Chapter 9: loans and receivable Management

How do we need defined receivables?

PAS 39 defines loans and receivable as “ non- derivative financial assets with fixed or
determinable payments that are quoted in an active market.”
(Financial Accounting, 2008 edition by Valix and Perta). Receivables are financial assets that
repreasents a contractual right to receive cash or other financial assets from another entity or
customer.
These are the examples of receivable:
1. Traditional accounts receivable or sometimes called trade debtors or trade accounts
recevable. This account either be:
Trade receivables- this is normally supported by credit invoice issued by the company and
has credit terms. The credit terms stated in the invoice are the basis of the accounting
department on whether the customer’s account is not yet due or past due already. This
will also be the basis for recognizing an impairment loss arising from receivable account.
2. Notes receivable- this is supported by formal promise to pay in the form of a note.
3. Loans receivable- this is a receivable arising from banks and other financial institution.
II. what are the other accounting elements that affect receivable?
Discounts
Let us study first the environment of by which this receivable works, its nature, risk, and
collectability. This account is affected by discount and there are two types of discount, these are:
1. Trade discount- a discount that is not recorded in the book of accounts. This is the
discount granted to a customer because of the bulk order that they made. This is normally
expressed in terms of percentage and will encourage our customers to buy in commercial
quantity. Remember, the more our customers buy, the bigger discount that they can get.
2. Cash discount- this is the discount that is recorded in the books. This is the kind of
discounts that you can see in your income statement in order for you to come up with net
sales. This will encourage our customers to pay on time because if they pay early or within
the credit terms, they can avail of the discount.
Returns
This account is also affected by returns. There are two types of returns and these are:
1.Sales return- these are goods, which the customers have physically return. This may be a
matter of wrong shipment or wrong deliveries of merchandise, thus the merchandise were
physically returned to the company, or a sub-standard merchandise were delivered to them.
Analysis:
 Too much sales returned should be analyzed because this could be a indicator of a
potential problem.
a. There might be a problem on the quality of products that we are selling, thus we have to
re-examine our supplier of goods (external source of the problem) this is an inefficiency
on the part of the supplier and therefore we have to check on the quality opf services so
that we can get quality goods. This is the reason why some of our companies nowadays
have accredited suppliers so they can be assured that the materials supplied to them are
not sub- standard.
b. there might be a problem on the control and inspection of shipment of our customers,
thus there are wrong shipments or wrong deliveries or the shipments of goods are correct
but were shipped to wrong customer (internal source of the problem)
this is an inefficiency of our people in the organization
1.) If our people lack training – we have to provide the proper training to that we can be
assured of quality service to our customer. We have to remember that a quality service
produces satisfied customer. Satisfied customer begot more loyalty orders and even
additional customers since this can be good vehicle of advertising (word of mouth
advertising).
2.) If our people are fault – we have to provide disciplinary sanctions so that our people will
continue to give their best in giving our customers quality services because our customers
deserve the best service.

2.) sales allowance – these are the goods, which were delivered to customer but defective. For
this reason, the company agrees to reduce the receivable account from these customers by
granting a sales allowance. Instead of physically returning the merchandise, the customers agree
to accept the delivery at reduce price.
Analysis;
This account should also be analyzed deeper because just like in our analysis above, this
could be an indicator of a potential problem.
a. Looking on the positive side, our sales force is very effective in sales persuasiveness and
is able to persuade customer on the last minute of defective goods delivery acceptance.
b. If this is the case, we are thankful for very skillful sales force but we have to investigate
further because if this prevail, our customers might get rid of this situation and might find
another supplier, thus we loose our customer.
c. Looking on the negative side, this means that our customers were just forced to accept
goods to avoid inconvenience in returning them.
Risk evaluation
There is always an inherent risk granting credit to our customers. Normally, customers will grab
an opportunity of using the leverage in obtaining favorable response to their operating
performance. We have to do our part in order to minimize this inherent risk by exercising our
best effort in the following;
1.) Conduct a field investigation on the customers paying behavior. For this matter, we can
ask from a third party on how this customers behaves in setting in his accounts with other
suppliers.
2.) Ask from the application/customers applying for credit facilities, a financially, a financial
report day certified public accountant, then prefer financial analysis.

1. Accounts Receivable Turnover:

The formula: Total Credit Sales

_________________
Average Accounts Receivable
Assume the following:

Number of days in Receivable: If you will convert this into the number of days your receivable
were left uncollected, then proceed to the next analytical tool, the number of days in
receivable.
The formula:
365 days /accounts receivable turn over.
In our illustration we can compute the number of days in receivable as follows 365 days/12
times=30 days
The analysis is that the company is able to collect their receivables in 30 days.
Receivable Turnover= P2,950,00/ 50,000=59 times
Number of days in Receivable= 365 days/ 59 times= 6days
Inventory Turnover= P1,770,000/ 65,000=27 times
Number of days in Inventory= 365 days/ 27 times= 14 days
Payable Turnover= 1,770,000/ 100,000= 18 times
Number of days in Payable= 365 days/ 18 times= 20 days
Interpretation:
If the company purchased the merchandise on Jan 1, the analized financial figure provides that
they pay it on Jan 21.
On the other hand when they purchased the merchandise on Jan 1 the analized financial figure
provides that they sold it on Jan 6 and collected 14 days there after. In other hand words they
have converted back the inventory to cash on Jan 20.
If you can see now our example the date of collection and the date of payment equal to 20
days. So how would this operation affect your cash position?
To make it more realistic, we have to compare the number of days in receivable with the credit
terms the company is extending to customers. Assuming that the company credit terms is 2/10,
n/30.
The figure means that the collection of the company are not able to persuade the customers to
pay within the discount period but they are good collectors because they were able to persuade
the customers to pay on time.

This is another opportune time to evaluate our cash discount rate might not be too attractive
for our customers to grab as trade off on early setting their accounts. We have to remember
that the conversion of our receivable to cash early would mean the following:
a. We can use this cash again to start the operating cycle. We have to remember that the faster
cycle the better as this will not only improve our receivable turn over but also our inventory
turnover. Improving it would mean improving our bottom line figures (bottom line figure would
mean net income): or
b. We can place this in high yielding time deposits to earn another income and thus improve
also our bottom line figures How about our credit term is 45 days and our receivable turnover is
30 days how would be this interpreted?
If this is the case, then there are two sides of the coins again.
1) Our company collectors were working so hard to cope with collection stress and were able
to collect the receivable early.
2) Again, this is an opportune time to evaluate our credit terms because it might be too relaxed
because our customers can easily settle their obligation with us. We have to benchmark our
credit policy, and improve and minimize the inherent risk.
So as you can see, in managing our account there should be comfortable amount of flexibility
and mobility. This is because our primary motive in managing our accounts is to improve
bottom line figures and improve the inherent risk present in all business enterprises. In
managing our accounts receivable, we also have to consider the other tools, which might be
helpful in improving our operating performance.
Charging bad accounts into our operating performance:
In accounting, there are two methods of estimating bad accounts in our receivable and these
are:
a. If the company is operating performance focus, the formula will be:
Credit sales multiplied by the estimated percentage of bad accounts and this is
the amount that will reduce company's receivable account.
For example: In our example above, the net credit sales is P2,950,000. Assuming that the balance of
accounts receivable is P240,000 and the allowance for doubtful accounts is P10,000.The company
estimated that the 2% of credit sales will be considered bad account, so the bad accounts can be
computed as follows:

P2,950,000 x 2%= P59,000

So the company's receivable will be reduced by P59,000 when presented in the year end balance sheet.

b. If our company is focused on realizing its receivables, the formula will be:
Accounts Receivable x % of bad account minus the allowance for doubtful account
balance
For example: In our example above, the net credit sales is P,950,000. Assuming that the
balance of accounts receivable is P240,000 and the allowance for doubtful account is P10,000.
The company estimated that 6% of accounts receivable will be considered bad account, so the
bad account can be computed as follows:
P240,000 x 6% - P10,000 =P4,000

This is so because what the company would like to know is the estimated amount of receivable
that can be collected when the allowance for doubtful account is deducted.

c. Aging of accounts receivable

Under this technical tool estimating bad accounts the company will consider he age of
receivables and it will be the determining factor by which the receivable might because bad or
uncollectible.
So we have to age the receivable in accordance with the following:
Not yet due accounts 1 – 30 days P150,000 x 0% = P 0.00
31 to 60 days P50,000 x 5% = P2,500
61 to 90 days P25,000 x 15% = P3,750
Over 91 days P15,00 = 40% = P6,000
Totals P240,000 P12,250
Total estimated bad accounts P12,250
Less: allowance for doubtful accounts P10,000
Remainder to be charged to bad accounts P 2,250
How to count the age of your receivables?

When the credit terms is 2/10, n/30 and the buyer had purchased the merchandise on Jan. 1. This is the
due on Jan. 31

From Jan. 1 – 31 31 days

Minus Jan. 1 (the first day) 1 day

Difference 30 days

This account when unpaid on Feb. 1 will be classified at 31 days to 60 days overdue.
If the accounts are unpaid on April 25, It will now be classified as over 91 days.
Jan 1 – 31 31 days
Feb. 1 – 28 28 days
March 1 – 31 31 days
April 1 – 25 25 days
Total 115 days
Less Jan. 1 1 day
Difference 114 days

IV. How to convert your receivable faster?

1. Pledging
This is a way where in a company can obtain cash using the company’s receivable as a
pledge or a collateral security for such loans payment. With the new loan, businesses are
using its leverage in order to make more business transactions thereby enhancing its
operating surplus.

For example: Kristine Joyce enterprises borrowed money from security bank amounting to
500 thousand pesos and pledge its P 1500 accounts receivable to secure the loan.
If you are reading financial report of Kristine Joyce enterprises, this pledging cannot been
on the face of financial report but instead in the notes to financial statement. This is
because the receivable was only made as collateral and therefore will not affect any figure
in the financial report of the company.
An example of the notes to the financial statement will be: “the notes payable to security
bank which will mature on April 30, 2010 is secured by the companies accounts receivable
amounting to 1million 500 thousand.”
2. Assignment
 This is a formal type of pledging since specific accounts receivable will serve as collateral.
Assignment could either be on non notification or on notification basis. Under this
technique, there are two parties concern in this agreement and they are:
a. Assignee (the lender); and
b. Assignor (the borrower)

Under the non notification basis, customers are not notified about the assignment and
for this matter, customer will just continue to pay their accounts with the company and the
company upon collecting such account (which was specifically assign to the lender) will
remit such collection to the lending company.

Under the notification basis customer are advice about the assignment and therefore
customers are advice to make their payments directly to the assignor (the lending
company).

3. Factoring
Under this method, the company is actually selling its accounts receivable to a factor
(lender). Factoring could either be:
a. Casual factoring- is a casual selling of assets wherein the difference between the selling
price and the book value of the assets sold represent gain or loss.
b. As a continuing agreement- this agreement would mean that the factor assumes the
credit functions as well as the collection function of the company. So the seller can receive
the cash and use it immediately in its operation.
c. Credit Cards- customers may use their credit cards in purchasing various merchandise
from the company. Since the company is only a medium by which transaction pass, as the
real transaction is between the card holder and the credit card company, the store
normally can consider this as cash transaction.

Industry practice

A company that has a large customer environment should tie up with various banking
companies .
1. Customers can now deposit their payments directly to the banking system. This system
cut some of the possibility of losses:
a. Cost of collectors services . Since the company allow the customers to the deposit their
payments directly to the bank, the companies are now minimizing the cost of collectors
salary.
b. The company is also cutting the opportunity of losing the money collected by collectors
due to miss appropriation.
c. The forms of which the company will issue to evidence the payment is also eliminated
since the customers are keeping the validated deposit slip made by the bank and serve as
evidence for their payment.

2. Automatic debit arrangement with the bank system. The account of the customers will
automatically be debited for the amount they have to pay to the company. This is a bank
product by which prior arrangement was made to automatically debit the account for the
various payment.
3. Phone banking. Nowadays, customers can avail of phone banking, wherein the customer
can now pay in the comfort of their homes and within their time and convenience. When
you avail of this bank product, one has to enroll first the supplier that the companies often
pay. Once enrolled and approved by the bank branch, then the company can start paying
through phone. As a phone banking user, you always have to keep the acknowledge receipt
number. This will serve as your reference in case of questionable debits in the companies
bank account.
4. Internet access. Some customers can have access their bank account in the internet and
in so doing they can pay their accounts.