MODULE 3- ACCOUNTS RECEIVABLE
Receivables are financial assets that represent a contractual right to receive cash or another financial
asset from entity.
Classifications of Receivables for retailers or manufacturers
1. Trade Receivables
2. Nontrade receivables
Trade receivables- claims arising from sale of merchandise or services in the ordinary course of business.
(Examples: a. Accounts Receivable; and b. Notes receivable
Accounts receivable- open accounts arising from the sale of goods and services in the ordinary
course of business and not supported by promissory notes.
Other names of Account receivable:
Customers’ accounts, trade debtors, and trade receivable.
Notes receivable –are those supported by formal promises to pay in the form of notes.
Trade receivables which are expected to be realized to cash within the normal operating cycle or
one year, whichever is longer, are classified as current assets.
Nontrade receivables – claims arising from sources other than the sale of merchandise or services in the
ordinary course of business.
For banks and other financial institutions, receivables result primarily from loans to customers
(Loans receivables)
Nontrade receivables which are expected to be realized in cash within one year are classified as
current assets. IF collectible beyond one year, nontrade receivables are classified as noncurrent
assets.
Examples of Nontrade receivables:
- Advances to or receivables from shareholders, directors, officers or employees
- Advances to affiliates - Special deposits on contract bids
- Advances to supplier - Accrued income, such as dividend receivable
- Subscription receivable - Accrued rent receivable
- Claims receivable (claims for losses or damages from common carriers, claims for rebates
and tax refunds, claims from insurance company)
Customers’ Credit Balances – these are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.
Initial measurement of Accounts Receivable
Accounts receivable shall be measured initially at face amount or original invoice amount.
Subsequent measurement
After initial recognition, accounts receivable shall be measured at amortized cost or most
commonly referred to as net realizable value. The net realizable value of accounts receivable
is the amount of cash expected to be collected or the estimated recoverable amount.
Methods of Recording Credit Sales
Gross Method
Net Method
The gross method is the most common method used because it is simple to apply.
Illustration – Gross Method
1. Sale of merchandise for P100,000, terms 5/10, n/30.
2. Assume Collection is made within the discount period.
3. Assume collection is made beyond the discount period.
Accounting for Bad Debts
Business companies sell on credit or on account rather than sell only for cash, simply to increase sales
and thereby increase income. However, a company that sells on credit assumes the risk that some
customers will not pay their accounts.
When an account cannot be collected or becomes uncollectible, the company has sustained a bad debt
loss. (This loss is simply one of the costs of doing business on credit).
Two methods in accounting bad debt loss
1. Allowance Method
2. Direct Write-off method
* ( For BS Entrep program, only the Allowance Method shall be discussed)
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.
Illustration
1. Accounts of P30,000 are considered doubtful of collection
Doubtful accounts 30,000
Allowance for doubtful accounts 30,000
2. The accounts are subsequently discovered to be worthless or uncollectible
Allowance for Doubtful accounts 30,000
Accounts receivable 30,000
3. The same accounts that are previously written off are unexpectedly recovered or collected.
Accounts receivable 30,000
Allowance for doubtfull accounts 30,000
Cash 30,000
Accounts receivable 30,000
Exercises
Problem 3-1 Gross method of recording sales
a. Sale of merchandise for P150,000, terms 2/10, n/30.
b. Assume Collection is made within the discount period.
c. Assume collection is made beyond the discount period
Problem 3-2 Allowance method of accounting for Bad debts
a. Accounts of P50,000 are considered doubtful of collection
b. The accounts are subsequently discovered to be worthless or uncollectible
c. The same accounts that are previously written off are unexpectedly recovered or collected.
