Module 3 Part 1

ACCOUNT RECEIVABLES

7-1
 Receivables

Receivables are financial assets that represent a contractual right to

receive cash or other financial asset from another entity. In short, these are
claims held against customers and others for money, goods, or services.

Oral promises of the Written promises to pay a

purchaser to pay for goods sum of money on a
and services sold. specified future date.

Accounts Notes
Receivable Receivable

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 Classification
 Trade Receivables
- Claims arising from sale of merchandise or services.
- Expected to be realized in cash within the normal operating
cycle or one year.
- Classified as Current Asset
 Nontrade Receivables
- Expected to be realized in cash within one year; the length of the
operating cycle notwithstanding
- Classified as Current Asset and non-current asset if collectible
beyond one year.

* PRESENTATION ON THE FACE OF THE STATEMENT OF

FINANCIAL POSITION AS ONE LINE ITEM CALLED TRADE
AND OTHER RECEIVABLES. HOWEVER, DETAILS OF THIS
ITEM SHALL BE DISCLOSED IN THE NOTES TO FINANCIAL
STATEMENTS.

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 Receivables
Non-trade Receivables
1. Advances to officers, shareholders, directors and employees.
2. Advances to subsidiaries/affiliates.
3. Advances to suppliers.
4. Subscription Receivable.
5. Creditors’ accounts may have debit balance as a result of
overpayment of returns and allowances.
6. Special deposits on contract bids
7. Accrued Income such as dividends receivable, etc.
8. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).
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 Customer’s credit balances

- are credit balances in accounts receivables

resulting from overpayments, returns and
allowances, and advance payments from
customers.
- are classifies as current liabilities and are
not offset against the debit balances in other
customer accounts except if the amount is
not material.

7-5
 Initial Measurement of Receivables
 PFRS 9 (P5) provides that a financial asset
shall be recognized initially at fair value
plus transaction costs that are directly
attributable to the acquisition.
 Fair Value means:
1. short-term receivables
- face value/invoice amount
2. long-term receivables that are interest bearing
- face value
3. long-term receivables that are non-interest bearing
- present value of all future cash flows discounted using the
prevailing market rate.

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 Subsequent Valuation of Accounts Receivable

 At NRV (Net Realizable Value) – the amount

of cash expected to be collected.
 Deductions of A/R:
a. Allowance for freight charge
b. Allowance for Sales Return
c. Allowance for Sales Discount
d. Allowance for Doubtful Accounts

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 Terms related to Freight Charges
 FOB Destination
- Ownership of the goods purchased is vested in the buyer
upon receipt (seller to pay freight charges)
 FOB Shipping Point
- Ownership of the goods purchased is vested in the buyer upon
shipment
 Freight Collect
- freight charges of goods shipped were not yet paid (buyer to
pay freight charges)
 Freight Prepaid
- freights charges were already paid by the seller.

7-8
 Accounting for freight charge
Example: P100,000 accounts receivable. The
terms are 2/10, n/30, FOB destination and
freight collect. The customer paid the freight
charge of P5,000.
Sale:
Accounts Receivable 100,000
Freight Out 5,000
Sales 100,000
Allowance for freight charges 5,000

Collection:
Cash 93,000
Sales discount 2,000
Allowance for freight charges 5,000
Accounts Receivable 100,000
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 Allowance for Sales Returns

 The probability that some customers will

return goods that are unsatisfactory or with
defects.
 So example, an amount of P50,000 of total
accounts receivable at year-end will
probably be returned.
Entry:
Sales Return 50,000
Allowance for Sales Return 50,000

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 Accounts Receivable

Recognition of Accounts Receivable

Trade Discounts
Reductions from the list
10 %
price
Discount
Not recognized in the for new
accounting records Retail
Customers are billed net of Store
discounts Customers

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 Accounts Receivable

Recognition of Accounts Receivable

Cash Discounts
(Sales Discounts)
Inducements for prompt
payment Payment terms
are 2/10, n/30
Gross Method vs. Net
Method

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 Accounts Receivable

Ex-1: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of 2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, the company received a check for
the balance due from Arquette Company. Prepare the journal entries
on Bolton Company books to record the sale assuming Bolton records
sales using the gross method.

June 3 Accounts receivable 2,000

Sales 2,000

June 12 Cash 1,960

Sales discounts (2,000 x 2%) 40
Accounts receivable 2,000

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 Accounts Receivable

Ex-2: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of 2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, the company received a check for
the balance due from Arquette Company. Prepare the journal entries
on Bolton Company books to record the sale assuming Bolton records
sales using the net method.

June 3 Accounts receivable 1,960

Sales 1,960

June 12 Cash (2,000 x 98%) 1,960

Accounts receivable 1,960

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 Accounts Receivable

Ex-3: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of 2,000 with terms of 2/10, n/60,
f.o.b. shipping point. Prepare the journal entries on Bolton Company
books to record the sale assuming Bolton records sales using the net
method, and Arquette did not remit payment until July 29.

June 3 Accounts receivable 1,960

Sales 1,960

June 12 Cash 2,000

Accounts receivable 1,960
Sales discounts forfeited 40

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 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Cash 330
Total current assets 1,657

7-16 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable, net of $25 allowance 475
Cash 330
Total current assets 1,657

7-17 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable, net of $30 allowance 227
Cash 330
Total current assets 1,409

7-18 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

Valuation of Accounts Receivables

Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts

not being collected.

7-19 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Valuation of Accounts Receivable

Uncollectible Accounts Receivable

An uncollectible account receivable is a loss of revenue that
requires,
 a decrease in the asset accounts receivable and
 a related decrease in income and shareholders’ equity.

7-20 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Accounting for Bad Debts

BAD DEBTS – cost of doing business on credit.

 Direct Write-off Method

- Requires the recognition of a bad debt loss
only when the accounts proved to be
worthless or uncollectible.
 Allowance Method
- Requires the recognition of a bad debt loss if
the accounts are doubtful of collection.

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 Valuation of Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are Estimated:
No matching Percentage-of-sales
Receivable not stated at Percentage-of-receivables
cash realizable value Aging the accounts
Not IFRS when material in receivable
amount

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 Illustration
Allowance Method Direct Write-off Method
1. Accounts of P30,000 are considered doubtful in collection
Doubtful Accounts 30,000 No Entry
Allowance for D/A 30,000
2. The accounts are subsequently discovered to be worthless or uncollectible.
Allowance for D/A 30,000 Bad Debts 30,000

Accounts Receivable 30,000 Accounts Receivable 30,000

3. The same accounts that are previously written-off are unexpectedly
recovered or collected.
Accounts Receivable 30,000 Accounts Receivable 30,000
Allowance for D/A 30,000 Bad Debts 30,000
Cash 30,000 Cash 30,000
Accounts Receivable 30,000 Accounts Receivable 30,000

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 Methods of Estimating Doubtful Accounts
Illustration 7-7

Emphasis on
the Income
Statement

Emphasis on
the Statement
of Financial
Position

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 Uncollectible Accounts Receivable

Percentage-of-Sales Approach

Percentage based upon past experience and anticipate

credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.

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 Uncollectible Accounts Receivable

Percentage-of-Sales Approach

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2011, it records bad debt expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Illustration 7-8

7-26 LO 5
 Uncollectible Accounts Receivable

Percentage-of-Receivables Approach
Not matching.
Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

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 Uncollectible Accounts Receivable

Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Bad Debt Expense 37,650

Allowance for Doubtful Accounts 37,650

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 Uncollectible Accounts Receivable

Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?

Bad Debt Expense ($37,650 – $800) 36,850

Allowance for Doubtful Accounts 36,850

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 Recovery of Uncollectible Accounts

Illustration: Assume that the financial vice president of Brown

Furniture authorizes a write-off of the P1,000 balance owed by
Randall Co. on March 1, 2012. The entry to record the write-off is:

Allowance for Doubtful Accounts 1,000

Accounts Receivable 1,000

Assume that on July 1, Randall Co. pays the P1,000 amount that
Brown had written off on March 1. These are the entries:

Accounts Receivable 1,000

Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
7-30 LO 5
 Debit Balance in Allowance Account

 Normally appears before adjustment

Allowance for Doubtful Accounts
Beg.
Written-off Doubtful
Recovery

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 Correction in Allowance for Doubtful Accounts

 The correction is to be reported in the income

statement either as an addition to or subtraction
from doubtful accounts expense.
 CHANGES IN ESTIMATE are treated
CURRENTLY and PROSPECTIVELY.
 Inadequate Allowance is adjusted as:
Doubtful Accounts xxx
Allowance for Doubtful Accounts xxx
 Excessive Allowance is adjusted as
Allowance for Doubtful Accounts xxx
Doubtful Accounts xxx

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 Doubtful Accounts in the Income Statement

 If granting of credit and collection of accounts

are under the charge of:

 Sales manager – Distribution Cost/Selling Expenses

 Officer Other than sales manager – Administrative
Expenses
 If silent: Administrative Expenses

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 Seatwork- 1
Braces 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 Outstanding Amount Estimated uncollectible
0-30 days P500,000 2%
31- 60 days 200,000 10%
Over 60 days 100,000 20%

The following additional information is available for the current year:

Net credit sales for the year P4,000,000
Allowance for Doubtful Accounts:
Balance January 1 45,000 (credit)
Balance before adjustment, December 31 2,000 (debit)
a. If Braces based its estimate of bad debts on the aging of accounts
receivable, doubtful accounts expense for the current year ending
December 31 is ____________________.
b. If Braces determines bad debt expense using 1.5 percent of net credit
sales, the net realizable value of accounts receivable on the
December 31, balance sheet will be _______________________.
c. Give the journal entries for A & B
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 Seatwork - 2
Bikko, Inc. reported the following balances (after
adjustment) at the end of 2016 and 2015.
12/31/2016 12/31/2015
Total accounts receivable P105,000 P 96,000
Net accounts receivable 102,000 94,500

During 2016, Bikko wrote off customer accounts totaling

P3,200 and collected P800 on accounts written off in
previous years.
Bikko’s doubtful accounts expense for the year
ending December 31, 2016 is ___________. Show the
T-account of Allowance for Doubtful Account.

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 Seatwork - 3
The following transactions occurred during the year ended December 31,
2016:
Gross sales (cash and credit) P750,614
Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers
for sales returns and allowances 8,400
Cash refunds given to cash customers
for sales returns and allowances 12,640
Recoveries on accounts receivable written off in prior years
(not included in cash received stated above) 5,421

At year-end, the company provides for estimated bad debt losses by

crediting the Allowance for Bad Debts account for 2% of its net credit
sales for the year.
What is the bad debt expense to be reported for 2016?

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