Accounts Receivable

Accounts
Receivable
ACCOUNTS RECEIVABLE
Receivables - financial assets that represent a contractual right to

receive cash or another financial asset from another entity
FINANCIAL INSTRUMENT
FINANCIAL LIABILITY
FINANCIAL ASSET (1) contractual obligation to

deliver cash or another
(1) cash financial asset to another entity
(2) contractual right to (2) contractual obligation to

receive cash or another exchange financial assets or
financial asset liabilities under potentially
unfavorable conditions
(3) contractual right to
exchange financial asset of OR
another entity under
EQUITY SECURITY
potentially favorable
conditions ownership interest in another
entity in the form of ordinary
(4) Equity instrument of shares, preference shares and
another entity rights or options to acquire
ownership shares
ACCOUNTS RECEIVABLE
Receivables - financial assets that represent a contractual right to

receive cash or another financial asset from another entity
FINANCIAL INSTRUMENT
FINANCIAL LIABILITY
FINANCIAL ASSET (1) accounts payable; notes

payable
(1) cash
(2) contractual obligation to
(2) accounts receivable, exchange financial assets or
liabilities under potentially
notes receivable, loans
unfavorable conditions
receivable
OR
(3) share options
EQUITY SECURITY
(4) Investment in shares
share capital
ACCOUNTS RECEIVABLE
BASIC ENTRIES – MERCHANDISING BUSINESS
ACCOUNTS RECEIVABLE
Classification and Financial Statement Presentation of Receivables
1. TRADE RECEIVABLES
- arise from the sale of goods and or services
- are classified as CURRENT if collectible within 1 year from the cut-off
reporting date, or within the normal operating cycle, whichever is
longer
2. NONTRADE RECEIVABLES
- arise from sources other than from the sale of goods and or services
- are classified as CURRENT if collectible within 1 year from the cut-off
reporting date, the length of the operating cycle notwithstanding
Illustration:
The following receivables were outstanding as at 12/31/2020:
Accounts receivable 1,000,000
Note receivable (from sale of goods) – due on Feb 1, 2022 2,000,000
Receivable from officers – due on Feb 1, 2022 3,000,000
Advances to suppliers 1,500,000
Normal operating cycle = 15 months
REQUIRED: Determine the amount of receivables to be presented as current assets under

the line item “trade and other receivables”
ACCOUNTS RECEIVABLE
Classification and Financial Statement Presentation of Receivables
Illustration:
The following receivables were outstanding as at 12/31/2020:
Receivable from officers – due on Feb 1, 2022 3,000,000
Normal operating cycle = 15 months
REQUIRED: Determine the amount of receivables to be presented as current assets under

the line item “trade and other receivables”
ANSWER:

Trade and other receivables, 12/31/2020 4,500,000
ACCOUNTS RECEIVABLE
Classification Rules Related to Nontrade Receivables
ACCOUNTS RECEIVABLE
Rules on customers’ accounts with credit balances
1. Customers’ credit balances resulting from overpayments, returns and allowances, and
advance payments from customers are classified as current liabilities and are not offset
against customers’ accounts with debit balances.
2. Alternatively, the same can be offset against other customers’ accounts with debit
balances if the amount is immaterial.
Illustration: The following customer – ledger balances were available as at December 31,
2020:
Required:
Determine the amount of
accounts receivable to be
presented among current
assets at year-end.
ANSWER: Php 70,000

(The credit balance is shown
as a current liability)
ACCOUNTS RECEIVABLE
Illustrative Problem on
Classification of Receivables:
HEY-HOUR Co. reported the “Receivables” account with a debit balance of P2,000,000 at
year end. The allowance for doubtful accounts had a credit balance of P50,000 as at the
same date. Subsidiary details revealed the following items comprising the balance of the
Receivables account:
Trade accounts receivable 775,000

Trade notes receivable 100,000
Installments receivable, normally due in 1 year to 2 years 300,000
Customers’ accounts reporting credit balances arising from
sales return (30,000)
Advance payments for purchases of merchandise 150,000
Customer’s accounts reporting credit balances arising from
advance payments (20,000)
Cash advance to subsidiary 400,000
Claim from insurance entity 15,000
Subscription receivable due in 60 days 300,000
Accrued interest receivable 10,000
Total 2,000,000
REQUIRED:
a. Prepare one compound entry to reclassify the receivables account.
b. Compute the amount to be presented as “trade and other receivables” under current
assets.
c. Indicate the classification and presentation of the other items excluded from “trade and
other receivables”.
ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE
HEY HOUR Co. provided the following T-account summarizing the transactions affecting the
accounts receivable for the current year:
REQUIRED:
a. Compute the correct amount of accounts receivable.
b. Prepare one compound entry to adjust the accounts receivable account.
c. Compute the amount to be presented as “trade and other receivables” under current
assets.
d. Indicate the classification and presentation of the other items excluded from “trade and
other receivables”.
ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE
Measurement of Accounts Receivable:
a. Initial – face amount or original invoice amount (fair value)
b. Subsequent – net realizable value (amortized cost)
Net realizable value

The net realizable value of accounts receivable is the outstanding face amount of the
receivables reduced by (1) allowance for freight charge; (2) allowance for sales return; (3)
allowance for sales discount; and (4) allowance for doubtful accounts
ACCOUNTING For FREIGHT CHARGE
FREIGHT refers to the cost incurred in transporting goods from one location to the other. The
Freight – in account is used if the buyer is legally responsible for the freight while the Freight
out account is used if the responsibility rests with the seller.
FREIGHT TERMINOLOGIES
(a) On ownership
FREIGHT on BOARD (FOB) Shipping Point – ownership over the goods is transferred to the
buyer at the point of shipment
FOB Destination Point - ownership over the goods is transferred to the buyer at the time the
goods reach the buyer’s place of business
(b) On the payment the freight

Freight Prepaid – freight charge on the goods shipped was already paid by the seller
Freight Collect – freight charge on the goods shipped will be collected by the carrier from
the buyer
ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE
Illustrative Problem:
FR8 Co. sold merchandise on account for P500,000. The terms are 3/10, n/30. The related
freight charge amounted to P10,000/ The account was collected within the discount
period.
REQUIRED:
Prepare journal entries to record the transactions under the following freight terms:
1. FOB destination, freight prepaid
2. FOB shipping point, freight collect
3. FOB shipping point, freight prepaid
4. FOB destination, freight collect
CASE 1: FOB Destination, Freight Prepaid CASE 2: FOB Shipping Point, Freight Collect
Entry upon sale:
Accounts receivable 500,000
Entry upon sale:
Freight out 10,000 Accounts receivable 500,000
Sales 500,000 Sales 500,000
Cash 10,000
Entry upon collection (within the discount period):
Entry upon collection (within the discount period): Cash 485,000
Cash 485,000 Sales discount 15,000
Sales discount 15,000 Accounts receivable 500,000
Entry upon collection (beyond the discount period):
Entry upon collection (beyond the discount period): Cash 500,000
Cash 500,000 Accounts receivable 500,000
ACCOUNTS RECEIVABLE
FR8 Co. sold merchandise on account for P500,000. The terms are 3/10, n/30. The related
freight charge amounted to P10,000/ The account was collected within the discount
period.
REQUIRED:
Prepare journal entries to record the transactions under the following freight terms:
1. FOB destination, freight prepaid
2. FOB shipping point, freight collect
3. FOB shipping point, freight prepaid CASE 4: FOB Destination , Freight Collect
4. FOB destination, freight collect
Entry upon sale:
CASE 3: FOB Shipping Point , Freight Prepaid Accounts receivable 500,000
Freight out 10,000
Entry upon sale: Sales 500,000
Accounts receivable 510,000 Allowance for freight charge 10,000
Sales 500,000
Cash 10,000 Entry upon collection (within the discount period):
Cash 475,000
Entry upon collection (within the discount period): Allowance for freight charge 10,000
Cash 495,000 Sales discount 15,000
Sales discount 15,000 Accounts receivable 500,000
Entry upon collection (beyond the discount period):
Entry upon collection (beyond the discount period): Cash 490,000
Cash 510,000 Allowance for freight charge 10,000
Accounts receivable 510,000 Accounts receivable 500,000
ACCOUNTS RECEIVABLE
Accounting for Allowances for Sales Return

and Sales Discount
Illustrative Problem
AR-AR Co. records sales return during the year as a credit to accounts receivable.
However, at the end of the accounting period, the entity estimates the probable sales
return and records the same by means of an allowance account. The following
transactions occurred in summary form:
1. Sale of merchandise on account, 2/10. n/30 4,000,000

2. Collection within the discount period 1,470,000
3. Collection beyond the discount period 1,000,000
4. Sales return granted 100,000
5. Sales return estimated at the end of the year 20,000
REQUIRED:
Entries to record the transactions
ACCOUNTS RECEIVABLE
Accounting for Allowances for Sales Return
and Sales Discount
Illustrative Problem
AR-AR Co. records sales return during the year as a credit to accounts receivable. However, at the end of
the accounting period, the entity estimates the probable sales return and records the same by means of
an allowance account. The following transactions occurred in summary form:
1. Sale of merchandise on account, 2/10. n/30 4,000,000

2. Collection within the discount period 1,470,000
3. Collection beyond the discount period 1,000,000
4. Sales return granted 100,000
5. Sales return estimated at the end of the year 20,000
REQUIRED:
Entries to record the transactions
ACCOUNTS RECEIVABLE
Methods of Recording Credit Sales

1. Gross Method – The accounts receivable and sales are recorded at the gross amount of
the invoice (before deducting any offered cash discount)
2. Net Method – The accounts receivable and sales are recorded at the net amount of the
invoice (after deducting any offered cash discount)
Types of Discounts
1. Trade discount – refer to discounts that are offered to encourage transactions in high
volume (sales or purchases in bulk) and/or to reward customer patronage
2. Cash discount – pertain to discounts that are offered to encourage prompt

collection/payment of accounts
DISH-Count Co. had the following transactions during the month of July:
July 01 Sold merchandise to A Co. for P50,000, 2/10, n/30.
02 Sold merchandise to B Co. for P200,000, 2/10, n/30
12 Received payment from B Co. for the July 2 sale.
30 Received payment from A Co. for the July 1 sale.
Required:
a. Journal entries under the gross method
b. Journal entries under the net method
ACCOUNTS RECEIVABLE
DISH-Count Co. had the following transactions during the month of July:
July 01 Sold merchandise to A Co. for P50,000, 2/10, n/30.
02 Sold merchandise to B Co. for P200,000, 2/10, n/30
12 Received payment from B Co. for the July 2 sale.
30 Received payment from A Co. for the July 1 sale.
Required:
a. Journal entries under the gross method
b. Journal entries under the net method
ACCOUNTS RECEIVABLE
Accounting for Doubtful Accounts
ACCOUNTS RECEIVABLE
Classification of Doubtful Accounts in the Income Statement

1. Distribution cost (selling expense) – if the credit and collection function is under the
charge of the sales department
2. Administrative expense – if the credit and collection function is under the charge of a
department other than the sales department
ACCOUNTS RECEIVABLE
Illustrative Problem No. 1
GOOD DETZ Co. reported the following information before adjustments at year-end:

Notes receivable 200,000
Allowance for doubtful accounts 20,000
Sales 5,000,000
Sales returns and allowances 30,000
Sales discount 20,000
Required:
Prepare the adjusting entry to provide for doubtful accounts under each of the following
independent assumptions:
1. Past experience indicates that 75% of all sales are credit sales and that an average 2%
of credit sales may prove uncollectible.
2. One percent of gross sales may prove uncollectible
3. An analysis of the aging of trade receivables indicates that accounts receivable in the
amount of P80,000 may prove uncollectible
4. The policy is to maintain an allowance for doubtful accounts equal to 10% of the
outstanding accounts receivable.
ACCOUNTS RECEIVABLE

Sales 5,000,000
Required:
1. Past experience indicates that 75% of all sales are credit sales and that an average 2%
of credit sales may prove uncollectible.
ACCOUNTS RECEIVABLE

Sales 5,000,000
Required:
2. One percent of gross sales may prove uncollectible
ACCOUNTS RECEIVABLE
Illustrative Problem No.1

Sales 5,000,000
Required:
3. An analysis of the aging of trade receivables indicates that accounts receivable in the
amount of P80,000 may prove uncollectible
ACCOUNTS RECEIVABLE

Sales 5,000,000
Required:
4. The policy is to maintain an allowance for doubtful accounts equal to 10% of the
outstanding accounts receivable.
ACCOUNTS RECEIVABLE

Sales 2,000,000
Required:
1. Five percent of accounts receivable may prove uncollectible.
2. Aging shows that P50,000 of gross accounts receivable may prove uncollectible.
3. Two percent of net sales may prove uncollectible

ACCOUNTS RECEIVABLE

Sales 2,000,000
Required:
1. Five percent of accounts receivable may prove uncollectible.
ACCOUNTS RECEIVABLE

Sales 2,000,000
Required:
2. Aging shows that P50,000 of gross accounts receivable may prove uncollectible.
ACCOUNTS RECEIVABLE

Sales 2,000,000
Required:
3. Two percent of net sales may prove uncollectible
ACCOUNTS RECEIVABLE
Sales 8,000,000
Allowance for doubtful accounts – January 1 100,000
Accounts written off 130,000
Recovery of accounts previously written off 20,000
Required:
1. Percentage of sales – The estimate is 3%.

2. Percentage of accounts receivable – The estimate is 8%.
3. Aging – The estimate is P200,000.
ACCOUNTS RECEIVABLE
Sales 8,000,000
Required:
1. Percentage of sales – The estimate is 3%.
ACCOUNTS RECEIVABLE
Sales 8,000,000
Required:
2. Percentage of accounts receivable – The estimate is 8%.
ACCOUNTS RECEIVABLE
Sales 8,000,000
Required:
3. Aging – The estimate is P200,000.
ACCOUNTS RECEIVABLE
On January 01, 2020, GOOD DETZ Co. showed the following account balances: Accounts
receivable = P 1,000,000 and Allowance for doubtful accounts = P 40,000.
The following summary transactions occurred during the current year:
1. Sales on account 2/30, n/30 7,000,000

2. Collections from customers within the discount period 2,450,000
3. Collections from customers beyond the discount period 3,900,000
4. Accounts receivable written off as worthless 30,000
5. Recovery of accounts previously written off as worthless 10,000
6. Credit memo for sales return 70,000
Required:
1. Prepare journal entries pertaining to accounts receivable
ACCOUNTS RECEIVABLE
On January 01, 2020, GOOD DETZ Co. showed the following account balances: Accounts receivable = P
1,000,000 and Allowance for doubtful accounts = P 40,000.
The following summary transactions occurred during the current year:

1. Sales on account 2/30, n/30 7,000,000
2. Collections from customers within the discount period 2,450,000
3. Collections from customers beyond the discount period 3,900,000
5. Recovery of accounts previously written off as worthless 10,000
6. Credit memo for sales return 70,000
Required:
2. Adjusting entry for doubtful accounts (if the entity uses the % of AR method consistently).
3. Net realizable value of AR as at 12/31/2020
ACCOUNTS RECEIVABLE
HEY-OUR Co. reported the following balances on January 1, 2020: Accounts receivable - P 600,000; and
Allowance for doubtful accounts – P25,000.
The following transactions took place in the current year:

1. Sales – cash and credit 3.070,000
2. Cash received from credit customers 2,455,000
3. Cash received from credit customers who took advantage of the 3/10, n/30
credit terms (included in No. 2) 1,455,000
5. Cash received from cash customers 470,000
6. Credit memo for sales return and allowances issued to credit customers 55,000
7. Cash refunds to cash customers 10,000
8. Recoveries of accounts written off, not included in above collections 5,000
REQUIRED:
1. Journal entries to record the transactions.
ACCOUNTS RECEIVABLE

REQUIRED:
2. Adjusting entry for doubtful accounts ( 2% of net credit sales)
3. Net realizable value of AR as at 12/31/2020.
ACCOUNTS RECEIVABLE

REQUIRED:
3. Net realizable value of AR as at 12/31/2020.
ACCOUNTS RECEIVABLE
On January 01, 2020, HEY HOUR Company reported that the allowance for doubtful accounts has a credit
balance of P170,000. Bad debt recoveries and bad debts written off in the current year were P30,000 and
P235,000, respectively.
The allowance account had been previously calculated as a percentage of net sales. It was decided
however to provide for doubtful accounts commencing with the December 31, 2020 adjusting entry on
the basis of an analysis of the age of the receivables. The following schedule was prepared:
Age Amount Percent Uncollectible

Not yet due 1,700,000 NIL
1-30 days past due 1,200,000 5
31-60 days past due 100,000 25
61-90 days past due 150,000 50
Over 90 days past due 120,000 100
Additional accounts to be written off 30,000
REQUIRED:
1. Required allowance for doubtful accounts on December 31, 2020 (aging)
2. Doubtful accounts expense for 2020
3. Adjusting entry for doubtful accounts for 2020
4. Net realizable value of AR as at December 31, 2020
ACCOUNTS RECEIVABLE

1-30 days past due 1,200,000 5
31-60 days past due 100,000 25
61-90 days past due 150,000 50
REQUIRED:
1. Required allowance for doubtful accounts on December 31, 2020 (aging)
ACCOUNTS RECEIVABLE

1-30 days past due 1,200,000 5
31-60 days past due 100,000 25
61-90 days past due 150,000 50
REQUIRED:
2. Doubtful accounts expense for 2020
3. Adjusting entry for doubtful accounts for 2020
4. Net realizable value of AR as at December 31, 2020

Accounts Receivable

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Accounts Receivable

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Accounts

Receivables - financial assets that represent a contractual right to

FINANCIAL ASSET (1) contractual obligation to

(2) contractual right to (2) contractual obligation to

Receivables - financial assets that represent a contractual right to

FINANCIAL ASSET (1) accounts payable; notes

Classification and Financial Statement Presentation of Receivables

REQUIRED: Determine the amount of receivables to be presented as current assets under

Classification and Financial Statement Presentation of Receivables

REQUIRED: Determine the amount of receivables to be presented as current assets under

Accounts receivable 1,000,000

Rules on customers’ accounts with credit balances

ANSWER: Php 70,000

Trade accounts receivable 775,000

b. Prepare one compound entry to adjust the accounts receivable account.

Net realizable value

ACCOUNTING For FREIGHT CHARGE

(b) On the payment the freight

Accounting for Allowances for Sales Return

1. Sale of merchandise on account, 2/10. n/30 4,000,000

1. Sale of merchandise on account, 2/10. n/30 4,000,000

Methods of Recording Credit Sales

2. Cash discount – pertain to discounts that are offered to encourage prompt

Classification of Doubtful Accounts in the Income Statement

Accounts receivable 500,000

2. One percent of gross sales may prove uncollectible

Accounts receivable 500,000

Accounts receivable 500,000

Accounts receivable 500,000

Accounts receivable 500,000

Accounts receivable 600,000

1. Five percent of accounts receivable may prove uncollectible.

3. Two percent of net sales may prove uncollectible

Accounts receivable 600,000

Accounts receivable 600,000

Accounts receivable 600,000

1. Percentage of sales – The estimate is 3%.

The following summary transactions occurred during the current year:

1. Sales on account 2/30, n/30 7,000,000

The following summary transactions occurred during the current year:

The following transactions took place in the current year:

The following transactions took place in the current year:

The following transactions took place in the current year:

Age Amount Percent Uncollectible

Age Amount Percent Uncollectible

Age Amount Percent Uncollectible

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