ACCOUNTS RECEIVABLE

Chapter 10
 RECEIVABLES
Are financial assets that represent contractual right to
receive cash or another financial asset from another entity.

Trade receivable
Refers to claims arising from sale of merchandise or services in the ordinary course of business.

For banks
Accounts and other
Receivable financial
/ Customers’ institutions,
accounts receivables
/ Trade Debtors resultReceivable)
/ Trade Accounts
Are open primarily
accounts arising
fromfrom the sale
loans to of goods and services in the
customers.
ordinary course of business and not supported by promissory notes.

The
Notes loans are made to heterogenous customers and the
Receivable
Are those supported
repayment by formal
periods are promises to pay
frequently in the form
longer of notes.
or over several
years.
Nontrade receivable
Represent claims arising from sources other than sale of merchandise or services in the ordinary
course of business.
 Classification
Nontrade receivables which
Trade receivables which
are expected to be realized in
are expected to be realized cash within one year, the
in cash within the normal length of the operating cycle
operating cycle or one notwithstanding are classified
year, whichever is longer, as current assets.
are classified as current
If collectible beyond one year,
assets.
nontrade receivable are
classified as noncurrent
assets.
 the entity
The classifications are in accordance
expects
with to realize
PAS 1, Presentation of Financial
Statements, paragraph 66, which
the states:
asset or
intends to sell or
consume it in the
entity's normal
operating cycle,
or when the
Trade receivables and Nontrade receivables

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 and other receivables.

However, the details of the total trade and other receivables shall be
disclosed in the notes to financial statements.
Examples of Nontrade Receivables
Advances to or receivables from shareholders, directors, officers
or employees. If collectible in one year, such advances or 1
receivables should be classified as current assets. Otherwise,
such advances or receivables are classified as noncurrent
assets.
Advances to affiliates are usually treated as long-
2
term investments.

Advances to supplier for the acquisition of

3
merchandise are current assets.

Subscriptions receivable are current assets if

collectible within one year. Otherwise, subscriptions
4 receivable should be shown preferably as a
deduction from subscribed share capital.

Creditors’ accounts may have debit balances as a result

5 of overpayment or return and allowances. These are
classified as current assets.
Examples of Nontrade Receivables
Special deposits on contract bids normally are classified as
noncurrent assets because such deposits are likely to remain
outstanding for a considerable long period of time.
6
However, the deposits that are collectible currently should be
classified as current assets.

Accrued income such as dividends receivable, accrued

rent income, accrued royalties income and accrued
7 interest on bond investment are usually classified as
current assets.

Claims receivable such as claims against

common carriers for losses or damages, claim for
rebates and tax refunds, claims from insurance
8
entities, are normally classified assets.
Customers’ credit balances
Are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments
from customers.

These credit balances are classified as current

liabilities and are not offset against the debit
balances in other customers’ accounts, except when
the same is not material in which case only the net
accounts receivable may be presented.

For example, the accounts receivable controlling

account reports a balance of P500,000. Examination
of the subsidiary ledgers reveals the following
details in the customers’ accounts.
 Customer A
Sales 800, 000 Collections 400,000
Debit balance 400,000

800,000 800,00

Customer B
Sales 600, 000 Collections 450,000
Debit balance 100,000

600,000 600,00

Customer C
Sales 500, 000 Collections 450,000
Credit Balance 50,000 Debit balance 100,000

550,000 550,00
The accounts receivable should be presented as
current asset at P550,000 representing the accounts
of A and b. The credit balance in the account of C is
classified as current liability and not offset against
the debt balances in the accounts of A and B.

No adjustment is necessary to formally recognize

the customers’ credit balances because ultimately
these are canceled for sales and cash settlement.
But an adjustment may be made only for worksheet
purposes, meaning, not formally journalized and
posted to the ledger, as follows:
Initial measurement of receivables
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.

The fair value of a financial asset is usually the transaction price, meaning, the
fair value is equal to the face value or original invoice amount.

Cash flows relating to short-term receivable are not discounted because the
effect of discounting is usually immaterial.

For long-term receivables that are interest-bearing, the fair value is equal to the
face value.

However, for long-term receivables that are noninterest-bearing, the fair value is
equal to the present value of all future cash flows discounted using the prevailing
market rate of interest for similar receivables.

Thus, initially, long-term interest- bearing notes receivable shall be measured at

face value and long-term noninterest-bearing notes receivable shall be measured
at present value.
 Accounts receivable
Accounts receivable shall be measured initially at face value or
original invoice amount.

However, subsequently the accounts receivable shall be measured

at net realizable value, meaning the amount of cash expected to
be collected or the estimated recoverable amount.

The net realizable value is actually the amortized cost of accounts

receivable.

The term “amortized cost” has more relevance in long-term

receivables.

Thus, the term “net realizable value” is preferably used in relation

to accounts receivable.
 Net realizable value
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 principles that “assets shall not be carried at above their
recoverable amount”,

Accordingly, in estimating the net realizable value of trade accounts receivable, the following deduction
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
Ownership of the goods purchased is vested in the buyer upon shipment thereof.

Accordingly, the seller shall be responsible for the freight charge up to the point destination.

FOB shipping point

Ownership of the goods purchased is vested in the buyer upon shipment thereof.

Thus, it is incumbent upon the buyer to pay for the transportation charge from the point of shipment to the
point of destination.

Freight collect
Freight charge on the goods shipped is not yet paid. The common carrier shall collect
the same from the buyer. Thus, under this, the freight charge is actually paid by the buyer.

Freight prepaid
Freight charge on the goods shipped is already paid by the seller.
Accounting for Freight charge

Sometimes, goods are sold “FOB destination” but shipped “freight collect” with the
understanding that the buyer will pay for the freight charge and deduct the same when the
remittance is made by him. On the part of the seller, the freight charge is recorded by debiting
freight out and crediting allowance for freight charge.

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 as in the case of shipment shortages and defects.
Methods of recording credit sales

Gross Net
Method Method
The accounts receivable The accounts
and sales are recorded at receivable and sales
gross amount of the are recorded at net
invoice. This is the amount of the invoice,
common and widely used meaning the invoice
method because it is price minus the cash
simply to apply. discount
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 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.
The adjustment to record the expected sales discount is:

Sales discount 50,000

Allowance for sales discount 50,000

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

Business entities sell on credit rather than only for the cash to increase total
sales and thereby increase income.
However, an entity that sells on credit assumes the risk that some
customers will not pay their accounts.
When an account becomes uncollectible, the entity has sustained a bad
debt loss. This loss is simply one of the cost of doing business on credit.
Two methods are followed in accounting for this bad debt loss
 Allowance Method Direct writeoff method
Doubtful accounts 30,000 No entry necessary
1. Accounts of P30,000 are
Allowance for doubtful 30,000
considered doubtful of collection accounts .

2. The accounts are proved to be Allowance for doubtful 30,000 Bad debts 30,000
accounts
worthless or uncollectible. Accounts receivable 30,000
Accounts receivable 30,000

3. The same accounts that are Accounts receivable 30,000 Accounts receivable 30,000
previously written off are Allow. for doubtful 30,000
unexpectedly recovered or collected Bad debts 30,000
accounts

If the recovery is subsequent to

the year of writeoff I and the Cash 30,000 Cash 30,000
direct writeoff method us used,
the recovery may simply be Accounts receivable 30,000 Accounts receivable 30,000
credited to the other income.
Doubtful accounts in the income statement
1. Distribution cost

If the granting of credits and collection of

accounts are under the charge of the sales
manager, doubtful accounts shall be
considered as distribution cost.

2. Administrative expense

If the of credit and collection of accounts are

under the charge of an officer other than sales
manger, doubtful accounts shall be considered
as administrative expense.

In the absence of any contrary statement, doubtful

accounts shall be classified as administrative
expense.
 Problem 10- 4
Dreamer Company reported the "Receivables" account with a debit balance of P2,000,000 at year-end.

The allowance for doubtful accounts had a credit balance of P50,000 on same date.

Subsidiary details revealed the following:

Trade accounts receivable 775,000

Trade notes receivable 100,000
Installment receivable , normally due 1 year to 2 years 300,000
Customers' accounts reporting credit balances
arising from sales returns (30,000)
Advance payment for purchase of merchandise 150,000
Customers' accounts reporting credit balances
arising from advance payments ( 20,000)
Cash advance to subsidiary 400,000
Claim from insurance entity 15,000
Subscriptions receivable due in 60 days 300,000
Accrued interest receivable 10,000
2,000,000

REQUIRED:

a) Prepare one compound entry to reclassify the receivables account.

b) Compute the amount to be presented as "trade and other receivables" under current assets.
c) Indicate the classification and presentation of the other items excluded from “trade and other receivables”.
a) Accounts receivable 775,000
b) Accounts receivable 775,000
Notes receivable 100,000
Allowance for doubtful accounts (50,000)
Installments receivable 300,000
Notes receivable 100,000
Advance to suppliers 150,000
Installment receivable 300,000
Advance to subsidiary 400,000
Advances to suppliers 150,000
Claim receivable 15,000
Claim receivable 15,000
Subscriptions receivable 300,000
Subscriptions receivable 300,000
Accrued interest receivable 10,000
Accrued interest receivable 10,000
Customers' credit balance 30,000
Total trade and other receivable 1,600,000
Advances from customers 20,000
Receivables 2,000,000

c)
• Advances to subsidiary should be treated as non-current asset because it is normally for long term
investments.
• Customers’ credit balance and advances from customers should be treated as current liabilities and should
not be offset from other receivables.
 Problem 10-5
Credible Company provided the following T-account summarizing the transactions
affecting the accounts receivable for the current year:

Accounts Receivable
Jan. 1 bal. 600,000 Collections from customers 5,300,000
Charge sales 6,000,000 Writeoff 35,000
Shareholders’ Merchandise returns 40,000
subscriptions 200,000 Allowance to customer for shipping damages 25,000
Deposit in contract 120,000 Collections from carrier claims 40,000
Claims against common Collection on subscriptions 50,000
carrier for damages 100,000
IOUs from employees 10,000
Cash advance to affiliates 100,000
Advances to suppliers 50,000

REQUIRED:
a) Compute the correct amount of accounts receivable.
b) Prepare one compound entry to adjust the accounts receivable.
c) Compute the amount to be presented as “trade and other receivables” under current
assets
d) Indicate the classification and presentation of the other items.
REQUIREMENT 1 REQUIREMENT 2

Jan. 1 balance Subscription receivable 150,000

600,000 Deposit on contract 120,000
Sales Claims receivables 60,000
6,000,000 Advances to employees 10,000
Collection from customers Advances to affiliates 100,000
(5,300,000) Advances to suppliers 50,000
Writeoff Accounts receivable 490,000
(35,000)
Merchandise returns
(40,000)
Allowance to customer for damages REQUIREMENT 4
(25,000)
Accounts Receivable • Subscription receivable is a non-current asset if not stated collectible within
1,200,000
one year, therefore, not included in the computation for trade and other
receivables.
• Deposit in contract is normally non-current asset because such deposits
REQUIREMENT 3 remains to be outstanding for a certain long period of time.
• Cash advances to affiliates is long term investment.
Accounts receivable 1,200,00
Claims receivable 60,000
Advances to employees 10,000
Advances to suppliers 50,000
Trade and other receivables 1,320,000
 Problem 10-6
Icon Company provided the following data for the current year.

Sales on account 3,600,000

Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable determined to be worthless 20,000
Merchandise returned by customer 15,000
Collections received to settle accounts 2,450,000
Discounts permitted to be taken by customers 45,000
Collections received in settlement of notes 150,000

REQUIRED:

Prepare journal entries to record the transactions and compute the net realizable value of
accounts receivable.
ENTRIES: Cash 45,000
Notes receivable 45,000
• Accounts receivable 3,600,000
Sales 3,600,000

• Notes receivable 400,000

Accounts receivable 400,000 Accounts receivable 670,000
Allow. for doubtful accounts 70,000
• Doubtful accounts 90,000 Net realizable value A/R 600,000
allow. for doubtful accounts 90,000

• Allow. for doubtful accounts 20,000

Accounts receivable 20,000

• Sales return 15,000

Accounts receivable 15,000

• Cash 2,450,000
Accounts receivable 2,450,000

• Sales discounts 45,000

accounts receivable 45,000
 Problem 10-7
Affectionate Company sold merchandise on account for P 500,000. The terms are 3/10, n/30.

The related freight charge amounted to P 10,000. The account was collected within the discount period.

REQUIRED:

Prepare journal entries to record the transactions under the following freight terms:

1. FOB destination and freight collect.

2. FOB destination and freight prepaid.
3. FOB shipping point and freight collect.
4. FOB shipping point and freight prepaid.
1. Accounts receivable500,000 3. Accounts receivable 500,000
Freight out 10,000 Sales 500,000
Sales 500,000
Allow. for freight charge 10,000 Cash 485,000
Sales discount 15,000
Cash 475,000
Sales discount 15,000
Accounts receivable 500,000
Allow. for freight charge 10,000
Accounts receivable 500,000

2. Accounts receivable500,000 4. Accounts receivable510,000

Freight out 10,000 Sales 500,000
Sales 500,000 Cash 10,000
Cash 10,000
Cash 495,000
Cash 485,000 Sales discount 15,000
Sales discount 15,000 Accounts receivable 510,000
Accounts receivable 500,000
 Problem 10-8
Finance Company records sales return during the year as a credit to accounts receivable.

However, at the end of the accounting period, the entity estimates the probable sales
return and the same by means of an allowance account.

The following transactions occurred in summary form:

1. Sale of merchandise on account, 2/10, n/30 4,000,000

2. Collection within the discount period 1,470,000
3. Collection beyond the discount period 1,000,000
4. Sales return granted 100,000
5. Sales return estimated at the end of the year 20,000

REQUIRED:

Prepare journal entries to record the transactions.

1. Accounts receivable 4,000,000
Sales 4,000,000

2. Cash 1,470,000
Sales discount 30,000
Accounts receivable 1,500,000

3. Cash 1,000,000
Accounts receivable 1,000,000

4. Sales return 100,000

Accounts receivable 100,000

5. Sales return 20,000

Allow. for doubtful account 20,000
 Problem 10-9
Eatable Company engaged in the following transactions during the month of July:

July 1 Sold merchandise to A Company for P50,000, 2/10, n/30.

2 Sold merchandise to B Company for P200,000, 2/10, n/30.
12 Received payment from B Company for July 2 sale.
30 Received payment from A Company for July 1 sale.

REQUIRED:
a. Prepare journal entries using GROSS METHOD b. Prepare journal entries using NET METHOD

NET METHOD
GROSS METHOD
1 – Accounts receivable 50,000 1 – Accounts receivable 49,000
Sales 50,000 Sales 49,000

2 – Accounts receivables 200,000 2 – Accounts receivable 196,000

Sales 200,000 Sales 196,000
12 – Cash 196,000
Sales discounts 4,000 12 – Cash 196,000
Accounts receivable 200,000 Accounts receivable 196,000

30 – Cash 50,000 30 – Cash 50,000

Accounts receivable 50,000 Accounts receivable 49,000
Sales discounts forfeited 1,000
 Problem 10-10
When examining the accounts of Brute Company, it is ascertained that balances relating to both
receivables and payables are included in a single controlling account called “receivables control”
that has a debit balance of P4,850,000. An analysis of the make-up of this account revealed the following:

Debit Credit
Accounts payable – customers 7,800,000
Accounts receivable – officers, current 500,000
Debit balances – creditors 300,000
Postdated check from customers 400,000
Subscription receivable 800,000
Accounts payable for merchandise 4,500,000
Credit balances in customers’ accounts 200,000
Cash received in advance from customers for goods not yet shipped 100,000
Expected bad debts 150,000

After further analysis of the aged accounts receivable, it is determined that the allowance for doubtful accounts should
be P200,000.

REQUIRED:

Compute the amount that should be reported as “trade and other receivables” under current assets.
 TRADE AND OTHER RECEIVABLES

Accounts receivable – customers 7,800,000

Accounts receivable – officers, current 500,000
Debit balance, creditors’ account 300,000
Postdated check from customers 400,000
TOTAL 9,000,000
Less: Allow. For doubtful account 200,000
TRADE AND OTHER RECEIVABLES 8,800,000
Thank you!