TRADE AND OTHER RECEIVABLES

1. Receivables – financial assets that represent a contractual right to receive cash or another financial asset from
another entity.
- Recognized when and only when the entity becomes a party to the contractual provisions of the instrument
- For retailers or manufacturers, receivables are classified into two: trade or non – trade receivables

A. Trade Receivables – refers to claims arising from sale of merchandise or services in the ordinary course of
business.
 Result from normal operating activities such as credit sales of goods or services to customers ( accounts
receivable)
 Maybe evidenced by a financial written promise to pay (notes receivable)
 In most cases, they are unsecured, “open” accounts reflecting a short – term extension of credit to a
customer for a period of 30 – 90 days, with the potential for interest charges if the account is not paid
within such period (installment receivable)
 If realizable within 1 year or normal operating cycle whichever is longer, CURRENT ASSETS.

B. Non – trade Receivables – all other types of receivables; those that arise from transactions other than sale of
merchandise or services in the ordinary course of business.
- If realizable within 1 year, CURRENT ASSETS.
 Advances to suppliers (debit in AP) – normally CA
 Advances to officers and employees – CA or NCA
 Advances to affiliates – long – term investment
 Receivables from sale of security or property other than inventory – CA or NCA
 Accrued income (DR and IR) – normally CA
 Subscriptions receivable – if current CA; if not, deduction from SHE
 Creditor’s account – debit balances – normally CA
 Special deposits on contract bids – normally NCA
 Claims receivables – normally CA

Note: For financial institutions, the current and noncurrent classification is not relevant. Receivables are presented in
order of liquidity.

2. Presentation of Receivables

A. Statement of Financial Position – trade receivables and non – trade receivables which are currently
collectible shall be presented on the face of the SFP as one – line item, “Trade and Other Receivables”
 Customer’s credit balances – classified as current liabilities and not offset against other accounts
unless immaterial.
 For installment receivables:
IR short – term – all are classified as CA with disclosure
Long – term – only the portion currently due is shown as current assets

B. Notes to Financial Statements – the details of the items comprising the one – line item should be disclosed
in the NTFS.

3. Measurement of Receivables

General Rule : Receivables are initially recognized at its FV plus transaction costs that are directly attributable to
the acquisition of the financial asset

Fair Value – amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing
parties in an arm’s length transaction (PFRS 13)
- For receivables, FV is usually the PV of expected cash flows
Transaction Costs – are incremental costs (would not have been incurred if the entity had not disposed, etc. the
instrument) that are directly attributable to the acquisition, issue or
Initially Subsequent
disposal of a financial asset or liability.
Financial Transaction PV Amortized
Short - term Cost
Non – financing transaction Face NRV
Amount
Receivable Face NRV
Interest - bearing Realistic
Amount
Long - term PV Amortized
Not
Cost
Non – interest bearing PV Amortized
Cost
 4. Accounts Receivable – open accounts arising from sale of merchandise or services in the ordinary course of
business.
 Measurement
- initially: face amount or original invoice amount(list price less trade discounts)
- Subsequent: at net realizable value
 Net Realizable Value
= Gross AR Less :
- Allowance for Freight Charge
- Allowance for Sales Discount
- Allowance for Sales Discount
- Allowance for Doubtful Accounts

5. Allowance for Freight Charge

Who Should Pay Who Paid Shipping Term
Buyer* Buyer FOB Shipping point, freight collect
Buyer* Seller FOB Shipping point, freight collect a
Seller** Buyer FOB Destination, freight collect b
Seller** Seller FOB Destination, freight prepaid
*- part of the cost of inventory purchased by buyer(freight in)
**- part of the selling costs of seller(freight out)
a – added to the AR of the seller
b – allowance for freight charge deducted from AR of the seller

6. Allowance for Sales Returns – the subsequent measurement of AR should 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
 Requires estimation at every end of the reporting period.

7. Allowance for Sales Discount – discounts are decreases in the gross or list price of goods sold to customers

A. Trade Discount – an amount deducted from the list price to obtain the “net” sales price actually charged to
the customer
- a means of varying price usually relating to purchase volume
- not recognized in the books; the “net” sales price is the amount at which the receivables and
revenues should be recorded.

B. Cash Discount – a price reduction granted to encourage prompt payment

- Known as purchase discount to the purchaser and a sales discount to the seller
- Usually granted for payment within periods of no more than 30 days and are reflected by sales
clauses such as 2/10, n/30.
Gross Method Net Method
To record the sale AR xx AR xx
a
Sales xx Sales xx b
a – at gross invoice b – at net invoice
Collection within the discount period Cash xx Cash xx
- NS and OI equals to Sales Discount xx AR xx
AR xx
Collection beyond the discount period Cash xx Cash xx
- NS and OI does not equal to AR xx AR xx
SD Forfeited xx

Notes: 1. The “sales discount forfeited” is presented as other income by the seller.
2. The gross method is the most commonly used method though the net method is conceptually favored.

8. Allowance for Doubtful Accounts – 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.
 Bad debts is simply one of the costs of doing business on credit
 Accounting for bad debts can be:
 a. Allowance Method – GAAP compliant as it conforms with the matching principle;
reports AR at their NRV
b. Direct Write off Method – non – GAAP compliant as it doesn’t provide for the matching
of expenses with current revenues; doesn’t report AR at their NRV; favored for tax
purposes.

Allowance Method Direct WO Method

Account is doubtful of collection Bad debts expense xxa No entry
Allowance for bad debts xx
a – decrease profit, net AR, CA, working capital and current ratio; increase allowance

Account is determined to be worthless Allowance for bad debts xxb Bad debts expense xx
Accounts Receivable xx Accounts Receivable xx
b – NE profit, net AR, CA, working capital and current ratio; decrease allowance

Recovery of previously Accounts receivable xxc Accounts receivable xx

Written of accounts Allowance for bad debts xx BDE or OI xx
Cash xx c Cash xx
Accounts Receivable xx Accounts Receivable xx
c – NE profit, CA working capital and current ratio; increase allowance and decrease net AR

9. Methods of Estimating Doubtful Accounts

Percent of AR

SFP Approach
Doubtful Accounts
Aging of AR

IS Approach Percent of credit Sales

A. IS Approach – emphasis is on proper matching of cost against revenue

 An assumed percentage is applied to current GROSS or NET credit sales
 What we get is bad debts expense for the year
 The assumed percentage is derived from the relationship over previous periods between the
amount of total or net credit sales and the actual amount of uncollectible accounts losses

%b = (Write offs less Recoveries) ÷ Net Credit Sales or a Gross Credit Sales
a – may be based on all available years including current year or only those prior years
b – for regulated entities, memos or circulars by the regulating authority is followed.
 Existing allowance balance is ignored in the computation

B. SFP Approach – emphasis is on fair representation in the SFP of the AR at net realizable value
 An assumed percentage is applied to balance of the AR (% or AR) or multiple percentages are
applied to the AR balance as broken into various categories determined by an aging process
(aging of AR)
-What we get is the desired allowance balance as of YE.
 To compute for the BDE, the amount is squeezed from the factors affecting the allowance
account
-BDE – do not consider the provisions made during the year
-amount of adjustment – consider all factors
 The aging method is the most satisfactory approach for achieving NRV reported in the SFP.
 Watch out for debit balance in the allowance account. It is also to be noted that “1 to 30 days” is
different from “1 to 30 days past due” age classification.

C. Combination of Method – the IS approach is used for monthly or quarterly financial statements while the BS
approach is used for annual financial statements

10. Presentation of Bad Debts Expense in the IS

 The sales manager is in
charge of the credit function selling expense

BDE

Other than sales manager Administrative expense