ACCOUNTS RECEIVABLE

RECEIVABLES
- Financial assets that represent a contractual right to receive cash or other financial assets from another entity.

TRADE RECEIVABLES – refers to claims arising from sale of merchandise or services in the ordinary course of business.
Trade receivables – it is classified as current asset, when it expected to realize in cash within the normal operating cycle or
one year, whichever is longer.

ACCOUNT RECEIVABLE – open accounts or those not supported with promissory notes. It is in the customers accounts, trade
debtors, trade accounts receivable.

Notes receivable are those supported by formal promise to pay in the form of notes.

NONTRADE RECEIVABLE – represents claims arising from sources other than the sale of merchandise or services in the ordinary
course of business.
Classification
Nontrade receivable – realized within one year (current asset) if beyond one year, it is noncurrent assets.

PAS 1 PARAGRAPH 66
“An entity shall classify an asset as current when the entity expects to realize the asset or intends to sell or consume it in the entity’s
normal operating cycle, or when the entity expects to realize the asset within 12 months after the reporting period.

PRESENTATION OF TRADE AND OTHER RECEIVABLES

- Trade and nontrade receivables are currently collectible.
-details of the receivable shall be disclosed in the notes of the financial statement.

NONTRADE RECEIVABLE
1. Advances to or receivable from shareholders, directors, officers and employees – if collectible in one year – current asset,
otherwise, it is noncurrent assts.
2. Advances to affiliates –long-term
3. Advances to supplier for merchandise – current asset
4. Subscription receivable – deducted from subscribed capital
5. Debit balance from creditors –current assets (offset can be done if immaterial)
6. Special deposit on contract or bids – collectible in a year – c.a. otherwise, it is noncurrent asset
7. Accrued income such as dividends, royalties, - current items
8. Claims receivable – claims from common carriers, tax refunds, claims from insurance companies – current assets

CUSTOMERS’ CREDIT BALANCES

-Resulting from overpayments, returns, allowances, and advance payments from customers.
-it shall be presented as liability.

INITIAL MEASUREMENT OF RECEIVABLE

PAS 39 paragraph 43 provides that financial assets shall be recognized initially at fair value plus transaction costs that are
directly attributable to the acquisition.
Fair value – transaction price or fair value of the consideration given.
Short-term receivable – fair value is the face value or original invoice amount.
Long-term receivable with
A. Interest bearing - fair value = face value.
B. If it is not interest – fair value = present value of all future cash flows at discounted using the prevailing market
rate of interest for similar receivables

ACCOUNTS RECEIVABLE
1. Open accounts arising from sale of merchandise or services in the ordinary course of business.
2. It shall be measured initially at face value or original amount.
3. Subsequently, it shall be measured at net realizable value.

ALLOWANCE RELATED TO FREIGHT CHARGE

FOB Destination – ownership of goods purchased is vested upon receipt of goods.

 FOB shipping point – ownership of goods purchased is vested upon shipping of goods.
Freight collect- freight charge is not yet paid
Freight prepaid – freight charge is paid by seller.

Accounting for freight charge

E.g. AR php100, 000; terms 2/10, n/30, fob destination and freight collect. The customer paid freight charge of php5, 000.
1. To record the sale:
Accounts receivable 100,000
Freight out 5,000
Sales 100,000
Allowance for freight charge 5,000

2. Record 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 RETURN

Returns of goods purchased or claims to reduce the amount due such as short shipment and defects.
Sales returns xxx
Allowance for sales returns xxx

ALLOWANCE FOR SALES DISCOUNTS

Cash discount is a reduction from an invoice price by reason of prompt payment. Eg. Payment term is 2/10, n/30.
Seller: sales discount
Buyer: purchase discount

METHOD OF RECORDING CREDIT SALES

1. GROSS METHOD – the sales and account receivable are recorded at gross. It is commonly used, it is simple to apply
Eg. Sale of merchandise for 100,000, terms 5/10, n/30.

Accounts receivable 100,000

Sales 100,000

If collection made within the discount period

Cash 95,000
Sales discount 5,000
Account s receivable 100,000

If collection made beyond the discount period

Cash 100,000
Accounts receivable 100,000

2. NET METHOD – recorded at net of discount. Invoice price less cash discount.
To record sales on account for 100,000 5/10, n/30
Accounts receivable 95,000
Sales 95,000
If collection is made within the discount period
Cash 95,000
Accounts receivable 95,000

If collection is made beyond the discount period

Cash 100,000
Sales discount forfeited 5,000
Accounts receivable 95,000
Sales discounted forfeited is classified as other income.

ALLOWANCE FOR SALES DISCOUNTS

This happens when the company’s customers normally availed prompt payment discounts, then at the end of the balance
sheet date, the allowance for discounts shall be made.
 If accounts receivable is p1, 000,000.
Entry:
Sales discount 50,000
Allowance for sales discounts 50,000

ACCOUNTING FOR BAD DEBTS

It arises when the credit sales transactions to increase revenue.

TWO METHODS IN ACCOUNTING BAD DEBTS

1. Allowance method – it requires recognition of bad debts
Entry:
Doubtful accounts xx
Allowance for doubtful accounts xx
Allowance for doubtful accounts – it shall be deducted from accounts receivable.
If account receivable is worthless, then the entry
Allowance for doubtful accounts xx
Accounts receivable xx
This entry supports the matching principle.

Recoveries of accounts written off

When the account is recharged; it shall be reversed the original entries, regardless when the recovery. The entry
would be:
Accounts receivable xxx
Allowance for doubtful accounts xxx

If collected
Cash xxx
Accounts receivable xxx

Example:
A. Accounts of p30, 000 are considered doubtful of collection.
Entry: doubtful account 30,000
Allow for doubtful accounts 30,000
B. Accounts are subsequently discovered to be worthless
Entry: allow for doubtful accounts 30,000
Accounts receivable 30,000
C. Written off account are unexpectedly recovered or collected
Entry: accounts receivable 30,000
Allow for doubtful accounts 30,000
Entry for receipt of cash
Cash 30,000
Accounts receivable 30,000

2. Direct write off method

When accounts are proved to be worthless
Entry: bad debts xxx
Accounts receivable xxx
BIR recognizes this method for income tax purposes; however it violates the matching principle.

Example:
Assume accounts of P30, 000 are considered doubtful of collections.
No entry

The accounts proved to be worthless

Bad debts 30,000
Accounts receivable 30,000

Previously written off as worthless are recovered or collected

Accounts receivable 30,000
Bad debts 30,000
 Cash 30,000
Accounts receivable 30,000
If the recovery is subsequent to the year of write off and the direct write off method is used, then the recovery entry:
Cash 30,000
Miscellaneous income 30,000

METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

PAS 37 “doubtful accounts are recognized when the loss is probable and the amount can be estimated reliably”.

1. Aging of accounts receivable – accounts receivable be classified into not due, 1 to 30 days past due, 31 to 60 days past due;
61 to 90 days past due, 91 to 120 days past due; 121 to 180 days past due; 181 to 365 days past due; more than 1 year past
due; bankrupt or under litigation. It is justified “fair presentation of accounts receivable in financial statements; violates
matching process, time consuming.

Past due – refers to the period beyond the maximum credit term
If the credit term is 2/10, n/30; and account is 45 days from invoice date, it is means that it is 15 days past due.

2. Percent of accounts receivable – a certain rate multiplied by accounts receivable at the end of balance sheet date in order
to get the required allowance balance. It is simple to apply; it violates principle of matching; loss experience rate may be
difficult to obtain and may not be reliable.

3. Percent of sales or income statement approach – sales amount is multiplied by a certain rate to get the doubtful accounts
expense. It is unsatisfactory when there is fluctuation in the cash and credit sales for the period. Proper matching of
revenue and expense is achieved. The amount of receivable may be proved to be excessive or inadequate.

Correction of allowance for doubtful accounts

“Change in estimate is treated currently and prospectively, if necessary.”

Debit balance in allowance account – possible? yes due to write off of accounts during the period, however at balance
sheet date, allowance shall be recognized, and thus allowance for doubtful accounts shall be ending balance.

Doubtful accounts in the income statement

Distribution cost - if granting of credit and collection of accounts are under the charge of the sales manager.
Administrative expenses – granting of credit and collection of accounts are under the charge of an officer other than sales
manager.

If silence, it shall be classified as administrative expense.