RECEIVABLES

Overview on the topic:

Topic Title Sub-topics___
1 Receivables –Part 1 Accounts receivable
2 Receivables –Part 2 Notes receivable
3 Receivables –Part 3 Miscellaneous concepts

Related standards:
• PFRS 9: Financial Instruments
• PFRS 15: Revenue from Contracts with Customers
• PFRS 7: Financial Instruments: Disclosures
• PAS 32: Financial Instruments: Presentation
Receivables (Part 1)

Learning Competencies

• Identify the proper presentation of

receivables as either current or
noncurrent assets.
• Determine the timing of recognition
and measurement of trade receivables.
• Determine how to estimate the
recoverable historical cost of trade
receivables.
 The Operating Cycle
of a Business

Cash

Inventory
Accounts
Receivables

3
Trade vs. Non-trade receivables

• Trade receivables are receivables arising

from the sale of goods or services in the
ordinary course of business.
• Receivables arising from other sources
are non-trade receivables.
Trade Receivables include:

• Accounts Receivable- open accounts arising from

the sale of goods and services in the ordinary
course of business and not supported by
promissory notes.
• Notes Receivable- are those supported by formal
promises to pay in the form of notes.
Nontrade Receivable:
• Advances to or Receivables from Shareholders,
Directors, Officers or Employees.
• Advances to Affiliates
• Advances to Suppliers
• Subscriptions Receivable
• Creditors’ Accounts with Debit Balances
• Special Deposits on Contract Bids
• Accrued Income
• Claims Receivable
Loans Receivable

• For banks and other financial institutions,

receivables result primarily from loans to
customers.
Financial statement presentation
• Trade receivables are classified as current assets when
they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.

• Non-trade receivables are classified as current assets

only when they are expected to be realized in cash within
one year.

• Trade and non-trade receivables that are current assets

are aggregated and presented in the statement of
financial position as one line item called “Trade and
other receivables.”
Customers’ credit balances

• These are credit balances in accounts

receivable resulting from overpayment,
returns and allowances and advance
payments from customers.
Initial Measurement
• Trade receivables that do not have a significant financing
component are measured at the transaction price in accordance
with PFRS 15 Revenue from Contracts with Customers.

• Transaction price is “the amount of consideration to which an

entity expects to be entitled in exchange for transferring promised
goods or services to a customer, excluding amounts collected on
behalf of third parties (e.g., some sales taxes).” (PFRS 15)

• As a practical expedient under PFRS 15, an entity may not discount

a trade receivable if it is due within 1 year.
Subsequent Measurement:

• In accordance with PFRS 9, after initial recognition,

accounts receivable shall be measured at amortized cost.
• The amortized cost is actually the net realizable value of
accounts receivable.
• The term “amortized cost” has more relevance in long-
term note receivable. Thus, the term “net realizable
value” is preferably used in relation to accounts
receivable.
Recognition

• Trade receivable is recognized when the entity

has right to consideration that is unconditional.
This is normally the case when the control
over the promised goods or services is
transferred to the customer.
Net Realizable Value:

In estimating the net realizable value of trade accounts

receivable, the following deductions are made:
• Allowance for Freight Charge
• Allowance for Sales Returns
• Allowance for Sales Discounts
• Allowance for Doubtful Accounts
Terms related to freight Charge:
FOB Shipping point vs. FOB Destination
• Under FOB shipping point, ownership is transferred
to the buyer upon shipment. Therefore, sales and
accounts receivable are recognized on shipment date.

• Under FOB destination, ownership is transferred only

upon receipt of the goods by the buyer. Therefore, sales
and accounts receivable are recognized only when the
buyer receives delivery of the goods.
Freight collect vs. Freight prepaid

• “Freight collect” means that the freight

charge on the goods shipped is not yet
paid.
• “Freight prepaid” means that the freight
charge on the goods shipped is already
paid by the seller.
Accounting for Freight Charge

• Sometimes goods are sold “FOB destination” but

shipped “freight collect”.
Example: An entity has a P10,000 accounts
receivable at the end of the accounting period.
Term: 2/10, n/30 FOB destination and freight
collect. The customer paid freight charge of P500.
Accounting for freight charge:

1) To record the sale:

Accounts Receivable 10,000
Freight Out 500
Sales 10,000
Allowance for Freight Charge 500

2) To record the collection within the discount period:

Cash 9,300
Sales Discount 200
Allowance for Bad Debts 500
Accounts Receivable 10,000
Accounting for Sales Return:

• Entry for the probable return is:

Sales Return xx
Allowance for Sales Return xx
Accounting for Sales Discount
Methods of recording credit sales:
1. Gross method- The accounts receivable and
sales are recorded at gross amount of the
invoice. This is the commonly and widely used
method because it is simple to apply. Sales
discount is recorded when taken.
2. Net method- The accounts and receivable and
sales are recorded at net amount of the invoice,
 Accounting for Sales Revenues
Gross Method

Assume on March 15, P1,000 of merchandise is

sold on account. The terms of the agreement are
2/10, n/30. The firm uses the gross method for
record sales on account.
Entry on date of sale:
Accounts Receivable 1,000
Sales 1,000

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 Accounting for Sales Revenues

Gross Method
If paid within the discount period:
Cash 980
Sales Discounts 20
Accounts Receivable 1,000
If not paid within the discount period:
Cash 1,000
Accounts Receivable 1,000

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 Accounting for Sales Revenues

Net Method

This time, assume that all sales on account are

recording using the net method. Again, the terms
of the agreement are 2/10, n/30.
At the point of sale (March 15):
Accounts Receivable 980
Sales 980

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 Accounting for Sales Revenues

Net Method
If paid within the discount period:
Cash 980
Accounts Receivable 980

If not paid within the discount period:

Cash 1,000
Sales Discounts Not Taken 20
Accounts Receivable 980

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 Accounting for Bad Debts

 Occur when customers do not pay for

items or services purchased on credit.
 Bad debts are uncollectible accounts
receivable.
 Bad Debt Expense is reported as a
general expense.
 Accounts receivable are reported on
the Statement of Financial Position
sheet at their net realizable value.
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 Accounting for Uncollectible
Receivables (Direct Method)
Write Off:
Bad Debts Expense 400
Accounts Receivable 400
To write off an
uncollectible account.

Since this determination was made after the

period in which the sale takes place, the
matching principle is violated. This
method is not accepted under PFRS.

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 Accounting for Uncollectible
Receivables (Allowance Method)
In this method, an estimate of the total uncollectible
accounts is made at the end of the period, and an expense
is recognized.
Bad Debts Expense 2,000
Allowance for Bad Debts 2,000
To record estimated
uncollectible accounts.

PFRS requires the use of

the allowance method.
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Accounting for Sales Discount:

The adjustment to record the expected sales

discount is:

Sales Discount xx
Allowance for Sales Discount xx
Estimating doubtful accounts

• Percentage of net credit sales method

Sales on Account xx
Sales Returns & Allowances (xx)
Sales Discount (xx)
Net Credit Sales xx
x Rate of loss %
Doubtful Accounts xx
1. Aging method
Estimating doubtful accounts

• Percentage of ending receivable method

AR, end xx
x Rate of loss %
Required Allowance xx
Less: Recorded Allowance xx
Doubtful Accounts xx
• Aging of Accounts Receivable
Basic Formulas:

AR, beginning xx
Add: Sales on Account xx
Recoveries xx, xx
Total xx
Less: Collections xx
Write-offs xx
Sales Returns xx , xx
AR, end xx
Basic formulas:

Allowance for Bad Debts, beg. xx

Add: Provisions for bad debts xx
Recoveries xx, xx
Total xx
Less: Write-offs xx
Allowance for Bad Debts, end xx