Chapter 10

Accounts Receivable
Reporters:
Roselle Nathalie L. Majomot
J-lyn H. Poliquit
Georgia L. Cerezo

Definition
Receivables are financial assets that
represent a contractual right to
receive cash or another financial
asset from another entity.
Are open accounts arising from the
sale of goods and services in the
ordinary course of business and not
supported by promissory notes.

Classifications of Account
Receivable
1. Trade Receivables (current assets)
- refer to claims arising from sale of
merchandise or service in the ordinary
course of business operation .
-usual types are accounts
receivables and notes receivables.

Usual types of Trade

Receivables
Accounts Receivables

Notes Receivables

Are open accounts or

those not supported
by promissory notes.
Other names of A/R
* costumers
account
* trade debtors
* trade account
receivables

Are those supported

by formal promises to
pay in the form of
notes.

2. Nontrade Receivables (Current

Assets)
- which are expected to be realized
in cash within one year, the length of
the operating cycle notwithstanding.
- Are classified as Current assets.
-if collectible beyond one year,
nontrade receivables are classified as
noncurrent assets.

Presentation
Trade
receivables
and
nontrade
receivables
which
are
currently
collectible shall be presented on he face
of the statement of financial position as
one line item called trade and
nontrade receivables.
-the total details of the total trade and
other receivables shall be disclosed in
the notes o financial statements.

For example, the disclosure may

appear as follows:
Accounts receivables
5,000,000
Allowance for doubtful accounts
(200,000)
Notes Receivables
1,000,000
Accrued interest on notes receivables
150,000
Advances to officers and employees
100,000
Dividends receivables
250,000
Total trade and other receivables
6,300,000

Examples of Nontrade
Receivables
1. Advances to or receivables from
shareholders, directors, officers, or
employees. If collectible in one year,
such advances or receivables should
be classified as current assets.
Otherwise,
such
advances
or
receivables are classified as non
current assets.

2. Advances to affiliates are usually

treated as long term investments.
3. Advances to supplier for the
acquisition of merchandise are current
assets.

4.
Subscriptions
receivables
are
current assets if collectible within one
year.
Otherwise,
subscriptions
receivables
should
be
shown
preferably as a deduction from
subscribe share capital.

5. Creditors accounts may have debit

balances as a result of overpayment or
returns and allowances. These are
classified as current assets.
If the debit balances are not
material, an offset may be against the
creditors
accounts
with
credit
balances and only the net accounts
payable may be presented

6. Special deposits on contracts bids

normally are classified as noncurrent
assets because such deposits
are
likely to remain outstanding for a
considerable long period of time.
However, the deposits that are
collectible
currently
should
be
classified as current assets.

7. Accrued income
-dividends
receivables
-accrued rent
income
-accrued royalties
income
-accrued interest
on
bond

8. Claims receivable
such as claims against
common carriers for
losses or damages,
claims for rebate and tax
refunds, claims from
insurance entities, are
normally classified as
current assets.

Costumers Credit Balances

Costumers credit balance are credit
balances in accounts receivables resulting
from overpayments, returns and allowances,
and advance payments from costumers.
Credit balances are classified as current
liabilities and are not offset against the debit
balances in other costumers accounts,
except when the same is not material in
which
case
only
the
net
accounts
receivables ay be presented.

________________Costumer A__________________
Sales
800,000
Collections
400,000
_______
Debit Balances
400,000
800,000
800,000
________________Costumer B__________________
Sales
600,000
Collections
450,000
_______
Debit Balances
150,000
600,000
600,000
________________Costumer C___________________
Sales
500,000
Collections
450,000
Credit balances 50,000
Returns
100,000
550,000
550,000

Initial Measurement of
Receivables
financial assets shall be recognized
initially at fair value plus
transaction costs that are directly
attributable to the acquisition.
Fair value usually the transaction
price
For long term receivables that are
interest-bearing, the fair value is
equal to the face value.

Accounts Receivable
A/R shall be measured initially at
face value or original invoice
amount.
Subsequently A/R shall be measured
at net realizable value.
the net realizable value is actually
the amortized cost of the accounts
receivable.

Net Realizable Value

In estimating the net realizable

value of trade account receivable, the
following deductions are made:
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

Terms Related to Freight

Charge
FOB Destination
-ownership of goods purchased is
vested in the buyer upon receipt
thereof.
FOB Shipping Point
- ownership of the goods purchased
is vested in the buyer upon shipment
thereof.

Freight Collect
- means that freight charge on the
goods shipped is not yet paid.
- the freight charge is actually paid
by the buyer.
Freight Prepaid
- means that the freight charge on
the goods shipped is already paid by
the seller.

Accounting for Freight

Charge
For example:
An entity has a P100,000 account receivable
at the end of the accounting period. The terms
are 2/10, n30, FOB destination and freight
collect. The costumer paid the freight charge of
P5,000.
1. To record sale:
Accounts Receivable
100,000
Freight out
5,000
sales 100,000
Allowance for freight charge

5,000

2. To record the collection within the

discount period:
Cash
93,000
Sales Discount
2,000
Allowance for Freight Charge
5,000
Accounts Receivable
100,000

Allowance for Sales Returns

For example:
an amount of P50,000 of the total
accounts receivable at year end represents
selling price of goods that will probably be
returned.
Journal entry to recognized the probable
return is :
Sales Return
50,000
Allowance for sales return
50,000

Sales Discount
Cash discount is also known as
sales discount on part of the
seller, and a purchase discount
on the part of the buyer.
Expressed as 5/10, n/30.

Methods of Recording Credit

Sales
1. Gross Method
- A/R and sales are recorded at
gross
amount of the invoice .
2. Net Method
- A/R and sales are recorded at net
amount of the invoice, meaning the
invoice price minus the cash discount.

Illustration Gross Method

1. Sale of merchandise for P100,000, terms 5/10, n30.
Accounts Receivable
100,000
Sales
100,000
2. Assumes collection is made within the discount
period.
Cash
95,000
Sales Discount
5,000
Accounts Receivable
100,000
3. Assumes collection is made beyond the discount
period.
Cash 100,000
Accounts Receivable
100,000

Illustration Net Method

1. Sale of merchandise for 100,000, terms 5/10, n30.
Accounts Receivable 95,000
Sales
95,000
2. Assume collection is made within the discount
period.
Cash 95,000
Accounts Receivable
95,000
3. Assume collection is made beyond the discount
period.
Cash 100,000
Accounts receivable
95,000
Sales discount forfeited
5,000

Allowance for Sales

Discount

For example, of the accounts

receivable of P1,000,000 at the end of
the period , it is reliably estimated that
the discounts to be taken will amount
to P50,000.
Adjustment to be record
Sales Discount
50,000
Allowance for doubtful account
50,00

Accounting for Bad Debts

When an account is uncollectible, the
entity has sustained a bad debts
loss.
2 methods of accounting for Bad Debts
1. Allowance Method
2. Direct Writeoff Method

Allowance Method
Requires recognition of a bad debts
loss if the accounts are doubtful of
collection.
Journal Entry
Doubtful accounts
xxx
Allowance for doubtful accounts
xxx
The allowance for doubtful accounts is
deduction from accounts receivable.

Illustration Allowance Method

1. Accounts of P30,000 are considered
doubtful of collection.
Doubtful accounts
30,000
Allowance for doubtful accounts
30,000
2. The accounts are subsequently
discovered to be worthless or
uncollectible.
Allowance for doubtful accounts
30,000
Accounts Receivable 30,000

3. The same amount that are

previously written off are unexpectedly
recovered or collected.
Accounts Receivable
30,000
Allowance for doubtful account
30,000
Cash
30,000
Accounts Receivables
30,000

If the doubtful accounts are

subsequently found to be worthless
or uncollectible, the accounts are
written off as follows:
Journal entry
Allowance for doubtful accounts
xxx
Accounts receivables
xxx

Direct Writeoff Method

Requires recognition of a bad
debt loss only when the accounts
are worthless or uncollectible.
Often used by small businesses
Violates the Matching Principle

1. Accounts of P30,000 are considered

doubtful of collection.
No entry
2. The accounts provide to be worthless .
Bad debts
30,000
Accounts receivables
30,000
3. The same accounts that are previously
written off as worthless are recovered or
collected.
Accounts Receivable
30,000
Bad debts
30,000
Cash
30,000
Accounts Receivables
30,000

Recoveries of Accounts
Written
Off
If a collectible is made on account
previously written off as uncollectible, the
customary procedure is first to recharge the
costumers account with the amount collected
and possibly with that entire amount
previously charged off it is now expected that
collection will be received in full.
Entry for collection
Cash
xxx
Accounts receivable xxx

The charging of the costumers

account is usually followed because it
is an evidence of the attempt of the
costumer to reestablish his credit with
the entity.
the accepted procedure is to simply
reverse the original entry of writeoff
regardless of whether the recovery is
during the year of writeoff or
subsequent thereto.

Doubtful Accounts in the Income

Statement
1. Distribution Cost
If the granting of credit and
collection of accounts are under the
charge of the sales manager, doubtful
accounts shall be considered as
distribution cost.

2. Administrative Expense
If he granting of credit and
collection of an officer other than sales
manager, doubtful account shall be
considered as administrative expense.