Accounts Receivable

and
estimation of
Doubtful Accounts
 Receivables
are financial assets that represent a contractual right to receive cash or
another financial asset from another entity.

NON
TRADE TRADE

claims arising from sale of claims arising from

merchandise or services in sources other than the
the ordinary course of sale of merchandise or
business. services in the ordinary
course of business.
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 Classification
Current Asset Noncurrent Asset
✘ expected to be ✘ collectible beyond one
realized in cash within year
the normal operating
cycle or one year,
whichever is longer

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 Presentation
Trade receivables and nontrade
receivables which are currently
collectible shall be presented on Accounts Receivable 5,000,000

the face of the statement of Allow. For Doubtful Accounts (200,000)

financial position as one line item Notes Receivable 1,000,000

called trade and other Accrued Interest on NR 150,000
receivables. Adv. To Officers & Emp. 100,000

Dividends Receivable 250,000

However, the details of the total Total Trade & other 6,300,000
Receivables
trade and other receivables shall
be disclosed in the notes to
financial statements.

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Examples of Nontrade Receivables
1. Advances to or receivables from shareholders, directors, officers or
employees
 Current asset – collectible in one year.
 Noncurrent asset - if otherwise.
2. Advances to affiliates
 usually treated as long-term investments.
3. Advances to supplier
 Current asset
4. Subscription receivable
 Current asset - collectible in one year
 Deduction from Subscribed share capital – if otherwise

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 Examples of Nontrade Receivables
5. Creditor’s debit balances
 Current asset
 Deducted to creditor’s credit balances - if material
6. Special Deposits on contract bids
 Normally classified as noncurrent
 Current asset if collectible within the year
7. Accrued Income
 Current asset
8. Claims Receivable
 Current asset

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 Customers’ credit balance
Customers' credit balances 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 and are not offset
against the debit balances in other customers’ accounts, except when the
same is not material in which case only the net accounts receivable may be
presented.

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 Initial Measurement
accounts receivable shall be measured initially at face amount or original
invoice amount

Subsequent Measurement
after initial recognition, accounts receivable shall be measured at amortized
cost. The amortized cost is actually 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

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 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 accounts

receivable, the following deductions are made:
✘ Allowance for freight charge
✘ Allowance for sales return
✘ Allowance for sales discount
✘ Allowance for doubtful accounts

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Terms related to Freight charge
 FOB Shipping Point
– means that ownership of the goods purchased is vested in the buyer
upon shipment
 FOB Destination
‒ means that ownership of the goods purchased is vested in the buyer
upon receipt
 Freight Collect
‒ means that freight charge on the goods shipped is not yet paid. Thus,
under this, the freight charge is actually paid by the buyer.
 Freight Prepaid
‒ means that freight charge on the goods shipped is already paid by the
seller
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 Allowance for Sales Returns
The measurement of accounts receivable shall also recognize the probability
that some customers will return goods that are unsatisfactory or will make
other claims requiring reduction in the amount due as in the case of shipment
shortages and defects.

Sales discount
Entities usually offer cash discounts to credit customers, A cash discount is a
reduction from an invoice price by reason of prompt payment.
A cash discount is known as sales discount on the part of the seller and a
purchase discount on the part of the buyer.

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Methods of Recording Credit Sales
1. Gross Method
‒ the accounts receivable and sales are recorded at gross
amount of the invoice. This is the common and widely used
method because it is simple to apply.
2. Net Method
‒ the accounts receivable and sales are recorded at net amount
of the invoice, meaning the invoice price minus the cash
discount.

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 Allowance for Sales Discount
If customers are granted cash discounts for prompt payment, then,
conceptually estimates of cash discounts on open accounts at the
end of the period based on past experience shall be made.

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 Accounting for Bad Debts
Business entities sell on credit rather than only for cash to increase
total sales and thereby increase income.
However, an entity that sells on credit assumes the risk that some
customers will not pay their accounts.
When an account becomes uncollectible, the entity has sustained a
bad debt loss. This is one of the costs of doing business on credit.

Two methods are followed in accounting for this bad debt loss, namely:
1. Allowance method
2. Direct writeoff method

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 Accounting for Bad Debts
1. Allowance method
- requires recognition of bad debt loss if the accounts are doubtful
of collection.

2. Direct writeoff method

- requires recognition of bad debt loss only when the accounts
proved to be worthless or uncollectible.

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Doubtful accounts in the income statement
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.

Administrative expense
‒ If the granting of credit and collection of accounts are under the
charge of an officer other than sales manager, doubtful accounts shall
be considered as administrative expense.
‒ In the absence of any contrary statement, doubtful accounts shall be
classified as administrative expense.
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Methods of Estimating Doubtful
Accounts
1. Aging the accounts receivable or “statement of financial
position approach”
2. Percent of accounts receivable or also “statement of
financial position approach”
3. Percent of sales or “income statement approach"

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 Aging of accounts receivable
The aging of accounts receivable involves an analysis where the
accounts are classified into due or past due.
✘ Not due ✘ 91 to 120 days past due
✘ 1 to 30 days past due ✘ 121 to 180 days past due
✘ 31 to 60 days past due ✘ 181 to 365 days past due
✘ 61 to 90 days past due ✘ More than 1 year past due

The allowance is then determined by multiplying the total of each

classification by the rate or percent of loss experienced by the entity for
each category

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 Percent of accounts receivable
A certain rate is multiplied by the open accounts at the end of the
period in order to get the required allowance balance.
The rate used is usually determined from past experience of the entity.
This procedure has the advantage of presenting the accounts
receivable at estimated net realizable value. The approach is also
simple to apply.

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 Percent of Sales
The amount of sales for the year is multiplied by a certain rate to get.
the doubtful accounts expense. The rate may be applied on credit sales
or total sales.

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END

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