Practical Accounting 1 1

Accounts Receivable

Accounts Receivable

Classification of Receivable

1. As to Source or Origin
1.1. Trade Receivables
1.1.1.Accounts Receivable
1.1.2.Notes Receivable
1.2. Non-Trade Receivables
1.2.1.Loans to officers and employee
1.2.2.Advances to affiliates
1.2.3.Accrued interest and dividends
1.2.4.Deposits to guarantee performance or payment to cover possible damages
1.2.5.Subscriptions for the entity’s securities
1.2.6.Deposits with creditors, claims for losses and damages
1.2.7.Claims for tax refunds or rebates
1.2.8.Claims against common carriers for damaged or lost goods
1.2.9.Clams against creditors for returned or damaged goods
1.2.10. Advances to suppliers
1.2.11. Special deposit on contract bids
2. As to Classification on Statement of Financial Position
2.1. Current Receivables
2.1.1.Accounts Receivable
2.1.2.Installment Receivables
2.1.3.Non-trade Receivable collectible within 12 months
2.2. Non-Current Receivable

Initial Recognition: Face Value

Subsequent Recognition: Net Realizable Value

Computation of NRV

Accounts Receivable xxx

Less: Allowance for freight charge xxx

Allowance for sales return xxx

Allowance for sales discount xxx

Allowance for doubtful account xxx xxx

Net Realizable Value xxx

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Accounts Receivable

Transfer of Title Paid by

Shipping Destination Buyer Seller
Point
FOB Destination  

FOB Shipping Point  

Freight Collect 

Freight Prepaid 

Trade Discounts/Volume Discounts –not recognized for financial accounting purposes

Chain Discounts – series of trade discounts

Computation: List Price – (Discount Rate x List Price) = Invoice Price

Sales Discounts/Cash Discounts – are reduction from sales price as inducement for prompt payment and are recognized
for financial accounting purposes e.g. 2/10, n/30

Transaction Gross Price Method Net Price Method Allowance Method

Cash discount is recorded only Cash discount is recorded Cash discount is recognized
when it is taken only when it is not taken when it is offered to customer
using the account allowance
for sales discounts
Initial Recording Accounts Receivable xxx Accounts Receivable xxx Accounts Receivable xxx
Sales xxx Sales xxx Sales xxx
AFSD xxx
Both accounts @ gross price Both accounts @ net price AR @ gross price
AFSD @amount of sales dis.
Sales @ net price
Collection Within Cash xxx Cash xxx Cash xxx
Discount Period Sales Discount xxx Accounts Receivable xxx AFSD xxx
Accounts Receivable xxx Accounts Receivable xxx
A/R @ gross price Both accounts @ net price A/R @ gross price
AFSD @ amount of sales dis. AFSD @ amount of sales dis.
Cash @ net price Cash @ net price
Collection After the Cash xxx Cash xxx Cash xxx
Discount Period A/R xxx SD Forfeited xxx AFSD xxx
A/R xxx SD Forfeited xxx
Both accounts @ gross price A/R xxx
Cash @ gross Cash and AR @ gross
SDF @ amount of discount AFSD and SDF @ amount of
AR @ net price discount
Adjusting entry for Sales Discounts xxx
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Accounts Receivable

possible recording of AFSD xxx

sale in one
accounting period
but cash discount
taken in the
subsequent period
Adjusting Entry for A/R xxx
yearend that have Sales Discount For. xxx
passed the discount
period
Adjusting Entry for AFSD xxx
passed but fully Sales Discount For. xxx
collectible

(See Problem 3-1)

Notes Receivable

Discount Premium
Relation of Present Value to Face If PV < its FV If PV > its FV
Value
Treatment Any unamortized discount is deducted Any unamortized premium is added to
from the face value of the note the face value of the note

Computation of Amortized Cost

Initial Measurement xxx

Less: Principal Repayments xxx

Less: impairment Loss xxx

+/- Cumulative amortization using the

effective interest method (Premium/Discount) xxx xxx

Amortized Cost xxx

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Accounts Receivable

Entries for Uncollectible Accounts

1. Direct Method
Entry to recognize impairment
Bad Debt Expense xxx
Accounts Receivable xxx
Recovery of previously written off
1. Accounts Receivable xxx
Bad Debts Recovery xxx
2. Cash xxx
Accounts Receivable xxx
2. Allowance Method
Entry to recognize impairment
Bad Debt Expense xxx
Allowance for Bad Debt xxx
When proven to be uncollectible
Allowance for Bad Debts xxx
Accounts Receivable xxx
Recovery of previously written off
1. Accounts Receivable xxx
Allowance for Bad Debts xxx
2. Cash xxx
Accounts Receivable xxx

(See Problem 3:9-13)

Measuring Impairment loss (See Problem 3-15)

Receivable Financing

1. Pledging of Accounts Receivable

- Refers to the use of receivable as collateral and is also known as general assignment
- No entry is made in the books pertaining to pledged accounts

Entries
Recording of Loans
Cash xxx
Discount on Note Payable xxx
Notes Payable xxx
Recording of Interest
Interest Expense xxx
Discount on note Payable xxx

A note to financial statement is necessary for pledged accounts

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Accounts Receivable

(See Problem 3-20)

2. Assignment of Accounts Receivable

- A more formal way of borrowing money in which specific accounts receivable are used as collateral
- A borrower called the assignor transfers its rights in some of its accounts receivable to a lender called assignee
in consideration of a loan
- Under non-notification basis, the customer pays directly to the assignor and remits thereof to the assignee
- Under notification basis, the customer pays directly to the assignee

Entries

Transaction Non-notification Basis Notification Basis

Assignment of Specific Receivables A/R Assigned xxx A/R Assigned xxx
AR xxx A/R xxx
Recording of Loan Cash xxx Cash xxx
Finance Charge xxx Finance Charge xxx
NP – Bank xxx NP – Bank xxx
Collection of Assigned Accounts Cash xxx -
A/R Assigned xxx
Remittance to Finance Company NP – Bank xxx NP – Bank xxx
Interest Expense xxx Interest Expense xxx
Cash xxx A/R Assigned xxx
Recording of Sales Returns and SR&A xxx SR&A xxx
Allowances A/R Assigned xxx A/R Assigned xxx
Reverted the Remaining Assigned A/R xxx A/R xxx
Account to Accounts Receivable A/R Assigned xxx A/R Assigned xxx

3. Factoring
- An outright sale of receivable, since the transfer of the receivables is without recourse
- An entity sells its accounts receivable to a bank or finance entity called a factor
- A gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the
receivables factored
- If the factor retains a portion of the purchase price to cover probable sales discounts, returns and allowances,
such amount is charged to a Receivable from Factor and is also known as Factor Holdback

Entries

To record Receivable Factored (Gain)

Cash xxx
Receivable form Factor xxx
Accounts Receivable xxx
Gain from Factoring xxx
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Accounts Receivable

Cash xxx
Loss from Factoring xxx
Receivable from Factor xxx
Accounts Receivable xxx

Sales Returns and Allowances xxx

Receivable from Factor xxx

Cash xxx
Receivable form Factor xxx

To record Receivable Factored (Loss)

When customers whose accounts were factored make returns

When all receivable factored are collected and no returns, discounts or allowances, final settlement with factor is
recorded as

Computation:

Gross Amount of Receivable Factored xxx

Less: Factoring Fee (% x Gross Amount) xxx

Factor Holdback [% x (Gross Amount – Factoring Fee)] xxx xxx

Net Cash Received from Factoring xxx

4. Discounting on Notes Receivable

- Is indorsing a promissory note to a bank or a financing institution, the latter advancing the maturity value of the
note less a charge called discount]

(See Problem 3:21-22)