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Related Standards
PFRS 9 Financial Statements
Definition
Receivables are assets that represent a
Examples of receivables
Accounts receivable – receivables supported by
oral or informal promises to pay. These are not
supported by promissory notes.
Notes receivable – receivables supported by
written or formal promises to pay in the form of
Accrued Income – receivables arising from
income earned but not yet collected, such as
interest income, dividend income, and the like.
Deposits – receivables from reimbursable
deposits paid to cover potential damages or
losses, deposits for guarantee of performance or
Tradeandnontradereceivables
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.
Notes receivable is those supported by formal
promises to pay in the form of notes.
Nontrade receivables represent claims arising
Classification
PAS1, Presentation of Financial Statements,
paragraph 66 states:
An entity shall classify an asset as current when
the entity expects to realize the asset or intends
to sell or consume it in the entity’s normal
operating cycle, or when the entity expects to
Presentation
Trade receivables and nontrade receivables
which are currently collectible shall be
presented on the face of the statement of
financial position as one line item called trade
Examples of nontrade receivables
Advances to or receivables from shareholders,
directors, officers or employees. *
Advances to affiliates
Advances to supplier for the acquisition of
PFRS 15 Revenue from Contracts with Customer
contractual right to receive cash or another
financial asset from another entity.
promissory notes. *
Loans receivable – receivables arising from loans
extended by financial institutions. **
Advances – receivables arising from advances to
officers and employees, advances to suppliers
and advances to affiliates
payment, and deposits for returnable items.
Claims receivable – receivables from insurance
companies for casualties, sustained, defendants
under suits, government agencies for refundable
taxes and other remittances, common carries
for damaged or lost goods and suppliers for
returned or damaged goods.
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
receivables are customers’ accounts, trade
debtors, and trade accounts receivable.
from sources other than the sale of
merchandise or services in the ordinary course
of the business.
realize the asset within 12 months after the
reporting period.
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 asset. *
and other receivable.
However, the details of the total trade and other
receivable shall be.
disclosed in the notes to financial statements.
merchandise are current assets.
Creditors accounts may have debit balances as a
result of overpayment or returns and
allowances.
Accrued income such as dividend receivable,
accrued rent receivable, accrued royalty’s
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receivable and accrued interest receivable on
bond investment are usually classified as
Examples of nontrade receivables
Claims receivable such as claims against
Abnormal balances in accounts
Credit balance in accounts receivable.
Customers’ credit balances
Customers credit balances are credit balances in
accounts receivable resulting from
overpayments, returns and allowances, and
Debit balance in accounts payable.
Supplier’s accounts (accounts payable) may at
times have debit balances resulting also from
DATA FROM THE BOOKS OF ACT
CORPORATION IS AS FOLLOWS:
Accounts receivable – net 50,000
of P10,000 credit balance
Notes receivable (trade) 5,000
Notes receivable (non- 25,000
trade)-P5,000 due in one
year
Dividend receivable 1,000
Subscription receivable 2,000
Advances to officers and 4,000
employees-due in 18
months
Accounts payable – net of 3,000
P6,000 debit balance
Subsequent measurement
Accounts receivables are subsequently
measured as recoverable historical cost (or net
realizable value)
TradeReceivablesRecognition
Trade receivable is recognized when the entity
has the right to consideration that is
Terms of sale contract
The terms of a sale contract are considered
when determining the timing of transfer of
control over the goods sold.
FOB shipping point – ownership over the goods
is transferred to the buyer upon shipment. Sales
current assets.
common carries for losses or damages, claims
for rebates and tax refunds, claim from
insurance entity are classified as current assets.
Debit balance in accounts payable.
advance payments from customers.
Credit balances in customers’ accounts are
presented as current liabilities and not offset
against receivables.
overpayments, advance payments, or errors.
Debit balances in suppliers’ accounts are
presented as part of current assets and not
offset against payables.
Illustration:
Information from the records of ABC Company is
shown below:
Requirements: total trade receivable and total
current receivables
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.
Recoverable historical cost (net realizable value)
represents the amount of cash expected to
recover from the contractual cash flows of the
receivable. Net realizable value is normally
computed as the transaction price minus
subsequent repayments of principal and minus
any reduction (directly or through the use of an
allowance account) for uncollectability or
impairment.
unconditional. This is normally the case when
the control over the promised goods or services
is transferred to the customer.
and accounts receivables are recognized on
shipment date.
FOB destination – ownership is transferred only
when the buyer receives the goods. Sales and
accounts receivable are recognized when the
buyer receives the goods.
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Freight Charges
Important terms:
Freight prepaid – means the seller has paid the
freight in advance before the shipment. This
does not mean that the seller is the one who is
supposed to pay for the freight.
Trade Discounts and Cash Discounts
TRADE DISCOUNTS
Trade discounts are given to encourage orders in
large quantities or to avoid frequent changes in
catalogs, to alter prices for different quantities
purchased, or to hide true invoice price from
CASH DISCOUNTS
Cash discounts are given to encourage prompt
payment. Cash discounts are deducted from the
invoice price when determining the net amount
collectible within the discount period.
PFRS 15
When the consideration includes a variable
amount (for example, the customer is given a
discount) the entity is required to estimate the
amount to which it expects to be entitled in
exchange for transferring the promised good or
service.
Traditional GAAP
Gross method – The accounts receivable and
sales are recorded at.
gross amount of the invoice.
Illustration – Traditional GAAP
An entity sells inventory with a list price of
Illustration 2: PFRS 15
An entity sells inventory with a list price of
Sales discount
Allowance for sales discount.
If customers are granted cash discounts for
prompt payment the, conceptually estimates of
cash discounts on open accounts at the end of
the period based on past experience shall be
Accounting for bad debts
When an account becomes uncollectible, the
entity has sustained a bad debt loss. This loss is
simply one of the costs of doing business on
Freight collects – means the freight is not yet
paid upon shipment. The carrier will collect the
shipping costs from the buyer upon delivery.
This does not mean that the buyer is the one
who is supposed to pay for the freight.
competitors.
Trade discounts are deducted from the list price
when determining the invoice price.
Trade discounts are not recorded by either the
buyer or the seller.
Accounting Treatment
PFRS 15. Revenue from Contracts with
Customers
Traditional GAAP
The entity then assesses whether there is a high
probability that the estimated amount will not
significantly change once the uncertainty is
resolved.
The entity recognizes revenue (and receivable)
equal to the estimated amount when it satisfies
its performance obligation in the contract.
Net Method – the accounts receivable and sales
are recorded at net amount of the invoice,
meaning the invoice price minus the cash
discount.
P10,000 on account under credit terms of 20%
10%, 2/10, n/30.
P10,000 on account under credit terms of 20%,
10%, 2/10, n/20. The entity estimates that only
80% of the cash discount will be taken.
A cash discount is known as a sales discount on
the part of the seller and a purchase discount.
made.
The adjustment to record the expected sales
discount is:
Sales discount xxxx
Allowance for sales discount xxx
credit.
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Two methods
Allowance method.
Allowance method.
The allowance method requires recognition of a
bad debt loss if the accounts are doubtful of
collection. The journal entry to recognize the
doubtful accounts is.
Doubtful accounts xxx
Recoveries of account written off
If a collection is made on account previously
written off as uncollectible, the customary
procedure is first to recharge the customer’s
account with the amount collected and possible
Direct write-off method
Bad debts expense is directly written from the
balance of accounts receivable only when the
Illustration
Transaction relating to ACT Corporation for its
receivables are as follows:
Accounts receivable of P10,000 is found to be
doubtful of collection.
Methods of estimating doubtful accounts
Percentage of net credit sales
Percentage of Credit Sales
Bad debts expense is computed by applying a
percentage of the net credit sales for the period.
The percentage applied is determined based on
the entity’s past experience and careful analysis
of the historical relationship between credit
sales and bad debts. The percentage is
Direct write off method
Allowance for doubtful accounts xxx*
If the doubtful accounts are subsequently found
to be worthless or uncollectible, the accounts
are written off as follows:
Allowance for double accounts xxx
Accounts Receivable xxx
with the entire amount previously charged off if
it is now expected that collection will be
received in the full.
The collection is then recorded normally by
debiting cash and crediting account s receivable.
accounts are deemed worthless.
No entry is made for accounts that are merely
doubtful of collection.
The P10,000 doubtful account is deemed
worthless (uncollectability is certain) and needs
to be written off.
The P10,000 account previous written off is
subsequently recovered.
Percentage of receivables
Aging of receivables
determined by dividing past bad debt expenses
net of past recoveries by past credit sales.
The ending balance of the allowance for
doubtful accounts is equal to the bad debt
expense recognized for the period plus the
beginning balance in the allowance account
minus write-off plus recoveries.
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Allowance for doubtful accounts P8,000 Illustration

Write-offs 5,000 ACT Corporation has the following
information on December 31, 2023,
Recoveries 1,000 before any year-end adjustments.

Sales (including cash sales of P100,000)
Sales returns and discounts
(including P1,000 sales returns on cash sales)
Accounts Receivable, December 31
Percentage of credit sales
Required:
Bad Debts Expense
Allowance for bad debts on December 31
600,000 Percentage of receivables (single loss-
rate approach)
Under this method, the required
balance of allowance for bad debts is
6,000 computed by applying a percentage on
the ending balance of the receivables.
150,000
The difference between the required
2%
balance and the unadjusted amount of
the allowance for doubtful accounts
(before recognizing bad debts expense)
represent the bad debt expense for the
period.

Net realizable value of accounts receivable

Illustration
Accounts 80,000 ACT Co. has the following information on
receivable, Jan 1 December 31, 2023, before any year-end
Net credit sales 270,000 adjustments:

Collections from 140,000

customers
(excluding
recoveries)
Allowance for 10,000
doubtful accounts,
Jan 1
Write offs 5,000

Recoveries 1,000

Percentage of 5%
receivables

Requirements
Bad debts expense
Net realizable
value of Accounts
Receivable

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Aging of receivables
The aging of receivables method, the required
balance of allowance for doubtful accounts is
Illustration
ACT Corporation has the following information.
Days Receivable % uncollectible
outstanding Balances
0-60 120,000 1%
61-120 90,000 2%
Over 120 100,000 6%
Summary:
Trade receivables are receivables arising from
the sale of goods or services in the ordinary
course of business. Receivables arising from
other sources are non-trade receivables.
Trade receivables are classified as current
assets when they are expected to be realized in
cash within the normal operating cycle or one
Trade receivables that do not have a significant
financing component are measured at their
transaction price in accordance with PFRS 15.
As a practicable expedient, a trade receivable
may not be discounted if it is due within 1 year.
Under FOB shipping point, ownership is
transferred to the buyer upon shipment. Sales
and accounts receivable are recognized on
Doubtful accounts may be estimated using (a)
percentage of credit sales, (b) percentage of
receivables, or © aging of receivables.
The amount computed under the percentage of
References
Intermediate Accounting 1A. 2023 Edition.
Milan. Auditing Practice 2023-2024 Edition.
Roque
computed by applying various estimated
percentages to the breakdown of the ending
receivable according to ages.
Total 310,000
accounts
receivables
During the year, the company wrote of P7,000
receivables and recovered P4,000 that had been
written off the prior years. The allowance for
doubtful accounts has a beginning balance of
P2,000
Requirement: Bad debts expense and Net
Realizable Value
year, whichever is longer. Non-trade receivables
are classified as current assets only when they
are expected to be realized in cash within one
year.
The adjusting entry to eliminate a credit balance
in a receivable or a
debit balance in a payable increase’s total
receivables.
shipment date.
Under FOB destination, ownership is transferred
only when the buyer receives the shipment.
Sales and accounts receivable are recognized
only when the buyer receives the delivery.
The allowance method of recognizing bad debts
on accounts receivable is used for financial
reporting purposes.
credit sales method is the bad debts expense of
the period.
The amount computed under the percentage of
receivables and aging methods, is the required
balance of the allowance account.