CHAPTER 2 – PART 1

ACCOUNTING FOR RECEIVABLES

What are Receivables?

• These are financial assets that represent a

contractual right to receive cash or another
financial asset from another entity.
What are the classifications of Receivables?

• As to source or origin
1. Trade Receivables
2. Non-trade Receivables
• As to SFP presentation
1. Current asset
2. Non-current asset
What are Trade Receivables?

• These are receivables arising from sale of goods

or services in the normal course of the entity’s
business.
What are Non-trade Receivables? Give
examples.
• Receivables that arise from sources other than from sale of goods or
services in the normal course of business.
• It includes:
1. Loans to officers and employees
2. Advances to affiliates
3. Accrued interest and dividends
4. Deposits to guarantee performance or payment or to cover possible
damages or losses
5. Subscriptions for the entity’s equity securities
6. Deposit with creditors
7. Claims for losses and damages
8. Claims for tax refunds or rebates
9. Claims against common carriers for damaged or lost goods
When is a receivable current?

A receivable is “current asset”,

1. When it arises from sale of goods or services in
the normal course of business (Trade
Receivables);
2. When even did not arise from sale of goods or
services (Non-trade receivables), such is
collectible within 12 months from the end of the
reporting period.
What is an “Accounts Receivable”?
Notes Receivable?
• AR is a trade receivable on open accounts as
compared to Notes receivable which is evidenced by
a promissory note.
• Open Account, meaning – a payment term under
which the buyer promises to pay the seller within a
predetermined number of days, and the seller does
not restrict the availability of documents that control
possession rights to the goods
What is the manner of presenting
receivable in the SFP?
• Trade receivables and non-trade receivables
which are currently collectible shall be presented
on the face of the SFP as one line item called
“Trade and Other Receivables”
Initial Recognition
• An entity shall recognize a financial asset in the SFP
when and only when, the entity becomes a party to
the contractual provision of the instrument. (IFRS 9)
• Trade receivables are recognized simultaneous to
the recognition of the related revenues.
• Trade receivables are initially recognized at the
transaction price, the amount to which an entity
expects to be entitled in exchange for the transfer of
goods and services. (IFRS 15, par. 47)
What is the initial measurement basis of
AR?
• At face amount (original invoice price)
Distinguish Trade Discount (TD) from
Cash Discount (CD)
Trade Discount
• A TD or volume or quantity
discount is a discount offered
and given to a customer on
account of latter’s bulk or huge
volume or quantity of
merchandise purchased. It is
normally expressed as a % or
series of % based on the list
price/catalog price of the goods.
• Trade discounts are not
recognized for financial
accounting purposes
Cash Discount
• A CD (sales discount, purchase
discount) is a discount given on
account of the buyer’s prompt
payment.
• CD are recognized (a) when
taken using the gross price
method, (b) when not taken
using the net price method, and
(c) when offered using the
allowance method
What are the 3 methods of accounting for
Cash (Sales) Discount?
• Gross Price Method – A/R and Sales are initially recorded at
gross sales price without recognizing discount until it is taken
• Net Price Method – A/R and Sales are recorded at an
amount net (after deduction) of discount. When discount is not
taken, a “sales discount forfeited” (an other operating income
or finance income account) is recorded.
• Allowance Method- the A/R is recorded at gross sales price
while the Sales is recorded at net amount and the available
cash discount is recorded as a credit in the valuation
allowance account.
Problem

• 2-1 Ginoo Company

Credit Card Sales

• Results to an accounts receivable in the name of

the credit card-issuing company reduced by
credit card fees which is reported as an
operating expense in the P/L.
Problems:

• Problem 2-2 Colleco Supermarket

• Problem 2-3 Colayco Company
How shall AR be measured subsequent to
initial recognition?
• After initial recognition, AR shall be measured
at amortized cost.
What are the methods of accounting for
doubtful accounts?
• Allowance method
• Direct write-off method
What are the methods of estimating doubtful
accounts under the allowance method?
• Aging of accounts receivable
• Percentage of AR
• Percentage of Sales
Problems:

• Problem 2-9 TOYOTA PRODUCTS, INC.

• Problem 2-10 WORD COMPANY
• Problem 2-11 EDIT COMPANY
• Problem 2-12 RAV, INC.
• Problem 2-13 REVO COMPANY
• Problem 2-14 ADVENTURE COMPANY