Review Class for ACT111-0 and ACT112-0 E.

T Yuchengco School of Business and Management

MODULE 8
RECEIVABLES

Definition
A receivable is an asset recognized to reflect a claim against another party for the receipt of money,
goods, or services. For most accounting purposes, the claim is one expected to be settled in cash.

Classification
1. Current vs. Noncurrent
a. A receivable is a current asset if it is reasonably expected to be collected within the longer of 1
year or the entitys normal operating cycle.
b. Otherwise, it should be classified as noncurrent.

2. Trade vs. Nontrade

a. Trade receivables, which constitute the majority of receivables, are current assets arising from
credit sales to customers in the normal course of business and due in customary trade terms.
They result in contracts evidenced by sales orders, invoices, or delivery contracts.
b. Nontrade receivables includes all receivables not classified as trade receivables.

Valuing Accounts Receivable

In accounting, credit losses are debited to Bad Debts Expense or Uncollectible Accounts Expense. Such
losses are considered to be a normal and necessary risk of doing business. Two methods are used in
accounting for uncollectible accounts: (a) the direct write-off method and (b) the allowance method.

Under the direct write-off method, bad debt losses are not anticipated and no allowance account is
used. No entries are made for bad debts until an account is determined to be uncollectible at which time
the loss is charged to Bad Debts Expense. This method makes no attempt to match bad debts expense
to sales revenue in the income statement or to show the cash realizable value of the accounts receivable
in the balance sheet. This method is not acceptable for financial reporting purposes, unless bad debt
losses are insignificant.

The allowance method is required when bad debts are material in amount. Its essential features are:
a. Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched
against sales in the same accounting period in which the sales occurred.
b. Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful
Accounts through an adjusting entry at the end of each period.
c. Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts
Receivable at the time a specific account is written off.

When there is a recovery of an account that has been written off as uncollectible, it is necessary to
reverse the entry made when the account was written off and record the collection in the usual manner.

There are two bases that are used to determine the amount of expected uncollectibles. One is the
percentage-of-sales basis, and the other is the percentage-of-receivables basis.

Percentage-of-Sales Basis
Under the percentage-of-sales basis,
a. Management establishes a percentage relationship between the amount of credit sales and expected
losses from uncollectible accounts.
b. The expected bad debt losses are determined by applying the percentage to the sales base of the
current period.
c. This basis better matches expenses with revenues.

Percentage-of-Receivables Basis
Under the percentage-of-receivables basis,
a. The balance in the allowance account is derived from an analysis of individual customer accounts.
The analysis is often called aging the accounts receivable.
b. The amount of the adjusting entry is the difference between the required balance and the existing
balance in the allowance account.
c. This basis produces the better estimate of cash realizable value of the accounts receivable.
Review Class for ACT111-0 and ACT112-0 E.T Yuchengco School of Business and Management

Sample Theory Questions

1. Which of the following is a correct statement?
A. Writing off an uncollectible account under the allowance method decreases net income.
B. Estimating uncollectible accounts expense improves the matching of revenues and expenses.
C. Writing off an uncollectible account under the direct write-off method does not affect net income.
D. All of the above are correct statements.
2. Which of the following statements is not correct?
A. The allowance method involves anticipating losses from uncollectible accounts by recognizing an
expense for these losses before the actual accounts are written off.
B. The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to
the Accounts Receivable account.
C. Losses from uncollectible accounts can be estimated by analyzing sales or accounts receivable.
D. The balance of Uncollectible Accounts Expense account appears among the operating expenses
on the income statement.
3. The adjusting entry to record estimated losses from uncollectible accounts consists of a
A. Debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable.
B. Debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful
Accounts account.
C. Debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable
account.
D. Debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts
account.
4. When the allowance method is used, the entry to record the collection of an account that has been
previously written off would include a
A. Debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts
account.
B. Debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable
account.
C. Debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable
account.
D. Debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful
Accounts account.
5. When a firm writes off a bad debt under the allowance method of accounting for bad debts
A. The realizable value of accounts receivable decreases.
B. Total net current assets will decrease.
C. The cash account will decrease.
D. The realizable value of accounts receivable will not change.

Computational Drills
1. The trial balance before adjustment of Pratt Company reports the following balances:
Dr. Cr.
Accounts receivable P100,000
Allowance for doubtful accounts P 2,500
Sales (all on credit) 650,000
Sales returns and allowances 50,000
Required:
a. Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be
(1) 8% of gross accounts receivable and (2) 1% of net sales.
b. Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of P2,500 instead of a credit balance. How will this difference
affect the journal entries in part (a)?

2. Richards Company uses the allowance method of accounting for bad debts. The following summary
schedule was prepared from an aging of accounts receivable outstanding on December 31 of the
current year.
No. of Days Probability
Outstanding Amount of Collection
0-30 days P500,000 98%
31-60 days 200,000 90%
Over 60 days 100,000 80%
The Allowance for Doubtful Accounts before adjustment has a credit balance of P2,000.
Required: If Richards bases its estimate of bad debts on the aging of accounts receivable, how much
is adjustment in the Allowance for Doubtful Accounts for the current year ending December 31.