TRADE AND OTHER RECEIVABLES

RECEIVABLES in General
Definition

Receivables are financial assets

because they represent a contractual
right to receive cash or another asset
from another entity (PFRS 9).
 TRADE AND OTHER 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 and
not supported by promissory notes. Other names of accounts
receivable are customers' accounts, trade debtors, and trade
accounts receivable.
 TRADE AND OTHER RECEIVABLES
Notes receivable are those supported by
formal promises to pay in the form of
notes. Nontrade receivables represent
claims arising from sources other than the
sale of merchandise or services in the
ordinary course of business.
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.

Nontrade 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, nontrade receivables are
classified as noncurrent asset.
Presentation
Trade receivables and nontrade receivables
which are currently collectible shall be
presented on the face of the statement
position as one line item called trade and other
receivables. However, the details of the total
trade and other receivable shall be disclosed in
the notes to financial statements.
Exercise #1 – Presentation
Exercise #1 – Presentation

170,000 – Accounts Receivable

Other receivables - CA
Other receivables - CA
Other receivables - CA
Long-Term Investment- NCA
Other receivables - CA

Accounts Receivable
Other receivables - CA
Deduction from SSC
10,000 - Other receivables - CA
Long-Term Investment- NCA
Other receivables - CA
Presentation

Trade receivables P 230,000 (1)

Other receivables 235,000
Trade and Other receivables P 465,000 (2)
Measurement
Initial measurement:
Transaction price/ Invoice price

To compute invoice price, it should be net

of trade discount or volume discount and
net of cash discounts if the company is
using net method.
Measurement
Initial measurement:
Solution guide:
List price xx
Less: 1st trade discount (xx)
Balance xx
Less: 2nd trade discount (xx)
Invoice Price xx
Measurement
Illustration:
An entity sold goods to its customers at a
list price of P10,000 on account under
credit terms 10, 20, 2/10 n/30. The 10, 20
figures represent the trade discount. This
means that the first trade discount is 10%
and the second trade discount is 20%.
Measurement

Initial measurement:
Solution guide:
List price 10,000
Less: 1st trade discount(10k x 10%) 1,000
Balance 9,000
Less: 2nd trade discount(9k x 20%) 1,800
Invoice Price 7,200
 Measurement
SUMMARY OF JOURNAL ENTRIES

Gross Method Net Method

1. Sales on Accounts receivable 7,200 Accounts Receivable 7,056

account Sales 7,200 Sales 7,056

2. Assume Cash 7,056 Cash 7,056

collected Sales Discount 144
within Accounts receivable 7,200 Accounts receivable 7,056
discount
period

3. Assume Cash 7,200 Cash 7,200

collected Sales discount forfeited 144
beyond Accounts receivable 7,200 Accounts receivable 7,056
discount
period
Measurement
Subsequent measurement:
Net Realizable Value = Gross Balance - Allowances
Accounts Receivable
Beg. Balance xx Collections xx
Credit sales xx Sales discount &
allowances xx
Sales discount forfeited xx
Sales return xx
Notes as payment xx

Write-off xx
End. Balance xx
Accounting for Freight Charge

FOB = means “Free on Board”

FOB Destination
FOB Shipping point

Freight Collect
Freight Prepaid
Accounting for Freight Charge
FOB Destination = ownership of the goods purchased is
vested in the buyer upon receipt thereof.

Owner = Seller Owner = Seller

Accounting for Freight Charge
FOB Destination = ownership of the goods purchased is
vested in the buyer upon receipt thereof.

Owner = Buyer
Accounting for Freight Charge
FOB Shipping point= ownership of the goods purchased is
vested in the buyer upon shipment thereof.

Owner = Seller

Owner = Buyer
Accounting for Freight Charge

Freight collect = means freight charge on

the goods shipped is not yet paid.
Freight charge = paid by buyer

Freight prepaid = means freight charge on

goods shipped is already paid by the seller.
Accounting for Freight Charge

Freight collect = means freight charge on

the goods shipped is not yet paid.
Freight charge = paid by buyer
Accounting for Freight Charge
Accounting for Freight Charge
Freight prepaid = means freight charge on goods shipped
is already paid by the seller.
Exercise # 2 Accounting for Freight Charge
Measurement

Initial measurement:
Solution guide:
List price 300,0000
Less: 1st trade discount(300k x 10%) 30,000
Balance 270,000
Less: 2nd trade discount(270k x 15%) 40,500
Invoice Price 229,500
Exercise # 2 Accounting for Freight Charge
Accounting for Freight Charge

“Who owns the goods,

shoulders the freight”
Accounting for Freight Charge

VA BENE
Accounting for Freight Charge

Who shoulders the freight

= will debit “Freight” account

Who pays the freight

= will credit “Cash” account
Exercise # 2 Accounting for Freight Charge
a. FOB Shipping Point, Freight Collect
Owner = Buyer | Who actually paid the freight? = Buyer
Pharsa (SELLER) BUYER
1. Sales on Accounts receivable 229,500 Inventories 229,500
account Sales 229,500 Accounts payable 229,500

2. Freight Freight-In 10,000

Cash 10,000

3. Collected Cash 224,910 Accounts Payable 229,500

within Sales Discount 4,590 Purchase discount 4,590
discount Accounts receivable 229,500 Cash 224,910
period
Exercise # 2 Accounting for Freight Charge
b. FOB Shipping Point, Freight Prepaid
Owner = Buyer | Who actually paid the freight? = Seller
Buyer Pharsa (SELLER) BUYER
1. Sales on Accounts receivable 229,500 Inventories 229,500
account Sales 229,500 Accounts payable 229,500

2. Freight Accounts receivable 10,000 Freight-in 10,000

Cash 10,000 Accounts Payable 10,000

2. Collected Cash 234,910 Accounts Payable 239,500

within Sales Discount* 4,590 Purchase discount 4,590
discount Accounts receivable 239,500 Cash 234,910
period
*229,500 x 10%
Exercise # 2 Accounting for Freight Charge
c. FOB Destination, Freight Prepaid
Owner = Seller | Who actually paid the freight? = Seller
Buyer Pharsa (SELLER) BUYER
1. Sales on Accounts receivable 229,500 Inventories 229,500
account Sales 229,500 Accounts payable 229,500

2. Freight Freight-out 10,000

Cash 10,000

3. Collected Cash 224,910 Accounts Payable 229,500

within Sales Discount 4,590 Purchase discount 4,590
discount Accounts receivable 229,500 Cash 224,910
period
Exercise # 2 Accounting for Freight Charge
d. FOB Destination, Freight Collect
Owner = Seller | Who actually paid the freight? = Buyer
Pharsa (SELLER) BUYER
1. Sales on Accounts receivable 229,500 Inventories 229,500
account Sales 229,500 Accounts payable 229,500

3. Freight Freight-out 10,000 Accounts payable 10,000

Accounts receivable 10,000 Cash 10,000

2. Collected Cash 214,910 Accounts Payable 219,500

within Sales Discount 4,590 Purchase discount 4,590
discount Accounts receivable 219,500 Cash 214,910
period
Measurement
Subsequent measurement:
Net Realizable Value = Gross Balance - Allowances
Accounts Receivable
Beg. Balance xx Collections xx
Credit sales xx Sales discount &
Sales discount forfeited xx allowances xx
Sales return xx
Notes as payment
xx
End. Balance xx Write-off xx
Measurement

There are four types of allowances:

1. Allowance for sales return
2. Allowance for sales discounts
3. Allowance for freight charge
4. Allowance for doubtful accounts
Measurement
Note:
1. Entry for allowance for sales returns
Sales return xx
Allowance for sales returns xx

2. Entry for allowance for sales discounts

Sales discounts xx
Allowance for sales discounts xx
Measurement
3. Allowance for freight charge – results when the
shipping term is FOB Destination, Freight Collect.
Accounting for Freight Charges
Party Who is chargeable? Who actually paid?
Buyer FOB Shipping Point Freight Collect
Seller FOB Destination Freight Prepaid
Note: If freight charges resulted to an increase in accounts
receivable due to the credit terms, always remember that it is
not subject to cash discount. In other words, it will increase the
amount of cash to be received by the seller but this amount can’t
be subject to cash discount
Measurement
4. Allowance for doubtful accounts Percent of AR
Method (ADA)
Balance Sheet
Direct write- method Aging Method
off method (ADA)

Accounting Income Percent of Credit

for bad debts statement Sales Method
method (DAE)

Allowance
method
Mixed
 Measurement
SUMMARY OF JOURNAL ENTRIES IN ACCOUNTING BAD DEBTS

DIRECT WRITE-OFF ALLOWANCE

1. No entry Bad debts exp. xx

Collectability Allowance for BD xx
becomes
doubtful

2. Write-off Bad debts exp. xx Allowance for BD xx

Accounts receivable xx Accounts Receivable xx

3. Recovery Cash xx Cash xx

Accounts receivable xx Accounts receivable xx
 Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off xx Beg. Balance xx

Doubtful Accounts
Expense (DAE) xx
Recovery xx

End. Balance xx
 Exercise # 2
Scenario A – Percent of Credit Sales method

ALLOWANCE

1. Write-off Allowance for BD 80,000

Accounts Receivable 80,000

2. Recovery Accounts Receivable 50,000

Allowance for Doubtful Accounts 50,000

Cash 50,000
Accounts Receivable 50,000

3. Collectability becomes Bad debts expense 300,000

doubtful Allowance for Doubtful Accounts 300,000

10million x 3%
 Exercise # 2
Scenario A – Percent of Credit Sales method

ALLOWANCE

1. Write-off Allowance for BD 80,000

Accounts Receivable 80,000

2. Recovery Accounts Receivable 50,000

Allowance for Doubtful Accounts 50,000

Cash 50,000
Accounts Receivable 50,000

3. Collectability becomes Bad debts expense 300,000

doubtful Allowance for Doubtful Accounts 300,000

10million x 3%
 Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) 300,000
Recovery 50,000

End. Balance ?
 Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) 300,000
Recovery 50,000

End. Balance 720,000

 Exercise # 2
Scenario B – Percent of Accounts Receivable method

ALLOWANCE

1. Write-off Allowance for BD 80,000

Accounts Receivable 80,000

2. Recovery Accounts Receivable 50,000

Allowance for Doubtful Accounts 50,000

Cash 50,000
Accounts Receivable 50,000

3. Collectability becomes Bad debts expense 540,000

doubtful Allowance for Doubtful Accounts 540,000

4,500,000 x 12%
 Exercise # 2
Scenario B – Percent of Accounts Receivable method

ALLOWANCE

1. Write-off Allowance for BD 80,000

Accounts Receivable 80,000

2. Recovery Accounts Receivable 50,000

Allowance for Doubtful Accounts 50,000

Cash 50,000
Accounts Receivable 50,000

3. Collectability becomes Bad debts expense 540,000

doubtful Allowance for Doubtful Accounts 540,000

4,500,000 x 12%
Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) ?
Recovery 50,000

End. Balance 540,000

Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) 120,000
Recovery 50,000

End. Balance 540,000

 Exercise # 2
AGING OF RECEIVABLES
Days overdue Amount Probability of
Collection

0-30 days 2,000,000 0.99

31-60 days 1,500,000 0.90
61-120 days 800,000 0.60
Over 120 days 200,000 0.20
4,500,000
 Exercise # 2
AGING OF RECEIVABLES
Days overdue Amount Probability of Probability of
Collection Uncollectability

0-30 days 2,000,000 0.99 0.01

31-60 days 1,500,000 0.90 0.10
61-120 days 800,000 0.60 0.40
Over 120 days 200,000 0.20 0.80
4,500,000
 Exercise # 2
AGING OF RECEIVABLES
Days overdue Amount Probability of Allowance for
Collectability doubtful
accounts
0-30 days 2,000,000 0.01 20,000
31-60 days 1,500,000 0.10 150,000
61-120 days 800,000 0.40 320,000
Over 120 days 200,000 0.80 160,000
4,500,000 650,000
 Measurement
Scenario A

ALLOWANCE

1. Write-off Allowance for BD 80,000

Accounts Receivable 80,000

2. Recovery Accounts Receivable 50,000

Allowance for Doubtful Accounts 50,000

Cash 50,000
Accounts Receivable 50,000

3. Collectability becomes Bad debts expense 650,000

doubtful Allowance for Doubtful Accounts 650,000

See Aging schedule

Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) ?
Recovery 50,000

End. Balance 650,000

Exercise # 2
Allowance for Doubtful Accounts (ADA)

Write-off 80,000 Beg. Balance 450,000

Doubtful Accounts
Expense (DAE) 230,000
Recovery 50,000

End. Balance 650,000