 To know the classification and presentation of receivables.

 To know the initial and subsequent measurement of accounts

receivable.

 To identify the adjustments necessary in determining the net realizable

value of accounts receivable.

ACCOUNTS RECEIVABLE
 To understand the gross method and net method of recording credit
sales.

 To know the accounting for doubtful accounts, worthless accounts

written off and recoveries of accounts written off.
RECEIVABLES

• Financial assets that represent a contractual right to

receive cash or another financial asset from another
entity.
• It is classified as trade receivables and nontrade
receivables.
RECEIVABLES

• Trade receivables – refer to claims arising from sale of

merchandise or services in the ordinary course of business.
Accounts receivable
Notes receivable
• Nontrade receivables – represent claims arising from sources
other than the sale of merchandise or services in the
ordinary course of business.
LOANS RECEIVABLE

• This is a form of receivable usually used by banks and other

financial institutions.
• These are made to heterogeneous customers and the
repayment periods are frequently longer or over several
years.
CLASSIFICATION OF TRADE RECEIVABLES

CURRENT ASSETS
• Trade receivables which are expected to realized in cash within the
normal operating cycle or one (1) year, whichever is longer.
• Nontrade receivables which are expected to be realized within one
year.
NONCURRENT ASSETS
• If collectibility of the nontrade receivable is beyond one year.
PAS 1, paragraph 66

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 realize the asset within
twelve months after the reporting period.
FS 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 call trade
and other receivables.
• The details of the total trade and other receivables shall be
disclosed in the notes to financial statements.
EXAMPLES OF NONTRADE RECEIVABLES

a. Advances to or receivables from shareholders, directors, officers or

employees. If collectible in one year, such advances or receivables
should be classified as current assets.
b. Advances to affiliates are usually treated as long-term investments.
c. Advances to supplier for the acquisition of merchandise are current
assets.
d. Subscription receivables are current assets if collectible w/n one year.
Otherwise, subscription receivables should be shown preferable as a
deduction from subscribed share capital.
e. Creditor’s account may have debit balances as a result of overpayment
or returns and allowances. These are classified as current assets.
EXAMPLES OF NONTRADE RECEIVABLES

f. Special deposits on contract bids normally classified as

noncurrent assets because such deposits are likely to remain
outstanding for a considerable long period of time. However,
deposits that are collectible currently should be classified as
current assets.
g. Accrued income are usually classified as current assets.
h. Claims receivable are normally classified as current assets.
INITIAL MEASUREMENT OF
ACCOUNTS RECEIVABLE
• A financial asset shall be recognized initially at fair value plus
transaction costs that are directly attributable to the
acquisition.
• The fair value of a financial asset is usually the transaction
price, meaning, the fair value of the consideration given.
• For short-term receivables, the fair value is equal to the face
amount or original invoice amount.
• Accounts receivable shall be measured initially at face
amount or original invoice amount.
SUBSEQUENT MEASUREMENT OF
ACCOUNTS RECEIVABLE
• In accordance with PRFS 9, paragraph 5.2.1, after initial
recognition, account receivable shall be measured at
amortized cost.
• The amortized cost is actually the NET REALIZABLE VALUE
of accounts receivable.

• NET REALIZABLE VALUE – the amount of cash expected to

be collected or the estimated recoverable amount.
NET REALIZABLE VALUE (NRV)

• The initial amount recognized for accounts receivable shall be reduced by

adjustments which in the ordinary course of business will reduce the amount
recoverable from the customer.
• This is based on the established basic principle that assets shall not be carried
at above their recoverable amount.
• In estimating the NRV of trade accounts receivable, the following deductions
are made:
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts
TERMS RELATED TO FREIGHT CHARGE

• FOB Destination
• FOB Shipping Point
> determines the ownership of the goods purchased
• Freight Prepaid
• Freight Collect
> determines who pay for the freight charge
ACCOUNTING FOR FREIGHT CHARGE

• FOB destination, freight collect

> the ownership of the goods will only transfer to the buyer
upon receipt of the item
> the freight is to be paid by the buyer upon receipt of the
item
On the book of the seller:
Accounts receivablexxx
Freight out xxx
Sales xxx
Allowance for freight charge xxx
ALLOWANCE FOR SALES RETURNS

• The measurement of accounts receivable shall also recognize the

probability that some customers will return goods that are
unsatisfactory or will make other claims requiring reduction in the
amount due.
• For example, an amount of P50,000 of the total accounts
receivable at year-end represents selling price of goods that will
probably be returned. The journal entry to recognize the probable
return is:
Sales return xxx
Allowance for sales return xxx
SALES DISCOUNT

• A cash discount is known as sales discount on the part of the

seller and a purchase discount on the part of the buyer.
• A cash discount may be expressed as 5/10, n/30.
• This means that the customer is entitled to a 5% discount if
payment is made within 10 days from the invoice date.
METHODS OF RECORDING CREDIT SALES

• A. GROSS METHOD
• B. NET METHOD

• Gross Method – accounts receivable and sales are recorded

at gross amount of the invoice.
• Net Method – accounts receivable and sales are recorded at
net amount of the invoice, meaning the invoice price minus
the cash discount.
 ILLUSTRATION

The sales discount forfeited is classified as other income.

ALLOWANCE FOR SALES DISCOUNT

• If customers are granted cash discounts for prompt payment, then,

conceptually estimates of cash discounts on open accounts at the end
of the period based on past experience shall be made.
• For example, of the accounts receivable of P1,000,000 at the end of the
period, it is reliably estimated that discounts to be taken will amount
to P50,000.
• Entry:
Sales discount xxx
Allowance for sales discount xxx
The adjustment may be reversed at the beginning of the next period in order that
discounts can then be charged normally to sales discount account.
ACCOUNTING FOR BAD DEBTS

TWO METHODS
a. Allowance method - requires recognition of a bad
debt loss if the accounts are doubtful of collection.
b. Direct writeoff method – requires recognition of
a bad debt loss only when the accounts proved to be
worthless or uncollectible.
ACCOUNTING FOR BAD DEBTS
ALLOWANCE FOR SALES DISCOUNT

• GAAP principles require the use of the ALLOWANCE

METHOD because it conforms with the matching principle.
• DIRECT WRITEOFF METHOD is often used by small businesses
because it is simple to apply.
• As a matter of fact the Bureau of Internal Revenue (BIR)
recognized only the net method for income tax purposes.
However, it violates the matching principle and is not
permitted under IFRS.
RECORDING OF DOUBTFUL ACCOUNTS
EXPENSE IN INCOME STATEMENT
• 1. Distribution cost – if the granting of credit and collection
of accounts are under the charge of the sales manager.
• 2. Administrative expense – if the granting of credit and
collection of accounts are under the charge of an officer
other than sales manager.

In the absence of any contrary statement, doubtful accounts

shall be classified as ADMINISTRATIVE EXPENSE.
ESTIMATION OF DOUBTFUL ACCOUNTS

To identify the methods of estimating doubtful accounts expense.

To understand the argument for and against the aging of accounts
receivable method.
To understand the arguments for and against the percentage of
accounts receivable method.
To understand the argument for and against the percentage of
sales method.
To determine the doubtful accounts expense and the allowance of
doubtful accounts under aging, percentage of accounts receivable
and percentage of sales method.
METHODS

1. Aging of accounts receivable or “statement of

financial position approach”
2. Percent of accounts receivable or also statement of
financial position approach
3. Percent of sales or “income statement approach”
AGING OF ACCOUNTS RECEIVABLE
The aging of accounts receivable involves an analysis where the accounts
receivable are classified into not due or past due.
a. Not due
b. 1-30 days past due
c. 31-60 days past due
d. 61-90 days past due
e. 91-120 days past due
f. 121-180 days past due
g. 181-365 days past due
h. More than 1 year past due
AGING OF ACCOUNTS RECEIVABLE
The allowance is then determined by multiplying the total of each classification
by the rate of percent of loss experienced by the entity for each category.

PROS
• This method has the advantage of presenting fairly the accounts receivable in the
statement of financial position at net realizable value.
CONS
• The major argument for the use of this method is the more accurate and
scientific computation of the allowance for doubtful accounts.
• The objection to the aging method is that it violates the matching processes.
• This method could become prohibitively time consuming if a large number of
accounts are involved.
AGING OF ACCOUNTS RECEIVABLE

The amount computed by aging of

accounts receivable represents the
required allowance for doubtful
accounts at the end of the period.
Thus, if the allowance for doubtful
accounts has a credit balance of
P10,000 before adjustment, the
expense is P40,000.
ENTRY:
WHEN IS AN ACCOUNT PAST DUE?

The credit terms will determine whether an account is past

due. For example, if the credit terms were 2/10, n/30, and
the account is 45 days old, it is considered to be 15 days past
due.
Past due – refers to the period beyond the maximum credit
term.
PERCENT OF ACCOUNTS RECEIVABLE
A certain rate is multiplied by the open accounts at the end of the period
in order to get the required allowance balance.
The rate is usually determined from past experience of the entity.
PROS
This procedure has the advantage of presenting the accounts receivable
at estimated NRV and is simple to apply.
CONS
It violates the principle of matching bad debt loss against the sales
revenue.
The loss experience rate may be difficult to obtain and may not be
reliable.
PERCENT OF ACCOUNTS RECEIVABLE
The balance of accounts receivable is P2,000,000 and the credit balance in
the allowance for doubtful accounts is P10,000. Doubtful accounts are
estimated at 3% of accounts receivable.
ENTRY:
Doubtful accounts 50,000
Allowance for doubtful accounts 50,000

REQUIRED ALLOWANCE: P2,000,000 x 3% = 60,000

Credit balance of Allowance for doubtful accounts (10,000)
Doubtful account expense 50,000
PERCENT OF SALES
The amount of sales for the year is multiplied by a certain rate to get
the doubtful accounts expense. The rate may be applied on credit
sales or total sales.
The rate to be used is computed by dividing the bad debt losses in
prior years by the charge sales of prior years.
The rate thus obtained is multiplied by current year’s charge sales to
arrive at the doubtful accounts expense.
PERCENT OF SALES
PROS
This procedure of determining the rate has the advantage of eliminating the
extra work of making a record of cash sales and credit sales.
Proper matching of cost against revenue is achieved.
CONS
May prove unsatisfactory when there is a considerable fluctuation in the
proportion of cash and credit sales periodically.
The accounts receivable may not be shown at estimated realizable value
because the allowance for doubtful accounts may prove excessive or
inadequate. Thus, it becomes necessary that from time to time the accounts
should be “aged” to ascertain the probable loss.
The rate applied on sales should be revised accordingly.
PERCENT OF SALES
The following accounts are gathered from the ledger:
Accounts receivable   1,000,000
Sales   5,050,000
Sales return   50,000
Allowance for doubtful accounts   20,000

If doubtful accounts are estimated at 1% of net sales, the doubtful accounts

expense is P50,000 (1% X P5,000,000) and recorded as follows:

Doubtful accounts 50,000

Allowance for doubtful accounts 50,000
CORRECTION IN ALLOWANCE FOR
DOUBTFUL ACCOUNTS
The percent of sales method of estimating doubtful accounts has the
disadvantage of the allowance for doubtful accounts being
inadequate or excessive.
Where allowance is inadequate or excessive, a question arises as to
the proper treatment of the discrepancy, whether to consider it as an
error or a component of profit/loss.
The correction is to be reported in the income statement either as an
addition or subtraction from doubtful accounts expense.
CORRECTION IN ALLOWANCE FOR
DOUBTFUL ACCOUNTS
INADEQUATE ALLOWANCE:
Doubtful accounts xxx
Allowance for doubtful accounts xxx
EXCESSIVE ALLOWANCE
Allowance for doubtful accounts xxx
Doubtful accounts xxx

When the excess allowance is greater than the debit balance of doubtful accounts
expense, an entry is to be made, and a miscellaneous income is recognized.
Allowance for doubtful accounts expense xxx
Doubtful accounts xxx
Miscellaneous income xxx
DEBIT BALANCE IN ALLOWANCE ACCOUNT

Is this possible? What does it indicate?

Yes, it is possible. In the case that at the end of the year, a

write-off entry resulted to a debit balance of the Allowance
for Doubtful Accounts.
But the debit balance is being offset upon estimation of the
Doubtful Accounts at the end of the year.