AUDIT OF ACCOUNTS RECEIVABLE AUDIT OF ACCOUNTS RECEIVABLE

GUIDE DICTIONARY

METHODS OF COMPUTING ADA/BAD  Past due accounts – accounts that are

DEBTS EXPENSE already beyond their credit period and not yet
paid by customers. Usually, mas malaki ang
1. Percent of Sales Method rate of uncollectibility nito unlike sa current
• It depends if where you would accounts.
multiply the uncollectibility rate: o So getting the % of AR could look like
o Sales revenue this:
o Net sales o Current accounts xx*3%
o Credit sales o Past due accounts xx*10%
o Net credit sales o Total xx

• Proforma #1:  ADA, end before adjustments – this is the

o Sales xx ending balance of ADA after the ff. line items
o Less: Cash sales xx but before the bad debts expense:
o Credit sales xx o ADA given amount xx
o Add: Recoveries xx
• Proforma #2: o Less: Write-offs (xx)
o Credit sales xx o Sometimes: Bad debts expense of initial
o Sales return xx ADA method used xx
o Sales discount xx o ADA, end (before adj.) xx
o Net credit sales xx o And before the bad debts expense is
computed using the 3 methods.
2. Percent of AR Method
• % of AR, ending balance  Control account and subsidiary account –
• % of current accounts + % of past there are problems that would give you two
due accounts (2) balances of AR.
o Adjustments should be accounted for
3. Aging Method separately for control account and for
subsidiary account.
• Same output with Percent of AR
o The problem will state if which record
method.
of AR (between the 2) would be
Difference between Percent of Sales and followed in the end.
Percent of AR o Huwag mong ilalagay sa subsidiary
account yung adjustment na for
• % of sales: Sales * % = Bad debts
control account lang (and vice versa)
expense
• % of AR: AR, end * % = required
ADA, end

NOTES IN AUDITING AND ASSURANCE: CONCEPTS & APPLICATIONS |BY: JOSHUA J. LISING | COLLEGE OF ACCOUNTANCY
Final Balance of Accounts Receivable AUDIT OF ACCOUNTS RECEIVABLE

Accounts receivable, beg xx ASKED

Credit sales:  Bad debts expense (sometimes called
Sales for the year xx “adjustment”, “allowance adjustment”,
Collections xx xx “adjustment of allowance”)
Recovery of accounts* xx 1. If % of sales method is used
Write-off (xx) • % of uncollectibility * sales = Bad debts
Accounts settled (by note/cash) xx expense na kaagad yun.
AR credit balances* xx 2. If % of AR is used (or Aging)
Overstatement/understatements xx • ADA, beginning xx
Clerical errors xx • Less: Required ADA, end xx
Accounts receivable, end xx • Bad debts expense xx
3. Other notes
*Recovery of accounts – add back on one of o Sometimes, it turns out na kailangan
the problems I encountered but on journal pa pala bawasan yung ADA, before
entries, it does only have a net effect adjustment kasi mas mababa ang
meaning zero effect on AR (dinebit mo ADA required end kaysa sa ADA
initially pero cinredit mo din) before adjustment.
*AR credit balances – add back ata ang o Kulang ang ADA – credit ADA
strategy (ito yung madalas)
o Need bawasan ang ADA –
 Net Realizable Value of AR debit ADA
o Accounts receivable, end* xx
o Less: ADA, end xx  Allowance for expected credit loss
o NRV of AR xx o Ito na yung outright amount na computed
*nasa itaas ang formula ng AR, end. sa % of AR method or % of Aging.
o Increase in allowance = If this is higher
Strategy for Problems regarding multiple
than the previous ADA amount, it means
subsidiary ledger accounts of customers
dagdagan mo ang ADA. So bad debts
(Ex. AA, BB, CC)
expense ka.
1. If the amount related involves 2 customers o Decrease in allowance = If this is lower
or parties (like between AA and BB) – than the previous ADA amount, bawasan
Determine and analyze if net (zero effect) mo ang ADA. Debit ADA.
lang ang epekto ng sinasabi sa problem that
appears as a correction.

Inclusions on Accounts Receivable

1. Advances on sales contract – (idk the
rationale) kasama siya sa amount ng AR
based sa problem na na-encounter ko so
huwag mo na ibabawas iyun sa AR.

NOTES IN AUDITING AND ASSURANCE: CONCEPTS & APPLICATIONS |BY: JOSHUA J. LISING | COLLEGE OF ACCOUNTANCY
Issues with two methods of ADA mentioned in one Dealing Audit of Accounts Receivable with
problem Sales, Inventory, and Purchases
• Initial method: % of sales
• Final method used: aging method  Cash sales – given
 Credit sales – to be computed since
1. First strategy collections of cash pertaining to AR of
a. ADA given amount xx one period are spread across different
b. Add: Recoveries xx periods
c. Less: Write-offs (xx) o Trace the collections pertaining to
d. Sometimes: Bad debts expense of initial ADA AR of each period to come up
method used xx with sales revenue per year
e. ADA, end (before adj.) xx
 Aggregate amount of purchases
2. Second strategy o Use the following:
a. ADA bal. per books – gagamitin lang to ▪ Cash disbursements given per
compute how much will be the adjustment of year (represents purchases)
allowance (bad debts expense) ▪ AP given at the inception year
and final year
a. “Reported” expected credit loss Formula:
i. Bad debts expense “recorded” (yung % of o AP, Dec. 2018 xx
sales) xx o Add: Cash disb (purch) xx
ii. Bad debts expense (yung % of AR) o Less: AP, Jan. 2016 xx
xx o Total purchases xx
iii. Final expected credit loss xx ▪ 2016 to 2018
▪ Note: Start with the final year AP
3. Entry for expected credit loss – as is. If how much is then pabalik strategy sa
your computed ADA, end, you deduct it from ADA simulang year.
unadjusted to come up with amount of credit (debit) for ▪ Huwag i-overthink ang mark-up
ADA account. ratio strategy, it won’t apply here
4. NRV of AR
 Gross profit ratio
o AR, end xx
o Use CGS Formula:
o ADA, end (% of AR) (xx)
▪ Invty, beg (given) xx
o Hindi na kasama yung Bad debts expense from
% of sales ▪ Purchases (computed) xx
o NRV, AR xx ▪ Invty, end (given) xx
▪ Cost of goods sold xx
5. Expected Credit Loss
o Entry: as is o Then Profit Formula:
o Amount itself: ▪ Sales xx
o BDE according to % of sales xx ▪ Cost of goods sold xx
o BDE aging (ADA, end less ADA, beg) xx ▪ Profit xx
o Expected credit loss xx
o Then Gross Profit Ratio:
▪ Profit / Sales

 Profit per year

o Sales revenue * GPR (Gross profit
ratio)
NOTES IN AUDITING AND ASSURANCE: CONCEPTS & APPLICATIONS |BY: JOSHUA J. LISING | COLLEGE OF ACCOUNTANCY