such as
cash, receivables, inventory, equipment, etc.) who are paid first from the
CREDIT RISK
To avoid this kind of risk, some suppliers may decide not to sell anything on credit,
but require instead that all of its goods be paid for with cash or a credit card.
Such a company, however, may lose out on sales to competitors who offer to sell
on credit.

To minimize losses, sellers typically perform a thorough credit check on any new
customer before selling to them on credit. They obtain credit reports and check
furnished references. Even when a credit check is favorable, however, a credit
loss can still occur. For example, a first-rate customer may experience an
unexpected financial hardship caused by one of its customers, something that
could not have been known when the credit check was done.

The point is this: any company that sells on credit to a large number of customers
should assume that, sooner or later, it will probably experience some credit losses
along the way.
Allowance Method for Reporting Credit Losses
Accounts receivable are reported as a
current asset on a company's balance
sheet. Since current assets by
definition are expected to turn to cash
within one year
(or within the operating cycle, whichever is
longer),
a company's balance sheet could overstate
its accounts receivable (and therefore its
working capital and
stockholders' equity) if any part of its
accounts
receivable is not collectible.
Allowance Method for Reporting Credit Losses
To guard against overstatement, a company will
estimate how much of its accounts receivable
will never be collected. This estimate is reported
in a balance sheet contra asset account called
Allowance for Doubtful Accounts.

(Some companies call this account Provision for

Doubtful
Accounts or Allowance for Uncollectible
Accounts.)
Any increases to Allowance for Doubtful
Accounts are also
recorded in the income statement account Bad
Debts
Expense (or Uncollectible Accounts Expense).
Under the allowance method, if a specific
customer’s
accounts receivable is identified as
uncollectible,
it is written off by removing the amount from Writing Off an
Accounts Receivable. The entry to write off Account under the
a bad account affects only balance
Allowance Method
sheet accounts: a debit to Allowance
for Doubtful Accounts and a credit to
Accounts
Receivable. No expense or loss is reported
on the 
income statement because this write-off is
"covered“
under the earlier adjusting entries for
estimated bad
 Journal entries
Allowance for Doubtful Accounts
I. Allowance Method II. Direct Write Off

A. Doubtful Collection
dr. Doubtful accounts xx
cr. Allowance for Doubtful Accounts xx A. Worthless accounts
dr. Bad Debts xx
B. Worthless collection/write off cr. Accounts Receivables xx
dr. Allowance for Doubtful Accounts xx
cr. Accounts Receivable xx B. Recovery
dr. Accounts receivable xx
C. Recovery cr. Bad Debts xx
dr. Accounts receivable xx Collection of recovery
cr. Allowance for doubtful accounts xx dr. Cash xx
Collection of recovery cr. Accounts Receivables xx
dr. Cash xx
cr. Accounts Receivable xx
NOTES RECEIVABLE
The notes receivable is an account on the balance sheet 
usually under the current assets section if its life is less than
a year. Specifically, a note receivable is a written promise to
receive money at a future date. The money is usually made
up of interest and principal.
 Measurement

Initial – present value

Subsequent – amortized cost
A note receivable is often formed when a business, usually a
bank, makes a loan to another business. A note will often be
for less than a year, but some can be well in excess of this
time frame. Recognize notes receivable income as interest 
income on the income statement. Thus, when payment is
made the amounts effect the balance sheet as well as the
income statement.
Interest-bearing notes receivable (measure at Face
value)
The interest-bearing note receivable is a note on which
interest rate is
quoted and interest is paid on the due date along with the
principal
amount. This notes receivable also called non-discounted
notes receivable.

Non-interest bearing notes receivable (measure at

present Value)
A note receivable on which interest rate is not specified but
the total
interest amount is deducted on advance is called non-
interest bearing notes receivable. This notes receivable also
called discounted note receivables 
because the payment made to the client by discounting or
Notes Receivable Example

Money Bank is extending a $100,000 90 day note to Toys Inc.

so that they can fund some of its short term needs for financing
during the year. The note has an interest rate of 5% and is
recorded by the bank as a note receivable on Money’s balance
sheet under the current assets section. At the end of the term,
Toys inc. will pay the $100,000 in principal back to Money Bank,
and approximately $1,233 (100,000 * 90/365 * .05) worth of 
interest. Record the amount as interest income on the incomes
statement at the end of the year.
LOANS RECEIVABLE
A loan receivable is the amount of
money
owed from a debtor to a creditor
(typically a bank or credit union). It
is recorded as a
“loan receivable” in the creditor’s
books.
Is a Loan Payment an
Expense?
Partially. Only the interest portion on a loan payment is
considered to be an expense. The principal paid is a
reduction of a company’s “loans payable”, and will be
reported by management as cash outflow on the Statement
of Cash Flow.

Is a Loan an Asset?
A loan is an asset but consider that for reporting purposes,
that loan is also going to be listed separately as a liability
 Measurement

Initial – fair value

Subsequent – amortized cost
RECEIVABLE FINANCING
Pledge, assignment, factoring

- Financial flexibility or
capability of an entity to raise
money out of its receivable
Pledging of Factoring of
Receivables Receivables

Assignment Discounting
of of
Receivables Receivables

Common Forms of Receivable Financing

 LOANS

Receives the
collections as a
payment in
Collect the pledged
satisfaction of the
accounts
loan
ACCOUNTS
RECEIVABLE

Pledge of Accounts Receivable

 LOANS ACCOUNTS
RECEIVABLE
When the company made a loan from the
bank:
Cash xx
Discount on note payable xx NO ENTRY
Note payable – Bank xx

For subsequent payment of the loan: ONLY A DISCLOSURE IN

Note payable – Bank xx
NOTES TO FINANCIAL
Cash xx
Discount on note payable is amortized:
STATEMENT
Interest Expense xx
Discount on note payable xx
 In form:
SUBSTANCE Secured borrowing evidenced by a
OVER financing agreement and a promissory
FORM
note both of which the assignor signs.

In substance:
Assignor transfers its rights in some of its
accounts receivable to an Assignee in
consideration for a loan.

Assignment of Accounts Receivable

Features of Assignment
• Assignment may be done either:
Non-notification basis
Buyer is not informed of the
assignment and will continue to remit its payment to the seller
(assignor).

Buyer is informed of the assignment

Notification basis
arrangement and will remit payment directly to the assignee

• Bank or a finance entity analyzes the borrower’s

account receivable.
• Assignee charges interest for the loan, and
required a service or financing charge or
commission for
the assignment agreement.
• Loan is at a specified percentage of the face value
of the collateral and the interest and service fees
are charged to the assignor (borrower).

• Assigned accounts are segregated from other

accounts. The notes payable should be deducted from
the balance of Accounts Receivable assigned to
determine the equity in assigned accounts receivable.
 Non- notification Notification
Accounts Accounts
Receivable - Receivable
To separate assigned xx - assigned xx
the assigned
Accounts Accounts
accounts
Receivable xx Receivable xx
Cash xx Cash xx
Service Service
To record the Charge xx Charge xx
loan Notes Notes
payable - payable -
Bank xx Bank xx
Sales return xx Sales return xx
Issued credit
Accounts Accounts
memo (e.g.
Receivable - Receivable
sales return) assigned xx - assigned xx

Pro-forma journal entries:

Non-notification vs. Notification
 Non- notification Notification
Allowance Allowance for
for Doubtful
To record Doubtful Accounts
write-off of Accounts xx xx
accounts
Accounts Accounts
assigned Receivable - Receivable
assigned xx - assigned xx
To transfer the Accounts Accounts
remaining Receivable Receivable
balance of A/R xx xx
– assigned to
A/R - Accounts Accounts
unassigned Receivable - Receivable
assigned xx - assigned xx

Pro-forma journal entries:

Non-notification vs. Notification
 Non- notification Notification
Cash xx Note xx
payable -
Sales xx Bank
Discount Sales xx
To record Discount
collection
Accounts Accounts
Receivable - Receivable -
assigned xx assigned xx
Notes Interest
payable - Expense
To record
Bank xx xx
remittance
Interest Cash
Expense xx xx
Cash xx

Pro-forma journal entries:

Non-notification vs. Notification
Accounts Receivable – unassigned xx
Accounts Receivable – assigned xx
Total xx
Less: Allowance for Doubtful Accounts xx
Net Realizable Value xx

Included under the line item:

Trade and Other Receivables

Statement Presentation
Accounts Receivable – assigned xx
Less: Note payable – Bank xx
Equity in assigned accounts xx

The assignor (entity) should

disclose its equity in the assigned
accounts

Statement Presentation
 Sale of accounts receivable on a without
recourse, notification basis.

Factor
- an entity who sells accounts receivable to a bank of
finance entity
- assumes responsibility for uncollectible factored
accounts.

Factoring differs from an assignment in that an

entity actually transfers ownership of the accounts
receivable to the factor.
Factoring
An entity finds itself in a critical cash position, it may
be forced to factor some or all of its accounts
receivable at a substantial discount to a bank or a
finance entity to obtain the much needed cash.

Casual Factoring
This is where a finance entity purchases all of the accounts
receivable of a certain entity.

In this setup, before a merchandise is shipped to a customer,

the selling entity requests the factor’s credit approval. If it is
approved, the account is sold immediately to the factor after
shipment of the goods

Factoring as a continuing agreement

The factor then assumes the credit function
as well as the collection function.

The factor may withhold a predetermined

amount as a protection against customer
returns and allowances and other special
adjustments.

This amount withheld is known as Factor’s

holdback.
RECEIVABLE FINANCING
Discounting of notes receivable

One of the differences between notes and accounts

receivable is
the greater negotiability of notes. A holder of a note
can readily
convert it to cash by discounting it at a bank, either
with or without
recourse. The bank accepts the note and gives the
holder cash
equal to its maturity value less a discount computed
by a discount
rate to the maturity value. The bank gets its money
back plus the
discount when the note is paid by its maker at
For notes discounted with recourse, the original holder
is contingently liable for paying the note. That is, it will
have to pay the note if it is
defaulted. This type of liability is not disclosed in the
balance sheet
but should be described in a footnote if it is material.

A five-step processthe
1. Compute is used in accounting
maturity value. for a discount
on notes receivable:
2. Compute the discount (discount rate times
maturity value).
3. Compute the proceeds (maturity value less
discount).
4. Compute the net interest income or expense
(proceeds less carrying value).
5. Prepare the journal entry.
The discount rate is the annual percentage rate that the financial institution charges for
buying a note and collecting the debt. The discount period is the length of time
between a note's sale and its due date. The discount, which is the fee that the financial
institution charges, is found by multiplying the note's maturity value by the discount rate
and the discount period.

Suppose a company accepts a 90‐day, 9%, $5,000 note, which has a maturity value
(principal + interest) of $5,110.96. In this example, precise calculations are made by
using a 365‐day year and by rounding results to the nearest penny.
If the company immediately discounts with recourse the note to a bank that offers a
15% discount rate, the bank's discount is $189.04

The bank subtracts the discount from the note's maturity value and pays the company
$4,921.92 for the note.

Maturity Value $5,110.96

Discount (189.04)
Discounted Value of Note $4,921.92

The company determines the interest expense associated with this transaction by
subtracting the discounted value of the note from the note's face value plus any interest
revenue the company has earned from the note. Since the company discounts the note
before earning any interest revenue, interest expense is $78.08 ($5000.00 ‐ $4,921.92).
The company records this transaction by debiting cash for $4,921.92, debiting interest
expense for $78.08, and crediting notes receivable for $5,000.00.
Suppose the company holds the note for 60 days before discounting it. After 60 days,
the company has earned interest revenue of $73.97.

Since the note's due date is 30 days away, the bank's discount is $63.01. The bank
subtracts the discount from the note's maturity value and pays the company $5,047.95
for the note.
 Maturity Value $5,110.96
Discount (63.01)
Discounted Value of Note $5,047.95

The company subtracts the discounted value of the note from the note's face value plus
the interest revenue the company has earned from the note to determine the interest
expense, if any, associated with discounting the note. In this example, the interest
expense equals $26.02.

Note's Face Value + Interest Revenue Earned $5,073.97

Discounted Value of Note (5,047.95)
Interest Expense $ 26.02

The company records this transaction by debiting cash for $5,047.95, debiting interest
expense for $26.02, crediting notes receivable for $5,000.00, and crediting interest
revenue for $73.97.