ACCOUNTS

RECEIVABLE
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 4: Accounts Receivable

■ After studying this chapter, one should be able to:

a.) To know the classification and presentation of the receivables.
b.) To know the initial and subsequent measurement of accounting receivables.
c.) To identify the adjustments necessary in determining the net realizable value
of accounts receivable.
d.) To understand the gross method and net method of recording credit sales.
e.) To know the accounting for doubtful accounts, worthless accounts written off
and recoveries of accounts written off.
Definition:
Receivables are FINANCIAL ASSETS that
represent a contractual right to receive
cash or another financial asset from
another entity.
Types:
a . ) Tr a d e Re c e i va b l e s – c l a i m s a r i s i n g f ro m t h e s a l e o f
merchandise or services in the ordinary course of business. These
claims are classified as current assets because they are expected
to be realized in cash within the normal operating cycle or one year,
whichever is longer.

b.) Non Trade Receivables – claims arising from sources other than
the sale of merchandise or services in the ordinary course of
business. These claims are classified as current assets when they
are expected to be realized in cash within one year
notwithstanding the length of the operating cycle. Otherwise they
are classified as noncurrent assets.
Trade Receivables:
Ø Accounts Receivables – open accounts or those are
not supported by promissory notes.
(customers’ accounts, trade debtors, and trade
accounts receivables)

Ø Notes Receivables – supported by formal

promises to pay in the form of notes.

Ø Loans Receivables – for banks and other

financial institutions, receivables result primarily
from loans to customers.
Classification:
Ø Trade Receivables
- Current Assets
- Realized in cash within the normal
operating cycle or one year, whichever is longer.
v Account Receivable – Current Asset
v Notes Receivable – within one year – Current Asset
- beyond one year – Non Current
Asset
Classification:
Ø Non Trade Receivables
Current Assets – realized in cash within
one year, the length of the operating cycle
nothwithstanding.
Non Current Assets – collectible within one
year.
Presentation:
Trade and Non trade receivables which are
currently collectible shall be presented on the
face of the statement of financial position as
o n e l i n e i t e m c a l l e d Tr a d e a n d O t h e r
Receivables.
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.
2. Advances to affiliates/subsidiaries– usually treated as noncurrent
assets
3. Advances to supplier for acquisition of merchandise – current asset
4. Subscription receivable – current assets if collectible within one year.
Otherwise, they are shown as a deduction from subscribed share
capital
5. Creditors’ accounts with debit balances – results from overpayment or
returns and allowances. Classified as current assets.
Examples of Nontrade Receivables:
6. Special deposits on contract bids – classified as either current or
noncurrent assets depending on the collectability
7. Accrued Income (dividends receivable, accrued rent income, interest)
8. Claims receivable (insurance (fire): receivable from insurance, tax
refund (receivable from BIR)
Customer’s Credit Balance
Customer’s 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.
Initial Measurement
PFRS 9, paragraph 5.1.1 provides that a financial asset
shall be recognized initially at fair value plus transaction costs
that are directly attributable to the acquisition.
Fair Value = Transaction price (FV of the consideration
given)
Accounts Receivable shall be measured initially at face
amount or original invoice amount.
Subsequent Measurement
In accordance with PFRS 9, paragraph 5.2.1, after initial
recognition. Accounts receivable shall be measured at amortized cost.
Amortized Cost = Net Realizable Value
The net realizable value of accounts receivable is the amount of
cash expected to be collected or the estimated recoverable amount.
Accounts Receivable
Less:
Allowance for doubtful accounts (non-collection)
Allowance for sales returns (defective)
Allowance for sales discounts (discounts)
Net Realizable Value
Shipping Terms
In order to give proper accounting recognition to freight charge in relation to accounts
receivable, the following terms should be understood – FOB Destination, FOB Shipping
Points, freight collect and freight prepaid.
FOB Destination – ownership of the goods purchased is vested in the buyer upon
receipt thereof
- seller shall be responsible for the freight charge up to the point of
destination
FOB Shipping Point – ownership of the goods purchased is vested in the buyer upon
shipment thereof
- incumbent upon the buyer to pay for the transportation charge
from the point of shipment to the point of destination
Freight (Delivery Charge)
General rule: Owner of the goods pay for the freight.
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid already by the seller; seller pays the freight

(Upon Shipment)
Freight Collect Freight Prepaid
FOB Shipping Point no problem **
FOB Destination ** no problem
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.
For example, an amount of P50,000 of the total accounts receivable
at year end represents selling price of goods that will probably returned.
The journal entry to recognize the probable return is:
Sales return 50,000
Allowance for sales return 50,000
 Allowance for Sales Discounts
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 also known as sales discount on the part of the seller and a
purchase discount on the part of the buyer.
A cash discount may be expressed as 5/10, n/30. This means that the
customer is entitled to a 5% discount if the payment is made in 10 days from the invoice
date.
If the customer fails to pay within the 10 day – discount period, the gross
amount of the invoice price must be paid within 30 days from the invoice date.
Methods of recording credit sales
a. Gross Method – The accounts receivable and sales are recorded at gross
amount of the invoice. This is the common and widely used method.
Illustration:
1. Sale of merchandise for P100,000 terms 5/10, n/30.
Accounts Receivable 100,000
Sales 100,000

2. Assume collection is made within the discount period.

Cash 95,000
Sales discount 5,000
Accounts Receivable 100,000

3. Assume collection is made beyond the discount period.

Cash 100,000
Accounts Receivable 100,000
Methods of recording credit sales
b. Net Method – The accounts receivable and sales are recorded at
net amount of the invoice, meaning the invoice price minus the
cash discount.
Illustration:
1. Sale of merchandise for P100,000 terms 5/10, n/30.
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 (Other income)
Allowance for Sales Discounts
If customers are granted cash discounts for prompt payments, then
conceptually estimates of cash discounts on open accounts at the end of
the period based on past experience shall be made.
For example, of the accounts receivable of P1,000,000 at the end of
the period, it is reliably estimated that discounts to be taken will amount
to P50,000.
The adjustment to record the expected sales discount is:
Sales discount 50,000
Allowance for sales discount 50,000
Accounting for Bad Debts
Methods followed in accounting for this bad debt loss:
(1) Allowance Method
(2) Direct writeoff Method
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 loss simply one of the cost of doing business on
credit.
Allowance Method
Requires recognition of a bad debt loss if the accounts are
doubtful of collection.

o To recognize doubtful accounts:

Doubtful accounts/bad debts expense xx

Allowance for doubtful accounts xx

o Doubtful accounts subsequently found to be worthless:

Allowance for doubtful accounts xx

Accounts receivable xx
Allowance Method
Generally accepted accounting principles require the use of the
allowance method because it conforms with the matching principle.

Moreover, accounts receivable would be properly measured at net

realizable value.
Shipping Terms
Freight (Delivery Charge) General rule: The owner pays the freight or delivery charge
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid by the seller; seller pays the freight
FOB Collect FOB Prepaid
FOB Shipping Point (buyer) ok **
FOB Destination (seller) ** ok
Shipping Terms
Freight (Delivery Charge) General rule: The owner pays the freight or delivery charge
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid by the seller; seller pays the freight
FOB Collect FOB Prepaid
FOB Shipping Point (buyer) ok **
FOB Destination (seller) ** ok
Recoveries of accounts written off
If collection is made on account previously written off as
uncollectible, the customary procedure is first to recharge the
customer’s account with the amount collected and possibly
with the entire amount previously charged off if it is now
expected that collection will be received in full.
The collection is then recorded normally by debiting cash
and crediting accounts receivable.
The recharging of the customer’s account is usually
followed because it is an evidence of the attempt of the
customer to reestablish his credit with the entity.
Recoveries of accounts written off (cont.)

What account should be credited when the customer’s

account is recharged?

The generally accepted approach is to simply reverse the

original entry of the writeoff regardless of whether the recovery
is during the year of writeoff or subsequent thereto.
Direct Writeoff Method

This method requires recognition of a bad debt loss only

when the accounts proved to be worthless or uncollectible.
Worthless accounts are recorded by debiting bad debts
and crediting accounts receivable. If the accounts are only
doubtful of collection, no adjustment is necessary.
 Allowance Method Direct Write Off
1. Estimation of Doubtful Accounts 1. Estimation of Doubtful Accounts
Doubtful Accounts xx No Entry
Allowance for DA xx

2. Write Off 2. Write Off

Allowance for DA xx Doubtful Accounts xx
Accounts Receivable xx Accounts Receivable xx

3. Recovery 3. Recovery
Accounts Receivable xx Accounts Receivable xx
Allowance for DA xx Doubtful Accounts xx

4. Collection 4. Collection
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
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.

2. Administrative Expense – if the granting of credit and

collection of accounts are under the charge of an officer
other than the sales manager.

In the absence of any contrary statement, doubtful accounts

shall be classified as administrative expense.