DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

Bacolor, Pampanga

CHAPTER 8 PART 1- ACCOUNTS RECEIVABLES

LEARNING OBJECTIVES:

At the end of this chapter, the student should be able to:

1. To know the classification and presentation of receivables

2. To know the initial and subsequent measurement of accounts receivable

3. To identify the adjustments necessary in determining the net realizable value of accounts
receivable

4. To understand the gross method and net method of recording credit sales

5. To know the accounting for doubtful accounts, worthless of accounts written off and
recoveries of accounts written off.

DEFINITION OF RECEIVABLES

Receivables are financial assets that represent a contractual right to receive cash or another
financial asset from another entity.

TRADE AND NON-TRADE RECEIVABLES

Trade Receivables refer to claims arising from sale of merchandise or services in the ordinary
course of business.

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 not supported by promissory notes.

Other names of accounts receivable are customer’s accounts trade debtors and trade accounts
receivable.

Notes Receivable- are those supported by formal promises to pay in the form of notes.

Non- Trade Receivables- represent claims arising from sources other than the sale of merchandise
or services in the ordinary course of business.

LOANS RECEIVABLES

For banks and other financial institutions, receivables result primarily from loans to customers. The
loans are made to heterogeneous customers and the repayment periods are frequently longer or
several years.

INTERMEDIATE ACCOUNTING 1 1
 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

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.

Non- Trade 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, non- trade receivables are classified as non- current assets.

EXAMPLES OF NON- TRADE 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. Otherwise,
such advances or receivables are classified as non- current assets.

b. Advances to affiliates are usually treated as long- term investments.

c. Advances to suppliers for the acquisition of merchandise are current assets.

d. Subscription receivable are current assets if collectible within one year. Otherwise,
subscriptions receivable should be shown preferably as a deduction from subscribed share
capital.

e. Special deposits on contract bids normally are classified as non-current assets because such
deposits are likely to remain outstanding for a considerable long period of time.

However, the deposits that are collectible currently should be classified as current assets.

f. Accrued income such as dividends receivable, accrued rent receivable, accrued royalty’s
receivable and accrued interest receivable and bond investment are usually classified as
current assets.

g. Claims receivable such as claim against common carriers for losses or damages, claim for
rebates and tax refunds, claim for insurance entity, are normally classified as current assets.

CUSTOMERS CREDIT BALANCES

Customers Credit Balances are credit balances in accounts receivable resulting from overpayments,
returns, and allowances and advanced payments from customers.

These credit balances are classified as CURRENT LIABILITIES and are not offset against the debit
balances in other customers accounts.

INTERMEDIATE ACCOUNTING 1 2
 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

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.

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.

Thus, the term net realizable value is preferably used in relation to accounts receivable.

The net realizable value of accounts receivable is the amount of cash expected to be collected or the
estimated recoverable amount.

TERMS RELATED TO FREIGHT CHARGE

In order to give proper accounting, recognition to freight charge in relation to accounts receivable.

The term FOB Destination means that ownership of the goods purchased is vested in the buyer
upon receipt thereof.

Accordingly, the seller shall be responsible for the freight charge up to the point of destination.

The term FOB Shipping Point means that the ownership of the goods purchased is vested in the
buyer upon shipment thereof.

Thus, it is incumbent upon the buyer to pay for the transportation charge from the point of
shipment to the point of destination.

The term Freight Collect means that the freight charge on the goods shipped is not yet paid. The
common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the buyer.

The term freight prepaid means that the freight charge on the good shipped is already paid by the
seller.

INTERMEDIATE ACCOUNTING 1 3
 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

REFERENCES:

Millan, Zeus Vernon. (2020). Intermediate Accounting 1A. Baguio City: Bandolin Enterprise

Valix Conrado T & Valix Christian Aris M. (2020). Intermediate Accounting. Manila: GIC
Enterprises & Co. Inc.

CPAR, RESA, ICARE Review Materials in Intermediate Accounting or Financial Accounting

INTERMEDIATE ACCOUNTING 1 4