RECEIVABLES

A receivable is the right to receive cash, another asset (goods) or services

Receivables may be current or noncurrent and trade or nontrade

• The rules on current and noncurrent classification are discussed in detail under PAS 1 and are
also based on the receivable as either trade or nontrade

• Trade receivables arise from the sale of goods or services to customers and in the form of
accounts receivable or notes receivable while nontrade receivables are receivables from all
other types of transactions like advances to officers and employees and advances to other
entities.

Accounts receivable arise from credit sales. The amount to be recorded as accounts receivable from
sales on account shall be the “Invoice Price” which is the amount after deducting trade discounts from
the List Selling Price. Take note that trade discounts are not accounted for and are ignored for recording
purposes.

Example: An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point terms
with a list selling price of P2,000,000 with trade discounts of 20% and 10%. The Invoice price is
computed as follows:

List selling price 2,000,000

Less: 20% trade discount 400,000

Net 1,600,000

Less: 10% trade discount 160,000

Invoice price 1,440,000

As mentioned the entry will not include the total trade discount of P560,000 (400,000 + 160,000) but
instead only the P1,440,000 amount will be recorded as follows:

Accounts Receivable 1,440,000

Sales 1,440,000
The following transactions also affect accounts receivable in computing for the ending balance:

ACCOUNTS RECEIVABLE

+ Credit Sales (-) Sales returns and allowances

+ Recovery of accounts written off (-) Sales discounts

(-) Collections including recovery

(-) Write off

(-) Factored accounts

The write off for accounts receivable under the allowance method is recorded by:

Allowance for doubtful accounts xx

Accounts Receivable xx

So therefore the recovery or the collection on an accounts receivable that already has been written off
cannot be recorded by simply debiting cash and crediting accounts receivable. The entry for the write
off must be reversed and before recording the collection with the following two entries:

Accounts Receivable xx

Allowance for doubtful accounts xx

Cash xx

Accounts Receivable xx

Combining the two entries will be more efficient by:

Cash xx

Allowance for doubtful accounts xx

The ending balance of accounts receivable shall be presented as part of current assets under the
heading of “trade and other receivables” at the Net Realizable Value (expected cash value) or
“amortized cost”

The net realizable shall be computed after deducting an allowance for the following:

• Sales returns – Value of merchandise expected to be returned by customers as a result in error

of deliveries and defects

• Sales discounts – Value of price savings to customers expected to pay within the discount period
and take advantage of the cash discount.

• Freight charges – Amount of freight charges collected by the shipper from the buyer even
though the shipment was under FOB destination terms. This amount shall not be remitted by
the buyer hence deducted from the receivable.

• Doubtful accounts – Allowance for expected uncollectability that is an inherent risk from selling
on credit.

Allowance Method vs. Direct Write-off Method

Allowance Direct Write-off

Application Generally Accepted Non-GAAP

Expense and Increase

Accounts considered doubtful Not accounted for
the Allowance

Debit expense and

Write-off Debit Allowance and Credit AR
Credit AR

Debit AR and
Recovery Debit AR and credit Allowance
credit expense
The computation for the doubtful accounts expense which is an adjusting entry and the allowance for
doubtful accounts will be as follows:

Beginning balance X

Write off (X)

Recovery X

Balance before adjustment X

Doubtful accounts expense X

Ending balance X

There are 3 methods in estimating doubtful accounts:

• The percentage of net credit sales method which will provide the amount of doubtful accounts
expense for the year and therefore is a method that emphasizes proper matching of doubtful
accounts against sales. This amount will then be added to the balance before adjustment, the
total of the two will then be the amount of allowance at yearend or after adjustment.

• The percentage of accounts receivable method will provide the amount of required allowance
for doubtful accounts and just like its counterpart the “Aging Method”, the amount of doubtful
accounts expense will be worked back as an adjustment to the amount of required allowance.

• The Aging of accounts receivable method that is arguably the most accurate of all three
methods since an analysis is made and each classification of accounts receivable is multiplied by
a specific rate of the estimate of uncollectability. Naturally older accounts receivable are more
likely to be uncollectible compared to newer or more recent sales.

RECEIVABLE FINANCING

Accelerating the collection of receivables either by using accounts receivable as a loan collateral, selling
the receivables without recourse and discounting of notes receivable.

The use of receivables as a loan collateral can either be an designated as a pledging of accounts
receivable or an assignment of accounts receivables.
Pledging Assignment

Ø A specific portion or specific accounts receivable

are used a collateral. Not all of the accounts
Ø Total or all of the accounts receivable is used.
receivable balance.
Ø A disclosure is made of the fact that receivables
Ø A reclassification is made on the assigned
have been pledged.
accounts.
Ø The accounts receivable is accounted for
Ø Disclosure on the “equity on the assigned
normally but are not reclassified.
accounts or of the assignor” is disclosed in the
Ø Accounting for the loan shall be made with notes.
respect to the proceed, recording of interest and
Ø The equity in the assigned accounts is
payment of the principal.
the difference between the balance of the assigned
accounts and the balance of the loan.

• The absolute sale of receivables is known as factoring and can be either a “casual factoring”
transaction or “factoring as a continuing agreement”.

Casual factoring is a sale of the receivables at a discount. This is similar to any type of sale of an asset in
order to generate cash quickly. However the sale is always made below the carrying amount or the net
realizable value of the accounts receivable and therefore a loss shall be recognized as follows:

Face value of AR X

Less: Service fee or commissions X

Selling price X

Less: Accounts receivable X

Allowances X X

Loss on factoring X
Factoring as a continuing agreement involves the sale of accounts receivable to a financing entity on a
long term basis and where the buyer is committed to buy the receivables before the actual goods are
sold to the customers on credit. In other words, the collection and credit responsibilities are
surrendered to the buyer as soon as goods are delivered to the customers. The following items shall be
deducted from the face value of the receivables:

Face value of AR X

Less: Service fee or commissions X

Interest charges X

Factor’s holdback X X

Proceeds from factoring X

Both the service fee and interest shall be recognized as an expense, meanwhile the factor’s holdback is a
receivable and a value where the factor shall deduct the sales discounts and sales returns taken by the
seller’s customers before finally remitting to the seller the balance when all of the accounts receivable is
collected