ACCOUNTS RECEIVABLES

Holding out credits to customers or in accounting terms, Accounts

Receivables, is one of the ways of generating revenues in a business. However, it is
also one of the ways of increasing expenses as well as delaying cash receipts. It is
the money that a company has a right to receive after providing goods and/or
services to its customers. Also, accounts receivables are open accounts or those not
supported by promissory notes.
Accounts Receivables are under Trade Receivables class of receivables which
are claims arising from sale of merchandise or service in the ordinary course of
business operations. Accounts receivables are measured at their original exchange
price between the firm and the outside party, or the seller and the buyer. They can
be recognized or unrecognized under two accounting principles which are the
Accrual Basis of Accounting and Cash Basis of Accounting. In addition, they can be
recorded in three different methods namely, Gross Price Method, Net Price Method
and Allowance Method. Aside from that, adjustments are needed to be done to yield
and approximate the fair value of accounts receivables which is the amount
expected to be collected and these adjustments are for cash discounts, sales
returns and allowances.
Accruals are adjustments for 1) revenues that have been earned but are not
yet recorded in the accounts, and 2) expenses that have been incurred but are not
yet recorded in the accounts. If a company is operating under the accrual basis of
accounting, it should recognize and record accounts receivable transactions
irrespective of any changes in cash. Under the cash basis of accounting; on the
other hand, transactions are only recorded when there is a related change in cash.
This means that there are no accounts receivables or accounts payables to record
on the balance sheet, since they are not noticed until such time as they are paid by
customers or paid by the company, respectively.
Under the Gross Price Method of recording credit sales, the accounts
receivables and sales are recorded at gross amount of the invoice. This is the
common and widely used method because it is simple to apply. While under the Net
Price Method, the accounts receivables and sales are recorded at net amount of the
invoice, meaning the invoice price minus the cash discount. For a better
understanding of the methods, heres an example: Sale of merchandise for
100,000, terms 5/10, n/30. In gross method, accounts receivable will be debited at
its gross amount of 100,000 while sales will be credited at its gross amount of
100,000. Now, under net price method, accounts receivable will be debited at only
95,000 because of 5% cash discount already deducted from the gross amount
since in this method, cash discounts are already assumed to be taken by the
customers and sales will be credited at its net amount of 95,000 also.

Under Allowance Method, the accounts receivable is recorded at the gross

sales price, the sales revenue is recorded at the net amount and the available cash
discount is recorded a credit in the valuation account, Allowance for Sales
Discounts. Based on the example given above, the accounts receivable will be
debited at 100,000, the sales will be credited at 95,000 and the valuation account
Allowance for Sales Discounts will be credited at 5,000.
The measurement of accounts receivables 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. This probability will be recorded under the account title, Allowance for
Sales Returns. For example, an amount of 75,000 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 debit Sales Return at 75,000 and
credit Allowance for Sales Return at 75,000.
Entities usually offer cash discounts to credit customers. 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 at credit terms such as a 5/10,
n/30 or 2/5, 1/10, n/30. This means that the customer is entitled to a 5% discount if
payment is made in 10 days from the invoice date. If the customer fails to pay
within the 10-day discount period, the gross amount of the invoice price must be
paid within 30 days from the invoice date. As for the credit term 2/5, 1/10, n/30, 2%
discount and 1% discount are entitled to a customer if payment is made in 5 days
from the invoice date and within another 5 days after the first cash discount has or
hasnt been taken, respectively.

References:
Uberita, C. Practical Accounting 1. Suite 203 ICB Arizona Tower, 838 Padre
Campa St., Sampaloc, Manila. DomDane Publishers.
Robles N., and Empleo, P. The Intermediate Accounting Series Volume 1. RM
208, Jovan Condominium 600 Shaw Blvd., Corner Samat St., Mandaluyong City.
Millenium Books, Inc.
Averkamp, H. What is Accounts Receivable? and What are Accruals?
Retrieved from www.accountingcoach.com

Boundless. Recognizing Accounts Receivable.

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Valix, C. Peralta J., and Valix, C.A. Financial Accounting One. 2017 CM Recto
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