Accounts Receivable
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
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.
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.
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.
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:
Accordingly, the seller shall be responsible for the freight charge up to the point destination.
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.
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
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
2. Administrative expense
The allowance for doubtful accounts had a credit balance of P50,000 on same date.
REQUIRED:
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
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
• Cash 2,450,000
Accounts receivable 2,450,000
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:
However, at the end of the accounting period, the entity estimates the probable sales
return and the same by means of an allowance account.
REQUIRED:
2. Cash 1,470,000
Sales discount 30,000
Accounts receivable 1,500,000
3. Cash 1,000,000
Accounts receivable 1,000,000
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
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