ACCOUNTS RECEIVABLES

Receivables

 These are financial assets that represent a contractual right to receive

cash or another financial asset from another entity.
 CLASSIFICATIONS :
 1. Trade receivables
 2. Non-trade receivables
Trade receivables

 Trade receivables refer to claims arising from sale of

merchandise or services in the ordinary course of
business.
 This includes ACCOUNTS RECEIVABLES and NOTES
RECEIVABLES.
 Accounts Receivables are open accounts arising from
the sale of goods and services in the ordinary course of
business and not supported by promissory notes. (Also
known as, customer’s accounts, trade debtors
 Notes Receivables are those supported with promissory
notes.
Non-Trade Receivables

 These represents claims arising from sources other than sale of

merchandise or services in the ordinary course of business.
Loans Receivable

 These are receivables arises primarily from the loans to customers.

Classifications

 Trade receivables which are expected to be realized in cash within the

normal operating cycle or one year, whichever is longer are classified as
current asset.
 Non-trade receivables which are expected to be realized in cash within
one year, the length of the operating cycle notwithstanding are classified
as current asset. However, if it is collectible beyond one year, receivables
are classified as non-current assets.
Presentation of Receivables

 Trade 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.
Examples of Non-trade Receivables

 1. Advances to or receivables from shareholders, directors, officers or

employees. CA not unless classified as NCA
 2. Advances to affiliates are usually treated as long-term investments. NCA
 3. Advances to supplier for the acquisition of merchandise are current
assets. CA
 4. Subscriptions receivable. CA
 5. Creditors’ account. CA
 6. Special deposit on contracts. NCA
 7. Accrued Income. CA, not unless associated with long term bonds.
 8. Claims receivable. CA
Customer’s Credit Balance

 Customer’s credit balance 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.
Initial measurement

 Accounts receivable are initially measured at fair value.

 PRFS 9 par. 5.1 provides that a financial asset shall be recognized initially at
fair value plus transaction costs that are directly attributable on the
acquisition.
 Fair value usually means the transaction price.
Subsequent Measurement

 PFRS 9 par. 5.21 after initial recognition, accounts receivable shall be

measured at amortized cost.
 Amortized cost is usually the net realizable value of accounts receivable.
 The net realizable value of accounts receivable is the amount of cash
expected to be collected or the estimated recoverable amount.
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.
Accordingly, in estimating the net realizable value of trade AR, the
following deductions are made:
a. Allowance for freight charges
b. allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts
Freight Charges related to AR

 FOB Destination – the ownership of the goods purchased is vested in the

buyer upon receipt thereof.
 FOB Shipping Point - the ownership of the goods purchased is vested in
the buyer upon shipment thereof.
 Freight Collect – the freight charge is not yet paid, and actually paid by
the buyer upon receipt.
 Freight Prepaid – the freight charge on goods shipped is already paid by
the seller.
a. Allowance for freight charges

 For example an entity has a P100,000 accounts receivable at the end of

accounting period. The terms are 2/10, n/30, FOB destination, and freight
collect. The customer paid freight charge of P5,000.
1. To record sale
2. To record collection
b. Allowance for sales discount

 For example, an amount of P50,000 of the total accounts receivable at

year end selling price of goods that will probably be returned.

Sales Return P50,000

Allowance for sales return 50,000
c. Allowance for sales discount

 Cash discount is a reduction from an invoice price by reason of prompt

payment.
 It may be expressed as 5/10, n/30.
Methods of Recording Credit Sales

 1. Gross Method – the accounts receivable and sales are recorded at

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

 1. Sales of merchandise for P100,000, terms 5/20, n/30

 2. Assume collection is made within the discount period.
 3. Assume collection is made beyond the discount period.

***using gross and net method***

d. Accounting for bad debts

 Two methods of accounting bad debts :

1. Allowance Method
2. Direct Write-off Method
 Allowance Method – requires recognition of a bad debt loss if the
accounts are doubtful of collection. This is a deduction to Accounts
Receivable total.
Doubtful accounts xxx
Allowance for doubtful accounts xxx
***if the said account was said to be worthless, the entry is as follows:
Allowance for doubtful accounts xx
Accounts Receivable xxx
***GAAP requires the use of Allowance method because it conforms with the
Matching Principle of accounting***
Recoveries of Accounts Written-Off

 Example:
1. Accounts of P30,000 are considered doubtful of collection.
2. The accounts are subsequently discovered to be worthless or
uncollectible.
3. The same accounts that are previously written off are unexpectedly
recovered or collected.
Required : Prepare the Journal entry
 Direct Write off Method – requires recognition of a bad debt loss only when
the accounts proved to be worthless or uncollectible.
Example:
1. Accounts Receivable of P30,000 are considered doubtful of collection.
2. The accounts proved to be worthless.
3. The same accounts that are previously written-off as worthless are recovered or
collected.
Doubtful accounts 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 the sales
manager.

***in the absence of any contrary statement, doubtful accounts shall be

classified as administrative expense***