RECEIVABLES

Basic Accounting
 Receivables
• A receivable arises when a business sells
goods or services to another on credit.
• A receivable is the seller’s claim against the
buyer pertaining to the transaction.
• at least two parties
– creditor, who sells service or merchandise and
obtains a receivable
– debtor, who makes the purchase and creates a
payable.
 Receivables
• represent amounts collectible from customers
and others, most frequently arising from sales
of merchandise, claims for money lent or the
performance of services.
 Receivables
• two classes of receivables
– Trade receivables arise from sale of goods or
services to customers.
Two (2) major types of trade receivables
1. accounts receivable
2. notes receivable
– Non-trade receivables include such items as loans
or advances to suppliers, and accrued receivables.
ACCOUNTS RECEIVABLE
 ACCOUNTS RECEIVABLES
• NATURE
– Accounts receivable are amounts owed by
customer for goods sold and services rendered in
the normal course of business.
– supported by sales invoice or other documents
rather than written promises (notes receivable)
 ACCOUNTS RECEIVABLES
• Valuation
• Accounts receivable should be valued at their
estimated realizable value. (net realizable value
– NRV)
– The estimated realizable value is the amount of cash
the entity actually expects to collect from the
receivables.
– The value is derived by deducting from gross
accounts receivable the allowance for uncollectible
accounts.
 ACCOUNTS RECEIVABLES
• Classification
• Trade receivables that may be reasonably
expected to be collected within one year or
within the normal operating cycle, whichever
is longer, are classified as current assets
Accounting for Uncollectible Accounts
• When a credit is extended, it is to be
expected that a certain amount of these
receivables will not be collected.
• Entities attempt to develop a credit policy that
is neither too conservative nor too liberal.
• Key factors in credit policy:
– Past records of payments,
– financial condition and
– income of customers
Accounting for Uncollectible Accounts
• Uncollectible accounts should be anticipated
• Value of accounts receivable should be
reduced
Accounting for Uncollectible Accounts
• Two (2) general methods
A. direct write-off method
B. allowance method
Accounting for Uncollectible Accounts
• Direct write-off method
– No anticipation of uncollectible accounts.
– Uncollectible accounts are written off as an
expense (Bad Debts) in the accounting period
when the account is determined to be
uncollectible.
 Direct Write-Off Method
Date of Sale Accounts Receivable xxx
Sales xxx
To record credit sales
End of Period NO ENTRY

Date Account Bad Debts xxx

Identified as Accounts Receivable xxx
Uncollectible To write off uncollectible accounts.

Recovery of Accounts Receivable xxx

Write offs Bad Debts xxx
To reinstate accounts written off.
Cash xxx
Accounts Receivable xxx
To record collections on account.
Accounting for Uncollectible Accounts
• Allowance method
– requires that the accountant estimate
uncollectible accounts in the accounting period
when the credit sales are made,
– Estimation basis
• entity’s own experience or that of other companies
within the same industry.
Accounting for Uncollectible Accounts
• Allowance method
– The expense is recognized in the period of sale
and an allowance for uncollectible accounts is set
up.
• The uncollectible accounts represent
expenses to the seller and are considered as
either
– selling expenses or general expenses in the
income statement.
Accounting for Uncollectible Accounts
• The allowance account
– contra asset account and is deducted from
accounts receivable in the balance sheet.
– credited instead of accounts receivable because
the entity does not actually know which specific
accounts are uncollectible and besides the
amount involved is only an estimate.
Accounting for Uncollectible Accounts
• Allowance method
• effect of expense entry
– decreasing net income due to the debit of an
expense account
– Decreasing net accounts receivable due to the
credit of the allowance account.
Accounting for Uncollectible Accounts
• When an account is determined to be
uncollectible, (WRITE-OFF)
– the allowance account and the accounts
receivable are both reduced by the amount of the
uncollectible account.
• The write-off entry has no effect on net
income and on net accounts receivable.
Accounting for Uncollectible Accounts
• Allowance method
• Account written off: customer still has an
obligation to pay.
• when subsequently collected: (RECOVERY)
– To record the recovery, reverse the write-off entry
and record the collection
Accounting for Uncollectible Accounts
• Generally accepted accounting principles
require that the allowance method for
accounting of uncollectible accounts to be
used.
 Accounting for Uncollectible Accounts
Date of Sale Accounts Receivable xxx
Sales xxx
To record credit sales
End of Period Uncollectible Accounts Expense xxx
Allowance for Uncollectible Accounts xxx
To record estimated uncollectible.

Date Account Allowance for Uncollectible Accounts xxx

Identified as Accounts Receivable xxx
Uncollectible To write off uncollectible accounts.

Recovery of Accounts Receivable xxx

Write offs Allowance for Uncollectible Accounts xxx
To reinstate accounts written off.
Cash xxx
Accounts Receivable xxx
To record collections on account.
 SAMPLE PROBLEM ANALYSIS
• Adjunct Company had P500,000 total sales for
the year of which P350,000 were on account.
P120,000 were the accounts collected during
the year. Adjunct Company’s experience
estimated that P50,000 are considered doubtful
of collection. During the following year,
P35,000 of the accounts were considered to be
worthless. In a later period, P18,000 of the
worthless account were recovered.
 SAMPLE PROBLEM ANALYSIS
• REQUIRED
– Journal Entries using
(a) Direct Write-Off Method
(b) Allowance Method
 SAMPLE ANALYSIS
• P500,000 total sales P350,000 were on
account.
• P120,000 were the accounts collected.
• P50,000 are considered doubtful of collection.
• P35,000 of the accounts were considered to
be worthless.
• P18,000 of the worthless account were
recovered.
 P500,000 total sales P350,000 were on
account.
• DIRECT WRITE-OFF METHOD
Cash 150,000
Accounts Receivable 350,000
Sales 500,000

• ALLOWANCE METHOD
Cash 150,000
Accounts Receivable 350,000
Sales 500,000
P120,000 were the accounts collected.
• DIRECT WRITE-OFF METHOD
Cash 120,000
Accounts Receivable 120,000

• ALLOWANCE METHOD
Cash 120,000
Accounts Receivable 120,000
P50,000 are considered doubtful of
collection.
• DIRECT WRITE-OFF METHOD
NO ENTRY

• ALLOWANCE METHOD
Uncollectible Accounts Expense 50,000
Allowance for Uncollectible Accounts 50,000
P35,000 of the accounts were considered to
be worthless.
• DIRECT WRITE-OFF METHOD
Bad Debts 35,000
Accounts Receivable 35,000

• ALLOWANCE METHOD
Allowance for Uncollectible Accounts 35,000
Accounts Receivable 35,000
 P18,000 of the worthless account were
recovered.
• DIRECT WRITE-OFF METHOD
Accounts Receivable 18,000
Bad Debts 18,000

Cash 18,000
Accounts Receivable 18,000

• ALLOWANCE METHOD
Accounts Receivable 18,000
Allowance for Uncollectible Accounts 18,000

Cash 18,000
Accounts Receivable 18,000
 Accounts Receivable
• Normal Balance: DEBIT
• Increase (Debit)
– Sales on Account, Recovery
• Decrease (Credit)
– Collections, Write Off, Sales Returns & Allowance,
Sales discounts, Recovery (not part of collections)
 Allowance for Uncollectible Accounts
• Normal Balance: CREDIT
• Increase (Credit)
– Estimated uncollectible, Recovery
• Decrease (Debit)
– Write off
 PRESENTATION
• Balance Sheet as CURRENT ASSETS

GROSS ACCOUNTS RECEIVABLE XXX

LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS XXX
NET ACCOUNTS RECEIVABLE XXX
ESTIMATING ACCOUNTS
RECEIVABLE
Estimating Uncollectible Accounts
• Two (2) acceptable methods:
A. Credit Sales Method
B. Accounts Receivable Method
 Credit Sales Method
• emphasizes the matching principle and the
income statement
• The average percentage relationship between
actual uncollectible accounts and net credit
sales is estimated on the basis of experience.
• The percentage is then applied to the net
credit sales for the period to determine the
uncollectible accounts expense.
 Credit Sales Method
• Illustration. Ceramics Co, a medium scale business,
estimated that only 1% of credit sales would be
uncollectible. The balance in Accounts Receivable was
P1, 200, 000 and the Allowance for Uncollectible
Accounts was a P45, 000 credit. If credit sales in 2018
amounted to P7, 000, 000, the adjusting entry to record
the expense is:
7,000, 000 * 1 % = 70,000

Dec. 31 Uncollectible Accounts Expense 70, 000

Allowance for Uncollectible Accounts 70, 000
To record estimated uncollectible
 Credit Sales Method
• The amount of expense that will appear in the
income statement is P70, 000.
• The credit balance in the allowance account will
be P115, 000. (45,000 + 70,000)
• The accounts receivable will be reported in the
balance sheet as follows:

Accounts Receivable P 1, 200, 000

Less: Allowance for Uncollectible Accounts 115, 000
P 1, 085, 000
 Credit Sales Method
• This method establishes the desired balance
in the uncollectible accounts expense in the
income statement.
• No effort is made to reach a particular balance
in the allowance account.
• The entry ignores the prior balance in the
allowance account.
 Accounts Receivable Method
• This method emphasizes the estimated
realizable value of the accounts receivable.
• In contrast to the credit sales method, the
accounts receivable method estimate the
required ending allowance account balance to
state accounts receivable at estimated
realizable value.
 Accounts Receivable Method
• The current balance in the allowance is
updated through an adjusting entry to equal
the required balance.
• Uncollectible accounts expense is debited for
the amount of adjustment. The expense is
therefore determined indirectly.
 Accounts Receivable Method
• To estimate the required ending allowance
balance, either the following can be used
1. single rate based (Percentage) on total
accounts receivable
2. aging of accounts
 Accounts Receivable Method
Percentage of Total Accounts Receivable
• Illustration. Assume instead that Ceramics Co
estimated that 8% of its accounts would be
uncollectible. The balance in Accounts Receivable
was P1, 200, 000 and the Allowance for Uncollectible
Accounts was a P45, 000 credit. Credit sales in 2018
amounted to P7, 000, 000. The adjusting entry
follows:
1,200,000 * 8% = 96,000 – 45,000 = 51,000
Dec. 31 Uncollectible Accounts Expense 51, 000
Allowance for Uncollectible Accounts 51, 000
To record estimated uncollectible.
Estimating Uncollectible Accounts
• The allowance account will appear as follows:
Allowance for Uncollectible Accounts
45, 000 Balance before
Adjustment 51, 000 Adjusting Entry
(squeezed)
96, 000 Required Ending Balance

• Allowance – Ending P 96,000

• Less: Allowance – Beginning 45,000
• Uncollectible Account Expense P 51,000
 Estimating Uncollectible Accounts
• The amount of expense that will appear in the
income statement is P51, 000.
• The credit balance in the allowance account will
be P96, 000. The accounts receivable will be
reported in the balance sheet as follows:
Accounts Receivable P1, 200,
000
Less: Allowance for Uncollectible Accounts 96, 000
Net Accounts Receivable P1, 104,
000
Estimating Uncollectible Accounts
• Aging of Receivables
– an analysis that shows the length of time the
customers’ accounts have remained unpaid.
– Historical loss percentages are applied to the total
of each age category of accounts to determine the
required ending balance of the allowance for
uncollectible accounts.
 Aging of Receivables
• Illustration. Gamba Guimaras Mangoes uses aging of receivables to
estimate accounts that would be uncollectible. The balance in Accounts
Receivable was P1, 045, 450 and the Allowance for Uncollectible
Accounts was a P5, 000 debit. Credit sales in 2009 amounted to P8, 000,
000. The aging of receivables follows:
Estimating Uncollectible Accounts
• The total accounts receivable in each age category is
multiplied by the appropriate loss percentage figure to derive
the required allowance for that category.
Estimating Uncollectible Accounts
Allowance for Uncollectible Accounts
Bal. before Adjustment 5, 000
46, 798 Adjusting Entry (squeezed)
41, 798 Required Ending Bal.
(per Aging)

• Allowance – Ending (per aging) P 41,798

• Add: Allowance – Beg (Dr. bal) 5,000
• Uncollectible Account Expense P 46,798

• It is possible for the allowance account to have a debit balance before

adjustment. This may be caused by write-offs exceeding the balance in
the allowance account.
 Estimating Uncollectible Accounts
The adjusting entry will be:

Uncollectible Accounts Expense 46, 798

Allowance for Uncollectible Accounts 46,
798
To record estimated uncollectible.
Estimating Uncollectible Accounts
• The amount of expense that will appear in the income
statement is P46, 798.
• The credit balance in the allowance account will be
P41, 798.
• The accounts receivable will be reported in the
balance sheet as follows:

Accounts Receivable P1, 045, 450

Less: Allowance for Uncollectible Accounts 41, 798
Net Accounts Receivable P1, 003, 652
 SAMPLE PROBLEM ANALYSIS
• 2018 accounting information from Cepas
Company:
• Balance at the beginning of the period
Accounts Receivable P 150,000
Allowance for Doubtful Accounts 20,000

• Transactions for the year

Total sales for the year P875,000
Cash sales for the year 310,000
Accounts Collected 495,000
Accounts Written off 18,500
 SAMPLE PROBLEM ANALYSIS
• Required: For each method below (a) Compute the DOUBTFUL
ACCOUNT EXPENSE; (b) Adjusting Entry; & (c) Presentation of
Accounts Receivable
1. Credit sales method. Assume that the entity estimates that 3%
of credit sales will prove uncollectible.
2. Accounts Receivable Method. Assume that the entity
estimates that 10% of the accounts receivable will prove
uncollectible.
3. Aging of receivables method. The aging schedule estimates
that P20,750 of accounts receivable will prove uncollectible.
4. Assume the entity uses the Direct Write-Off Method in
accounting for uncollectible. No allowance account is
establish.
 Credit sales method. Assume that the entity
estimates that 3% of credit sales will prove
uncollectible.
REQT. (a) COMPUTE the Credit Sales then apply the rate

TOTAL SALES P 875, 000

LESS: CASH SALES 310, 000
CREDIT SALES P 565, 000
MULTIPLY BY RATE (%) OF CREDIT SALES 3%
DOUBTFUL ACCOUNTS EXPENSE P 16, 950
 Credit sales method. Assume that the entity
estimates that 3% of credit sales will prove
uncollectible.
REQT. (b) Adjusting Entry

DOUBTFUL ACCOUNTS EXPENSE P 16, 950

ALLOWANCE FOR DOUBTFUL ACCOUNTS P 16, 950
To record estimated uncollectible
Credit sales method. Assume that the entity estimates
that 3% of credit sales will prove uncollectible.
REQT. (c) COMPUTE the ENDING Accounts Receivable &
Allowance for Doubtful Accounts

ACCOUNTS RECEIVABLE - BEGINNING P 150, 000

ADD: CREDIT SALES 565, 000
TOTAL P 715, 000
LESS: COLLECTION P 495, 000
WRITE-OFF 18, 500 513, 500
ACCOUNTS RECEIVABLE - ENDING P 201, 500
Credit sales method. Assume that the entity estimates
that 3% of credit sales will prove uncollectible.
REQT. (c) COMPUTE the ENDING Accounts Receivable &
Allowance for Doubtful Accounts
ALLOWANCE FOR D.A. - BEGINNING P 20, 000
ADD: DOUBTFUL ACCOUNTS EXPENSE 16, 950
TOTAL P 36, 950
LESS: WRITE-OFF 18, 500
ALLOWANCE FOR D. A. - ENDING P 18, 450
PRESENTATION
ACCOUNTS RECEIVABLE P 201, 500
LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS 18, 450
NET ACCOUNTS RECEIVABLE P 183, 050
Accounts Receivable Method. Assume that the entity
estimates that 10% of the accounts receivable will prove
uncollectible.
REQT. (a) COMPUTE the ENDING Accounts Receivable &
apply the RATE (%) then compute the EXPENSE

ACCOUNTS RECEIVABLE - ENDING P 201, 500

MULTIPLY: RATE (%) OF ACCOUNTS RECEIVABLE 10%
ALLOWANCE FOR D. A. - ENDING P 20, 150
ADD: WRITE-OFF 18, 500
TOTAL P 38, 650
LESS: ALLOWANCE FOR D. A. - BEGINNING 20, 000
DOUBTFUL ACCOUNTS EXPENSE P 18, 650
 Accounts Receivable Method. Assume that the
entity estimates that 10% of the accounts
receivable will prove uncollectible.
REQT. (b) Adjusting Entry & (c) Presentation

DOUBTFUL ACCOUNTS EXPENSE P 18, 650

ALLOWANCE FOR DOUBTFUL ACCOUNTS P 18, 650
To record estimated uncollectible

PRESENTATION
ACCOUNTS RECEIVABLE P 201, 500
LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS 20, 150
NET ACCOUNTS RECEIVABLE P 181, 350
 Aging of receivables method. The aging schedule
estimates that P20,750 of accounts receivable
will prove uncollectible.
REQT. (a) Compute the expense

ALLOWANCE FOR D. A. – ENDING (per aging) P 20, 750

ADD: WRITE-OFF 18, 500
TOTAL P 39, 250
LESS: ALLOWANCE FOR D. A. - BEGINNING 20, 000
DOUBTFUL ACCOUNTS EXPENSE P 19, 250
 Aging of receivables method. The aging schedule
estimates that P20,750 of accounts receivable
will prove uncollectible.
REQT. (b) Adjusting Entry & (c) Presentation

DOUBTFUL ACCOUNTS EXPENSE P 19, 250

ALLOWANCE FOR DOUBTFUL ACCOUNTS P 19, 250
To record estimated uncollectible

PRESENTATION
ACCOUNTS RECEIVABLE P 201, 500
LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS 20, 750
NET ACCOUNTS RECEIVABLE P 180, 750
Assume the entity uses the Direct Write-Off
Method in accounting for uncollectible. No
allowance account is establish.
The total accounts written off (BAD DEBTS)
during the year is the expense related to
uncollectible accounts.
BAD DEBTS P 18, 500
ACCOUNTS RECEIVABLE P 18, 500
To record accounts written-off
PRESENTATION

The accounts receivable is presented in its ending

balance with no accrued allowance.
 SUMMARY
METHODS: ACCOUNTING METHODS:ESTIMATING
FOR UNCOLLECTIBLE UNCOLLECTIBLE
ACCOUNTS ACCOUNTS
1. DIRECT WRITE-OFF
1. CREDIT SALES METHOD
2. ALLOWANCE
2. ACCOUNTS RECEIVABLE
MERHOD
1. PERCENT OF
ACCOUNTS RECEIVABLE
2. AGING OF RECEIVABLES
END…
 Internal Control of Receivables
• Maintenance of subsidiary records and ledgers for
receivables.
• Personnel who maintain the accounts receivable
subsidiary ledger must not have access to cash receipts.
They must not have authority to issue credit memorandum
or to write off uncollectible accounts.
• Proper authorization of all sales discounts, sales returns
and allowances and write-offs.
• Effective collection procedures to ensure timely collection
of receivables.
• Monthly statements sent to all customers.