CHAPTER 4 10. Debit Balance of A.

If Material = Current
Creditors Account that may Asset
ACCOUNTS RECEIVABLE arise from Overpayments or B. If immaterial = May be
returns and allowances netted against AccPay with
Credit Balance.
RECEIVABLES = FA where entity has the A. If Collectible w/in 1 year
= Current Assets
right to receive cash or another FA from 11. Subscriptions Receivable
B. If not collectible within
another entity. Amount Collectible. 12 months = Deduction from
Subscribed Share Capital
12. Installment Receivable Current Asset if normally
A. CLASSIFICATION of Receivables as to SOURCE due within 1 year to 2 years.
1. TRADE RECEIVABLES *No. 10 Clarification:
=Claims arising from sale of merchandise or services Inv 500T Purchased A.Creditor’s Debit Balance
AP 500T inventory on
in the ordinary course of business. account 500T = Non-trade Receivable
AP 600T Paid AP 600T Ex. AP shows a Debit Balance on the
A. AR/ Customer’s Accounts/Trade debtors/ Trade Cash 600T Creditor’s Account, This is a
AR Receivable on the Entity’s POV.
=are open accounts arising from the SALE of goods and AR 500T Sold inventory on B. Customer’s Credit
Sales 500T account 500T
Services in the ordinary course of business not Cash 600T Customer paid AP Balance = Current liability
supported by promissory notes. AR 600T 600T Ex. AR shows a Credit Balance on
the Customer’s Account, This is a
B. Notes Receivable Liability on the Entity’s POV.
=a formal claim against another that is evidenced by a
written promise called Promissory Note, or a written
order to pay at a later time called Time Draft.
B. CLASSIFICATION of Receivables as to SOFP
Negotiable Promissory Note
1. CURRENT - “Trade and Other Receivables”
=unconditional written agreement to pay a certain sum
of money on a specific or determinable date to the A. Trade Receivable = generally CURRENT because
order of the payee or to bearer. of the concept of NORMAL OPERATING CYCLE
notwithstanding the period from the reporting date.
B. Nontrade Receivable = Current ONLY if they are
2. NONTRADE RECEIVABLES reasonable expected to be realized in cash Within
=Claims arising sources other than the sale of 12 Mos. after the reporting date.
merchandise or services in the ordinary course of 2. NON-CURRENT
business. = are not reasonably expected to be realized in
Examples: cash within 12 mos after the reporting date.
1. Advances to or A. Within 1 year from *NORMAL OPERATING CYCLE
receivables from officers, reporting Date = Current A = Period between the acquisition of materials entering into a
shareholders, directors and B. More than 12 months process (Manufacturing) or purchase of goods for resale
employees. from rep date = Non- (Retailers) and its realization in CASH or an instrument readily
current A convertible to cash.
A. Collectible w/in 1 year =
Short Term Investment
2. Advances to Affiliates/
B. Collectible for more than
Subsidiary
1 year = Long Term Inv. INITIAL MEASUREMENT OF ACC REC
3. Advances to Supplier for Current Asset
= initally at Fair Value Plus(+) directly
acquisition of Merchandise
4. Accrued Income attributable transaction costs
Receivable (e.g. Div Rec,
Current Asset =FV is usually the TRANSACTION PRICE
Accrued Rent Inc, Accrued
Royalties Inc, and Accrued For ST Receivable, FV = Face Amount or
Int on Bond Investment)
5. Deposits to guarantee
original invoice amount.
performance or payment or
Current Asset
SUBSEQUENT MEASUREMENT
to cover possible damages or
losses
= @ Amortized Cost = the NET
6. Deposit with Creditors, REALIZABLE VALUE of AR
Claims for Losses and
Current Asset
damages
7. Claims Receivables from *In estimating the NET REALIZABLE
common carriers for
damaged or lost goods;
VALUE, the following deductions are
claims against creditors for Current Asset made
returned, damaged, or lost
goods A. Allowance for Freight Charge
B. Allowance for Sales Return
*Claim Receivable
8. Claims for Tax Refunds or Current Asset C. Allowance for Sales Discount
Rebates D. Allowance for Doubtful Accounts
9. Special Deposit on A. Within 12 mos = Current
contract bids B. Normally (if silent) =
Noncurrent Assets
 Freight Charge
Freight Terms Buyer Seller
Purchases xx Acc Rec xx
Acc Pay xx Sales xx
FOB D, FP -No Entry- Freight-Out xx
Cash xx
Purchases xx Acc Rec xx
Acc Pay xx Sales xx
FOB D, FC Acc Pay xx Freight-Out xx
Cash xx Allow for
Freight Charge xx
Purchases xx Acc Rec xx
Acc Pay xx Sales xx
FOB SP, FC Fright-In xx -No Entry-
Cash xx
Purchases xx Acc Rec xx
Acc Pay xx Sales xx
FOB SP, FP Freight-In xx Acc Rec xx
Acc Pay xx Cash xx
*FOB D = Free on Board Destination
*FOB SP = Free on Board Shipping point
*FC = Freight Collect
*FP = Freight Prepaid
*Upon collection, allowance for freight charge is debited and is a
reduction to cash collection, since it was paid by buyer when it
should have been shouldered by the seller.

ALLOWANCE FOR SALES RETURN

=the probability that some customers will return goods
that are unsatisfactory or will make other claims
requiring reduction in the amount due as in the case of
shipment shortages and defects.

Sales Return xx
Allowance for Sales Return xx

No accounting entry,
TRADE DESCOUNT deducted directly from
LIST PRICE to get invoice
price.
CASH DISCOUNT To be journalized,
Seller: Sales Discount reduction from invoice
Buyer: Purchase Discount price for prompt payment.

To record Credit Sales with Sales Discount

A. Gross Method = AR and Sales are recorded at Gross
Amount of the invoice. Commonly used.
B. Net Method = AR and Sales are recorded at Net
Amount of invoice -> cash discount are already
deducted.

JOURNAL ENTRIES
GROSS METHOD NET METHOD
Sale of Merchandise, P100T, 5/10, n/30
AR 100T AR 95T
Sales 100T Sales 95T
Collection is made WITHIN discount period
Cash 95T Cash 95T
Sales Disc 5T AR 95T
AR 100T
Collection is made BEYOND discount period
Cash 100T Cash 100T
AR 100T AR 95T
Sales Discount
Forfeited 5T
*Sales Discount Forfeited is part of Other Income

T-Account: Accounts Receivable

Beg. Bal xx xx Sales Returns and allowances
Sales on Account xx xx Sales Discounts
xx Collections including recoveries
Recoveries xx
xx Accounts written off
ALLOWANCE FOR SALES DISCOUNT
=conceptually an estimate of cash discount to be taken
by customers at the end of the period based on past
experience.
To record expected Sales To be reversed at the
Disc beginning of subsequent
Sales Discount xx
year.
Allow for Sales Disc xx

ACCOUNTING FOR BAD DEBTS

=most entities sell on credit rather than
only for cash to increase total sales and
thereby increase income.
=however, credit sales assumes the risk
that some customers will not pay their
accounts.
=if UNCOLLECTIBLE = Bad Debts Loss

2 METHODS:
1. Allowance Method - Requires recognition of Bad
Debts Loss if account are DOUBTFUL of collection.
2. Direct Writeoff Method - Requires recognition
of bad debts loss ONLY when accounts proved to be
UNCOLLECTIBLE. Used by BIR. Not permitted (IFRS)

ALLOWANCE DIRECT WRITEOFF

METHOD METHOD
Accounts of 30T are considered doubtful of collection.
Doubtful Accounts 30T -NO ENTRY-
Allow for DA 30T
Accounts are proved uncollectible
Allow for DA 30T Bad Debts Exp 30T
Acc Rec 30T Acc Rec 30T
Recovered previously written off accounts
AR 30T AR 30T
Allow for DA 30T Bad Debts Exp 30T
-Reverse prev writeoff entry -Reverse prev writeoff entry
Cash 30T Cash 30T
AR 30T AR 30T
-Record collection of Cash -Record collection of Cash
*If recovered collection is *If the recovered collection is
during the year of writeoff or subsequent year, the
subsequent year =Just follow recovered cash may simply be
the same entry. credited to Other Income.
*Direct writeoff is Undesirable because it does not
match revenues and expenses and does not result in
receivables being stated at net realizable value in the
statement of Financial Position.
*Doubtful accounts/ Bad debts expense

DOUBTFUL ACC in the Income

Statement
If granting of credit and
DISTRIBUTION
collection of accounts are
COST under the charge of the Sales
Manager, doubtful Accounts
are Distribution Cost.
ADMINISTRATIVE If granting of credit and
collection of accounts are
COST under the charge of an
Officer other than sales
manager. DA =Admin Cost