Receivables

Objectives:

1 2 3 4 5 6

Describe the Classify the nature Apply the Record Determine the Distinguish the
nature of of receivables recognition and transactions amount of bad recording and bad
receivables according to measurement involving debts expense debts using direct
source principles relating receivables using and balance of write off and
to receivables different allowance using allowance method
approaches various methods
 Objectives:

7 8 9 10 11 12

State the State the Describe different Record Determine the State the
recognition, presentation of forms of transactions cash proceeds in presentation and
measurement and both notes and receivable involving each of receivable disclosure
presentation of loans receivable financing. receivable financing requirements for
notes and loans and apply these financing. receivable
receivable and principles to a financing
apply these business problem.
principles to a
business problem.
Nature of
receivables
 Nature of Receivables

Financial asset that represents a contractual right to receive cash of

another financial asset from another entity.
It represents the amount collectible from customers and others, most
frequently arising from sale of merchandise, claims of money lent, or
the performance of services.
Under PFRS 15 paragraph 108, a receivable is an entity’s right to
consideration that is unconditional. A right to consideration is
unconditional if only the passage of time is required before payment of
that consideration is due.
Classification of
receivables as to
source
 Receivables

Did they arise from

sale of goods and
services in the normal
course of business?

Yes No

Are they collectible

Report as current Yes within 12 months
assets from the end of the
reporting period?

No

Report as non-
current asset
 Classification of Receivables

As to source:
1. Trade Receivables – refer to claims arising from sale of merchandise or
services in the ordinary course of the business operations.
a. Accounts Receivable/customer’s account/trade debtors – these
are open accounts not supported by promissory note arising from
sale of merchandise or services in the ordinary course of business.
b. Notes receivable – is a formal claim against another that is
evidenced by a writtedn promise called promisorry note, or a written
order to pay at a later time called time draft.

Note:
Note: Only
Only negotiable
negotiable promissory
promissory note
note is
is included
included as
as part
part of
of notes
notes receivable.
receivable. Dishonored
Dishonored notes
notes receivable
receivable fofo not
not
qualify
qualify as notes receivable in the statement of financial position as well as overdue notes. They are reclassified as
as notes receivable in the statement of financial position as well as overdue notes. They are reclassified as
accounts
accounts receivable
receivable together
together with
with the
the accrued
accrued interest.
interest.
 Classification of Receivables

2. Nontrade receivables – these are receivables that arise from sources

other than from sale of goods or services in the normal course of
business.
Treatments to nontrade receivables
1. Loans to officers, shareholders, directors • Noncurrent if due more than 12
and employees
months from the reporting date

• Current Assets
2. Advances for Affiliates

3. Advances to supplier for acquistion of • Current Assets

merchandise

4. Accrued income receivables such as

dividends receivable, accrued rent income, • Current Assets
accrued royalties income and accrued interest
on bonds investment

5. Deposits to guarantee performance or • Current Assets

payment or to cover possible damages or
losses
Treatments to nontrade receivables
• Current Assets
6. Deposit with creditors, claims for losses and
damages

7. Claims receivables from common carriers • Current Assets

for damaged or lost goods; claims against
creditors for returned, damaged, or lost goods

• Current Assets
8. Claims for tax refunds or rebates

• Normally classified as other noncurrent assets unless

9. Special deposit on contract bids collectible within one year (current assets)

10. Debit balance of creditors account that • Current asset of material otherwise, it may be netted
may arise from overpayments of returns and against accounts payable with credit balance
allowance
Recognition
and
measurement
 Initial Measurement

Trade receivables that do not have a significant financing component

are measured at the transaction price in accordance with PFRS 15
Revenue from Contracts with Customers.

Transaction price is “the amount of consideration to which an entity

expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third
parties (e.g., some sales taxes).” (PFRS 15)
Recording
of
receivables
TRADE AND CASH
DISCOUNTS
(GROSS, NET AND
A L L O WA N C E )
Accounting for accounts receivable and other
revenues
a. Trade discounts/volume
discount/quantity discount
- Trade discounts are given to
encourage prospective
customers to buy the goods in
large quantities. These
discounts are deducted from
the list price to arrive at the
invoice price and are never
recognized in the accounting
record since the journal entry is
based on the amount on the
sales invoice.
b. Cash discount/Settlement
Discount
- Cash discounts are
reductions from invoice price
as an inducement for prompt
payment of an account
within the discount period
(e.g. 2/10, n/30). This is also
called sales discount from
the point of view of the
buyer.
Cash discount
Gross price method – sales and receivables are recorded at the
gross amount. Sales discounts taken by customers are debitedto
the Sales Discounts account which is reported as a reduction of
sales. This is considered to be more practical than the net
method.
Net price method - Sales and receivables are recorded at the
net amount. Sales discounts not taken by customers are
credited to the Sales discounts Forfeited (discounts not taken)
account, which is reported in the “other income” line item of
the statement of comprehensive income. This method is
considered to the theoretically correct since the receivable and
sales are recorded using the cash price equivalent.
Allowance method – account receivable and sales are recorded
at gross amount and a corresponding allowance for sales
discount is recorded.
Illustrative Example: Cash Discount
Naragsak Company entered into the following during the year:
Jan. 02 Sold 10,000 units of merchandise to Rex Company at a selling price
of P100 less trade accounts of 10% and 5% with terms of 2/10, 1/20, n/20
Jan. 04 Sold 15,000 units of merchandise to Zeus Company at a selling
price of P100 less trade accounts of 10% with terms 2/10, 1/20, n/30
Jan. 06 Rex returned 2,000 units of goods to the company
Jan. 10 Rex paid his account availing of the cash discount
Feb. 02 Zeus Company paid his account
Required: Prepare all the necessary entries assuming the company used:
1) Gross method 2) Net Method 3) Allowance Method
Gross method:
Date Account Title

Accounts Receivable 855,000

Jan. 02
Sales 855,000

Accounts Receivable 1,350,000

Jan. 04 Sales 1,350,000

Sales Return 171,000

Jan. 06 Accounts Receivable 171,000
(2,000 x 100 x .90 x .95)
Cash
670,320
Jan. 10 Sales Discount 13,680
Accounts Receivable 684,000
(8,000 x 100 x .90 x .95 x .02)

Cash 1,350,000
Feb. 02 Accounts Receivable 1,350,000
Net method:
Date Account Title

Jan. 02 Accounts Receivable 837,900

Sales 837,900

Accounts Receivable 1,323,000

Jan. 04 Sales 1,323,000

Sales Return 167,580

Jan. 06 Accounts Receivable
167,580
(2,000 x 100 x .90 x .95. .98)

Cash 670,320
Jan. 10 Accounts Receivable 670,320
(2,000 x 100 x .90 x .95)

Cash 1,350,000
Feb. 02 Accounts Receivable 1,323,000
Sales Discount Forfeited 27,000
Allowance Method:
Date Account Title
855,000
Accounts Receivable
17,100
Jan. 02 Allowances for Sales discount
837,900
Sales

1,350,000
Accounts Receivable
Jan. 04 Allowances for Sales discount 27,000
Sales 1,323,000

Sales Return 167,580

Allowance for Sales discount 3,420
Jan. 06 Accounts Receivable 171,000
(2,000 x 100 x .90 x .95 x .02)

Cash 670,320
Allowance for Sales Discount 13,680
Jan. 10 Accounts Receivable 684,000
(8,000 x 100 x .90 x .95 x .02)

Cash 1,350,000
Allowance for Sales Discount 27,000
Feb. 02
Sales Discount 27,000
Accounts Receivable 1,323,000
Credit card
 Credit Card Transactions

Credit card is plastic card which enables the holder to obtain credit up
to predetermined limit form the issuer of the card for the purchase of
goods and services. Services charge or credit card fees, normally ranging
from 1% to 5% of net credit card sales, reduce the value of the accounts
receivable. The account Credit Card Service Charge would be reported
as an operating expense in Profit or loss.
 Illustrations: Credit Card Transactions
Illustrative Example: On January 1, of the current year, Oxide sold
merchandise to customers using BPI Master Card totaling P1,000,000.
On January 6, BPI Master Card remitted in full the amount minus
service charge of 5%.
Required: Prepare all the necessary journal entries.
Date Account title
Accounts receivable – BPI Master card 1,000,000
Jan. 1 Sales 1,000,000

Cash (1M x 95%) 950,000

Service Charge (5% x P1M) 50,000
Jan. 6
Accounts Receivable – BPI Master card 1,000,000
Direct
write and TWO
METHODS TO
RECORD

allowance
UNCOLLECTI
BLE
ACCOUNTS

method
 Direct write-off

Direct write-off Method: When a specific account is ascertained or proven to be

uncollectible (which may not occur in the period of sale), Bad Debt Expense is
debited and Accounts Receivable is credited. This method is theoretically
undesirable because it:
◦ a) Makes to attempt to match revenues and expenses.
◦ b) Does not result in receivables being stated at net realizable value in the
statement of financial position.

To recognize impairment Receivable:

Bad debt Expense (Impairment loss) xxx
Accounts Receivable (Notes Rec.) xxx

To recovered or collected receivables previously written-off:

Accounts Receivable xxx
Bad debts Recovery xxx

Cash xxx
Accounts Receivable xxx
 Allowance method (GAAP)
At the end of each accounting period, an estimate is made of expected
losses from uncollectible accounts. This estimate is debited to Bad
Debts Expense and credited to the Allowance for Doubtful Accounts.
This method is justified because a company has incurred a loss the
moment customers receive goods or services that they will never pay
for. This is true even if the specific identity of such customers will not be
known for some time.

Comments: Matches cost against revenue and

receivable would be properly measured at net
realizable value.
Journal Entries for Allowance method:

To recognize impairment Receivable:

Bad debt Expense (Impairment loss) xxx
Allowance for Bad Debts xxx

To recovered or collected receivables previously written-off:

Accounts Receivable xxx
Allowance for bad debts xxx
Cash xxx
Accounts Receivable xxx

Note: Under
Under the
the allowance
allowance method, the
the write-off
write-off of of an
an uncollectible
uncollectible account
account does
does not
not change
change the
the
net amount of accounts receivable
receivable nor does itit affect
affect profit
profit and
and loss.
loss.
Estimating
bad debts
 Estimating bad debts

Percentage of Sales (Income Statement Approach): Bad debts expense

is estimated directly by multiplying a percentage to a sales account (e.g.
credit sales, net credit sale, net sales, gross sales).
◦ Advantage: Proper matching of cost against revenue is achieved.
◦ Argument: Accounts receivable may not be shown at estimated realizable
value because the allowance for doubtful accounts may prove excessive or
inadequate.
 Estimating bad debts

Percentage of A/R (Balance Sheet Approach): (a) First, the required

ending balance in the Allowance for Doubtful Accounts is estimated by
multiplying a percentage (a single composite rate) times the ending
outstanding receivables. (b) Then, bad debt expense is equal to the
difference between the required ending balance and the existing
balance in the Allowance account.
◦ Advantage: It presents accounts receivable at estimated realizable value. It is
also simple to apply.
◦ Argument: It violates matching principle and loss experience rate may be
difficult to obtain and may not be reliable.
 Estimating bad debts

Percentage of A/R (Balance Sheet Approach): This is the same

procedure in percentage of receivables; the only difference is the
percentage use for each in the aging schedule.
◦ Advantage: It is more accurate and scientific computation of the allowance
for doubtful accounts; thus, the accounts receivable are fairly presented in
the statement of financial position at net realizable value.
◦ Argument: It violates matching principle and time consuming if large number
of accounts are involved.
Illustrative Example:
Luka Company’s unadjusted trial balance at December 31,2018 included
the following accounts:
Debit Credit
Accounts Receivable 1,500,000
Allowance for Doubtful accounts 40,000
Sales 1,000,000
Sales return and allowance 700,000

The following analysis pertains to the accounts receivable reported in the trial balance:

Classification Balance of A/R% of collection

0-1 month category 500,000 98%
1-6 months category 800,000 95%
Over 6 months 200,000 80%
Illustrative Example
1. Luka Company estimates its bad debt expense to be 2% of net sales.
Determine the bad debts expense for the year and record the bad
debt expense.

Net Sales (P10,000,000 – P700,000) 9,300,000

Multiply by: Percentage of uncollectible 2%
Bad debt Expense 186,000

JE: Bad debt expense 186,000

Allowance for bad debts 186,000
Illustrative Example
2. Luka Company estimates its bad debt expense to be 5% of accounts
receivable. Compute for the bad debts for the year and record the bad
debt expense.

Allowance for bad debts (P1,500,000 x 5%) 75,000

Less: Allowance for bad debts, beg. 40,000
Bad debt expense 35,000
JE: Bad debt expense 35,000
Allowance for bad debts 35,000
Illustrative Example:
3. Luka company estimates its bad debt expense based on the aging.
Compute for the allowance for bad debt at the end of the year and
record the bad debt expense.

Classification Required Balance

0-1 month category (P500,000 x .02) 10,000
1-6 months category (P800,000 x .05) 40,000
Over 6 months (P200,000 x .20) 40,000
Allowance for bad debts – end 90,000
Less: Allowance for bad debts, beg. 40,000
Bad debt expense 50,000

JE: Bad debt Expense 50,000

Allowance for bad debts 50,000
Illustrative Example:
4. Assuming in Problem #3, on April 1, Luka Company wrote-off an
account of its customer, in the amount of 15,000 which has been
overdue for several years. Subsequently, on July 5, 2019, Luka recovered
and collected the account of ABC. Prepare journal entries on April 1 and
July 5.
April 1 Allowance for bad debts 15,000
Accounts Receivable 15,000

July 5 Accounts Receivables 15,000

Allowance for bad debts 15,000

Cash 15,000
Accounts Receivables 15,000
 REFERENCES:
- Asuncion, D. J., Ngina, M. A., & Escala, R. F. (2017). Applied Auditing.
Baguio City: Real Excellence Publishing.

- Millan, Z. V. (2019). Intermediate Accounting (Vol. 1A). Baguio City:

Bandolin Enterprises.

- Robles, N. S., & Empleo, P. M. (2019). Intermediate Accounting (Vol. 1).

Mandaluyong City.

- Valix, C. T., Peralta, J. F., & Valix, C. A. (2019). Intermediate Accounting 1.

Manila, Philippines: GIC Enterprises & Co., Inc.

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