Chapter 7

RECEIVABLES

Week 7/8
BKAR1013

1
 Learning Objectives
1. Define receivables and identify the different types of
receivables.
2. Explain accounting issues related to recognition,
measurement and valuation of accounts receivable and
notes receivable.
3. Explain the assignment and factoring of receivables.

2
 Section 1
Definition, Recognition
and Measurement of
Receivables

3
Receivables -Definition

• Amounts due from individuals and

companies.
• Types of receivables:
Accounts receivable
Notes receivable
Other receivables

4
Accounts Receivable
• Receivables associated with the normal operating
activities of a business.
-e.g. Credit sales of goods & services to customers
• Expected to be collected generally within 30 to 90
days.
• Most significant type of claim held by company.
• Also called trade receivables.

5
 Notes Receivable
Receivables that are evidenced by a formal written promise to pay a
certain sum of money at a specified date

Normally requires payment of interest and extends for time periods

of 60-90 days or longer

Notes receivables give holder a stronger legal claim to assets than

accounts receivable

Promissory note is a negotiable instrument and may be transferred

to another party by endorsement

6
Other Receivables
• Non-trade receivable

• Include all other types of receivable

• Arise from a variety of transactions

• E.g. Sale of property, advances to directors &
employees, claim for losses or damages.

7
Accounts Receivable – Issues
Recognition and valuation of accounts
receivable

√Cash discounts
√Trade discounts
√ Sales returns and allowances
√ Valuation of trade debtors

8
Accounts Receivable: RECOGNITION
Recognizing accounts receivable
 Accounts receivable generally arise as part of a revenue arrangement.
 The revenue recognition principle indicates that a company should
recognize revenue when it satisfies its performance obligation by
transferring the good or service to the customer.
 MFRS 15 Revenue from contracts with customers prescribes the five-step
process of revenue recognition which is as follow:
i. Identify contract with customer
ii. Identify separate performance obligations in the contract;
iii. Determine the transactions price;
(transaction price is the amount of consideration that a company
expects to receive from a customer in exchange for transferring a good
or service).
iv. Allocate the transaction price to the separate performance
obligations; and
v. Recognise revenue when each performance obligation is satisfied. 9
Illustration : Assumes that Airbus signs a contract to sell airplanes to
Malaysia Airlines for RM50 million and the processes to recognise the
revenue are as follow

10
Accounts Receivable: RECOGNITION

Journal entry for credit sales

DR Accounts Receivable RMXXX
CR Sales RMXXX
(to record credit sales of RMXXX)

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Cash Discounts ( or Sales Discounts)

 Offered to induce prompt

payment.
 Terms such as 2/10, n/30,
2/10, E.O.M., or net 30,
Payment
E.O.M. terms are
 Gross Method vs. Net 2/10, n/30
Method.

LO 2
RECORDING DISCOUNTS
There are two methods of recording discounts:

(1) Gross method records sales discounts when taken

by customers.

(2) Net method records the sale at net price

13
RECORDING DISCOUNTS
(cont’d)
Gross Method Net Method
• Record revenue at gross • Record revenue at gross
amount of sales amount of sales less cash
• When customer takes the discount
discount, record cash • When customer forfeits
discounts discount, record discounts
• Cash discounts reduce gross not taken
sales revenue
• Report discounts forfeited
as other revenue

14
Sales discount (Gross method)
• Example: if the sales invoice of RM100 include the
credit terms “2/10, net 60 days” -> 2% cash
discount on gross invoiced amount is given if pays
within 10 days.
• Using the Gross method the transaction would be
recorded as follows:
A) At date of sale:
Dr Accounts Receivable 100
Cr Sales 100

15
Sales discount (Gross method)-cont’d

B) Payment received within discount period:

Dr Cash 98
Dr Cash Discount on Sales 2
Cr Accounts Receivable 100
C) Payment received after discount period:

Dr Cash 100
Cr Accounts Receivable 100

16
 Net Method:
A) At point of sale:
Dr. Accounts Receivable 98
Cr. Sales 98

B) Payment received within discount period:

Dr. Cash 98
Cr. Accounts Receivable 98

C) Payment received after discount period:

Dr. Cash 100
Cr. Accounts Receivable 98
Discount forfeited 2
17
Trade discounts

• Trade (quantity) discounts are not recorded.

Invoiced at the amount net of the trade discount
(net method).
• e.g.: The quoted price of RM100 and a trade
discount of 10% resulted in sales and debtor
amount recorded at RM90.

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Comparison between sales discounts and trade
discounts

19
 Illustration :
• Suppose James purchased goods from Ali of the list
price of RM5,000, on 1 April 2018. Ali allowed 10%
discount to James on the list price, for purchasing
goods in bulk quantity. Further, a discount of RM
200 was allowed to him, for making immediate
payment.

Prepare the journal entries for the above

transaction for James.

20
Answer:
• Dr Purchases/Inventory RM 4,500
Cr Cash Discount 200
Cash 4,300
(Being goods purchased worth RM5,000 with trade
discount of RM500 and cash discount of RM200).

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Sales returns & allowances

• Allowances are to be made for:

Goods that are returned by customers,
and/or goods that are damaged during
shipment, spoiled or defective goods, or
shipment of an incorrect quantity or type
of goods.
Impact: Net sales and accounts receivable
are reduced.
Sales returns and allowances is a contra
revenue account to Sales Revenue.

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Illustration: Sales returns & allowances

Assume that books A costing RM700 are sold and

shipped to customer B for RM1,200. Buyer calls to
inform that Book C were actually ordered. Buyer
agrees to accept the goods if a reduction in price is
given. The company allows an allowance of RM250.

• Prepare the journal entries for the transactions.

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Answer: Sales returns & allowances
The entry to record the sales returns and allowances:

Dr Sales returns and allowances 250

Cr Accounts receivable 250

• If buyer returns the goods, the entry will be:

Dr Sales returns and allowances 1,200

Cr Accounts receivable 1,200
Dr Inventory 700
Cr Cost of goods sold 700

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VALUATION OF ACCOUNTS RECEIVABLE
• For short-lived debts such as trade receivables on
normal commercial term, the carrying amount is
the amount of debts less any allowances for
doubtful debts.
• Short term accounts receivable are shown at their
net realizable value as follows:
RM
Accounts Receivable (gross) XXX
Less: Allowance for doubtful debts (XX)
Net realizable value XXXX

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 Valuation of Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Method Allowance Method

Theoretically deficient: Losses are estimated:
 Fails to record expenses as  Percentage-of-sales.
incurred.  Percentage-of-receivables.
 Receivable not stated at  IFRS requires when bad
cash realizable value. debts are material in
 Not appropriate when amount.
amount uncollectible is
material.

LO 3
Valuation of Accounts Receivable

Direct Write-Off Method for Uncollectible

Accounts
When a company determines a particular account to be
uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Ltd. writes off
as uncollectible Yusado’s NT$8,000,000 balance. The entry is:
Bad Debt Expense 8,000,000
Accounts Receivable (Yusado) 8,000,000

LO 3
Valuation of Accounts Receivable

Allowance Method for Uncollectible Accounts

 Involves estimating uncollectible accounts at the end
of each period.
 Ensures that companies state receivables on the
statement of financial position at their cash realizable
value.
 Companies estimate uncollectible accounts and cash
realizable value using information about past and
current events as well as forecasts of future
collectibility.

LO 3
Allowance Method for Uncollectible Accounts

Recording Estimated Uncollectibles

Illustration: Assume that Brown Furniture in 2019, its first
year of operations, has credit sales of £1,800,000. Of this
amount, £150,000 remains uncollected at December 31. The
credit manager estimates that £10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:

Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000

LO 3
 Recording Estimated Uncollectibles

ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts

The amount of £140,000 represents the cash realizable value of

the accounts receivable at the statement date.

LO 3
Allowance Method for Uncollectible
Accounts
Recording the Write-Off of an Uncollectible
Account
 When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the account.
 In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.

LO 3
Write-Off of an Uncollectible Account

Illustration: The financial vice president of Brown Furniture

authorizes a write-off of the £1,000 balance owed by Randall plc on
March 1. The entry to record the write-off is:

Allowance for Doubtful Accounts1,000

Accounts Receivable 1,000

Assume that on July 1, Randall plc pays the £1,000 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
LO 3
Allowance Method for Uncollectible
Accounts
Estimating the Allowance

Percentage-of-Receivables Approach
 Reports estimate of receivables at cash realizable value.

Companies may apply this method using

 one composite rate, or
 an aging schedule using different rates.

LO 3
Estimating the Allowance ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

LO 3
Estimating the Allowance
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

Bad Debt Expense 26,610

Allowance for Doubtful Accounts 26,610

LO 3
Estimating the Allowance
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

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

Bad Debt Expense (€26,610 – €800) 25,810

Allowance for Doubtful Accounts 25,810

LO 3
Collection of AR After Writing Off Bad Debts
• If the account is collected, after being written off. For direct bad
debts written-off, recoverable entries:

Dr. Cash
Cr. Bad debts Recovered
(To record bad debts collected)
-the ‘bad debts recovered’ will be reported as “other income” in
SCI
• For allowance written off, then the recoverable entries are:
Dr Accounts Receivable
Cr Allowance for Doubtful Accounts
(To reverse write-off of accounts)
Dr. Cash
Cr. Account receivable
(To record bad debts collected)
-this entry affect SFP
37
 Section 2:
Notes Receivable

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 Notes Receivable
 A promissory note is a written promise to pay a sum of
money on a specified date in the future

 The parties to a promissory note are:

1. The maker/borrower/customer - the party that promises
to repay the amount borrowed
2. The payee - the party that will receive the payment

– E.g. RM1,000, 60-day note, 12% interest p.a.

RM50,000, 6-month note, 10% interest p.a.

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Terms used in Notes Receivable
Principal - the amount borrowed/ the face value/ the
stated amount of the note

Maturity date - the date the note is to be repaid/due

Term - the time period/life of the note (in days or months)

Interest - the amount charged on the borrower for the use

of the money borrowed

Maturity value - the amount of cash to be repaid including

principal and interest on the maturity date
40
 Due date
 The life of a note may be expressed in months or days.

 When the life of a note is expressed in terms of months, the due

date is found by counting the months from the date of issue.

 When the due date is stated in terms of days, it is necessary to

count the exact number of days to determine the maturity date.

 In counting the life of a note, the date the note is issued is

omitted but the due date is included.

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Example

42
 Computing interest

 The formula for computing INTEREST is PRT:

Principal(Face Value) x Rate (annual interest rate) x

Time (in Terms of one year)

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Computing interest

RM99
RM5099

RM5099

365 RM99

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Entries to record notes receivable
• At the time a note is received, it is recorded at face
value with no interest added.

45
Entries to record notes receivable
Notes receivable are reported at their cash (net) realizable
value

A note is honored when it is paid in full at maturity

Interest revenue is recorded when the note is paid. However, if

interim financial statements are prepared, interest on notes
receivable is accrued and shown as interest revenue as it is
earned.

46
Entries to record notes receivable

47
Entries to record notes
receivable
If a note is not paid in full at maturity, it is called a
dishonored note. If it can reasonably be assumed
that the amount due will ultimately be collected, it is
usually transferred to an Account Receivable.

48
Entries to record notes receivable

49
 Section 3 :
Assignment &
Factoring of
Accounts Receivables

50
Definition of Assignment and Factoring
• The holder of accounts or notes receivable may transfer
them for cash.
• The transfer may be:
• assignment (secured borrowing) or
• factoring (a sale of receivables)
• Assigning accounts receivable means using receivables as
collateral for a loan. Holder retains ownership.
• Factoring accounts receivable means selling them.
• Factoring can be with recourse or without recourse.
Recourse refers to ultimate responsibility for payment.

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Why are receivables used as a source
of cash?

• Providing customer financing is common in many industries, e.g.

autos, industrial and farm equipment, durable goods.
• Access to normal financing may be unavailable or expensive,
e.g., further borrowing may violate existing debt covenants.
• Seller may prefer to leave billing and collection to a more
specialized agency.
• Receivables financing may be cheaper than debt, as the former
conveys ownership rights to the purchaser.

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Assignment of receivables
• Trade debt may be assigned with a banker to obtain
funds to meet company’s cash needs.
• Trade debts are used as collaterals to obtain the
financing.
• Risk of bad debts are not passed on to the banker
because it has the full recourse (i.e. legal rights to
demand payment) on the company in the event that
the trade debtors are unable to settle their debts.

53
Assignment of receivables (cont’d)

• Bill of exchange – trade debt financing

arrangements to acknowledge its liability.
• The trade debts remain in the accounting
records and the cash received and the
corresponding bill payable should be
recognized in the accounts.

54
Assignment of receivables (cont’d)
Transferor records for note payable and finance charge. No
effect on accounting for accounts receivable.
Transferor collects accounts receivable.
Transferor records sales returns and sales discounts.
Transferor absorbs bad debts expense.
Transferor records interest expense on notes payable.
Transferor pays on the note periodically from collections.
Meanwhile, the banker will record for note receivables,
finance revenue, interest revenue and cash paid and
received.

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Example : Assignment of receivables
On January 2017, Provo Mercantile Co. assigns
specific receivables totaling RM300,000 to Salem
Bank as collateral on a RM200,000, 12% note. Salem
assesses a 1% finance charge on assigned receivables
in addition to the interest on the note. Provo is to
make monthly payments to Salem with cash
collected on assigned receivables. The entry should
be as follows:

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 Example : Assignment of receivables (cont’d)

1/1/2017
Dr Cash RM197,000
Finance charge RM3,000
Cr Notes payable RM200,000
(to record the loan with Salem Bank)

The trade debts of RM300,000 still remains in Provo’s accounts.

Dr. Accounts receivable assigned RM300,000

Cr. Accounts receivable RM300,000
( to reclassify the assigned account receivable)

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Example : Assignment of receivables (cont’d)

In the banker’s book:

1/1/2017
Dr Note Receivable 200,000
Cr Finance revenue 3,000
Cash 197,000
(to record loan to Provo Co.)

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Example : Assignment of receivables (cont’d)

Collection of assigned accounts during January 2017 of RM180,000

less cash discounts of RM1,000; Sales return in January RM2,000
31/1/17 RM RM
Dr Cash 179,000
Cash Discounts 1,000
Sales return 2,000
Cr Accounts Receivable Assigned 182,000
(to record collection in January)

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Example : Assignment of receivables (cont’d)

February 2017, Payment to Salem Bank on amount

owed plus interest on note payable

Journal entries-1/2/17 RM RM

Dr Notes payable 179,000

Interest expense (200,000 x12%x1/12) 2,000
Cr Cash 181,000
(To record loan repayment)

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Example : Assignment of receivables (cont’d)

In the banker’s book:

1/2/17
Dr Cash 181,000
Cr Note receivable 179,000
Interest revenue 2,000
(to record receipts from Provo Co. and recognize
interest revenue)

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Example : Assignment of receivables (cont’d)

28/2/17
Collection of the remaining 118,000 of receivables assigned

RM RM

Dr Cash 118,000
Cr Accounts Receivable 118,000
Assigned
(To record collection in February)

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Example : Assignment of receivables (cont’d)

1/3/17
Remittance of balance due to Salem Bank

RM RM
Dr Notes payable(200,000-179,000) 21,000
Interest expense (21,000 x 12% x 1/12) 210
Cr Cash 21,210
(to record loan repayment)

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Additional Exercise:
On 1 March 2018, ABC Bhd borrowed RM50,000 from
CCC Bank and signed a 12% one month note payable.
The bank charged 1% initial fee. Company A assigned
RM73,000 of its accounts receivable to the bank as a
security. During March 2018, the company collected
RM70,000 of the assigned accounts receivable and
RM3,000 of the sales were returned by the customers.
The company paid the principle and interest on note
payable to the bank on 1 April 2018.

• Prepare journal entries for ABC Bhd and CCC Bank

64
Answer (ABC Bhd):
1 March 2018

DR CR
Dr Cash 49,500
Finance charge 500
Cr Note Payable 50,000

(To record the loan with bank)

Cr Dr
Dr Accounts Receivable Assigned 73,000
Cr Accounts Receivable 73,000

(To reclassify the assigned account receivable)

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Answer (ABC Bhd):
31 March 2018

Dr Cr
Dr Cash 70,000
Sales returns and allowances 3,000
Cr Accounts Receivable Assigned 73,000

(To record collection during the month of March)

Dr Cr
Dr Interest Expense 500
Cr Interest Payable 500

(To record the interest expense for the note payable – Assume company
closes account on 31 March) 66
Answer (ABC Bhd):
1 April 2018

Dr Cr
Dr Note Payable 50,000
Interest Payable 500
Cr Cash 50,500

(To record loan repayment)

67
Answer (CCC Bank):
1 March 2018

Dr Cr
Dr Note Receivable 50,000
Cr Finance Revenue 500
Cash 49,500
(To record loan to ABC Bhd)
31 March 2018
Cr Dr
Dr Accrued Interest 500
Cr Interest Revenue 500

(To record accrued interest owed by ABC Bhd)

68
 Answer (CCC Bank):
1 April 2018

Cr Dr
Dr Cash 50,500
Cr Accrued interest 500
Note Receivable 50,000

(To record cash receipt from ABC Bhd)

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Factoring of Receivables

• Factoring of receivables is another way of obtaining

cash advances on amounts owed to the business.
• FACTORING : transferring (or selling) the receivables
to a factor (a company that undertakes factoring)
• Differs from assignment of trade debts where the
factoring company administers the credit
management (includes sales accounting services,
credit administration and control services and
collection services) for the company.

70
Question:
How is factoring recorded?
Are we going to RECOGNIZE or DERECOGNIZE
the sold receivables?
FRS 139/ Para 17
• Financial assets are derecognised:
(a) when the contractual rights to receive cash flows associated with the
financial assets expire; or
(b) when the contractual rights to receive cash flows associated with the
financial assets have not expired, but the entity has the obligations to
pay cash flow to the recipients(bankers) in an arrangements that meet
all the following THREE (3) conditions:
(i) Pay the original sum of money collected from the financial assets to the
recipients (or bankers);
(ii) Only secure the financial assets to the recipients; and
(iii) Remit immediately the cash collected associated with the financial assets.

71
FRS 139
More complex situation, adopts a step by
step approach:
Whether there is a transfer of the financial
asset (“the asset transfer test”); and
Whether substantially all the risks and
rewards of ownership of the financial asset
have been transferred (“the risk and reward
test”).

72
FRS 139
• General principal:
• If it passes both the asset transfer test and the risk and
reward test – DERECOGNIZE
• If it fails the asset transfer test – CONTINUE TO RECOGNIZE
as financial asset
• If it passes the asset transfer test but fails the risk and
rewards test, the entity needs to consider whether the
entity has retained control over the asset. If so, what
extent of its continuing involvement in the asset is?
-If do not retained control – DERECOGNIZE
-If retained control of the risk and rewards – CONTINUE TO
RECOGNIZE

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Factoring of receivables

Two types of debt factoring:

1. Debt factoring with recourse
2. Debt factoring without recourse

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• RECOURSE (or Guarantee) – refers to the ultimate
responsibility to pay for the debt (if default)

Types of With Without

Factoring recourse recourse

Responsibility SELLER BUYER

to pay the debts (The Factor)
(if default)?

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Factoring of receivables with recourse
• Debt factoring with recourse
• Immediate cash advances for certain % of
the debt factored provided by the factoring
company.
• The factor company – acts as a collection
agent.
• The seller has retained all the risk associated
with the trade receivable  full recourse.

76
Factoring of receivables with recourse
(cont’d)

• Therefore, the trade receivables would be

retained on the BS as assets and the proceeds
received would be recognized as a liability.
• As and when the trade debtors settled and the
cash was passed over to the factor, the trade
receivables and liability would be reduced.

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Example: Receivables factoring with recourse

Textiles Corporation factors RM500,000 of accounts

receivable with Cotton Bank on a 100% recourse basis.
The Cotton Bank assesses a finance charge of 3% of the
amount of accounts receivable and retain an amount
equal to 5% of the accounts receivable.

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Example: Receivables factoring with recourse
(cont’d)

Journal entries – Textiles Corp. (SELLER’S BOOK)

RMRM
Dr Cash 460,000
Due from Bank (holdback) (5%) 25,000
Finance charge (3%) 15,000
Cr Recourse Liability 500,000

79
Example: Receivables factoring with recourse
(cont’d)
Journal entries – Cotton Bank (Banker’s Book)

RM RM
Dr Accounts Receivable 500,000
Cr Due to customer (holdback) (5%) 25,000
Interest revenue(3%) 15,000
Cash 460,000

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Factoring of receivables without recourse

Debt factoring without recourse

• The legal title (the form) together with the risks
and rewards (the substance) of the trade debts
pass to the factoring company.
• The difference between the net proceeds and the
carrying amount of the trade debts (if any) is
recognized as a loss on sale of trade debts in the
income statement.

81
Factoring of receivables without recourse
(cont’d)

• Ownership, risks and gain will be transferred to

the factoring company.
• Control of receivables would be in the hand of
factoring company.
• Factoring company will charge the commission
based on the risks associated
• Factoring company normally pays 80% -90% of
the face value after considering the potential
sales return/allowance

82
Example: Factoring of receivables without
recourse

Textiles Corporation factors RM500,000 of accounts

receivable with Cotton Bank on a without recourse
basis. The receivable records are transferred to
Cotton Bank, which will receive the collections.

The Cotton Bank assesses a finance charge of 3% of

the amount of accounts receivable & retain an
amount equal to 5% of the accounts receivable.

83
Example: Factoring of receivables without
recourse (cont’d)

Journal entries – Textiles Corp. (SELLER’S BOOK)

RM RM
Dr Cash 460,000
Due from Bank (Cotton Bank) 25,000
Loss on sale of receivables 15,000
Cr Accounts receivable 500,000
(To record the receivables sold without recourse)

84
 Example: Factoring of receivables without
recourse (cont’d)

Journal entries – Cotton Bank (Factor’s book)

RM RM
Dr Accounts receivable 500,000
Cr Due to customer (Textiles Corp) 25,000
Interest revenue 15,000
Cash 460,000
(To record the purchase of receivables without recourse)

85
End of Chapter 7
86
 References
• Keiso, D.E., Weygandt, J. J., and Warfield, T. D.
(2017), Intermediate Accounting, IFRS edition, 3rd
ed., John Wiley & Sons Inc., USA.
 
• Malaysian Accounting Standards Board. (2018),
MASB, accessed 15 August 2018,
www.masb.org.my

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