Module on Accounts Receivable
accounts receivable) are presented as current
 Receivables are classified into TRADE
receivables and NONTRADE receivables.
1. Trade receivables are receivables arising
from sale of goods or services in the ordinary
course of business.
 TR are classified as current asset when it is
realizable within normal operating cycle OR
one year, whichever is longer.
* Normal operating cycle is the time between the
acquisition of assets for processing and their
realization in cash. If normal operating cycle is
not clearly unidentifiable, it is assumed to be 12
months.
2. Nontrade Receivables are claims arising from
other sources.
 NTR are classified as current when realizable
in cash within one year.
Examples of NTR
1. Advances to, receivable from, due from,
shareholders, directors or employees. (If silent,
classified as current)
2. Advances to affiliates/subsidiary
(Noncurrent)
3. Advances to supplier for purchase or goods.
(Current)
4. Subscription Receivable are current asset if
collectible within one year. If the problem is
silent, it is a deduction from Subscribed share
capital.
5. Special deposits on contract, normally,
noncurrent. BUT if collectible within a year,
classified as current.
6. Accrued dividends receivables, accrued rent
income, accrued royalties, accrued interest,
classified as current.
7. Claims receivables (current)
8. Creditor’s account (debit balance in accounts
payable) due to overpayment, returns, and
allowances are presented as part of current
asset and NOT OFFSET AGAINST ACCOUNTS
PAYABLE.
 Trade and non trade receivables that are
currently collectible are combined and presented
on statement of financial position as a one line
item called “Trade and other receivables.”
 Customers’ credit balances (credit balance in
liabilities and not offset against accounts
receivable
Example: A Co. has an outstanding receivable of
P120,000. Subsequently, Customer B paid P150,000
to A Co.
Entry:
 Cash P150,000
Accounts Receivable P150,000
Accounts Receivable
P120,000 -balance P 150,000- collection
P 30,000 -
credit balance
The credit balance should not be offset against the
debit balance. So an adjusting entry is needed to
eliminate the credit balance.
 Accounts receivable P30,000
Customers’ credit balances P30,000
*This example is same as with the Creditor’s account.
Other examples:
1. Trade receivables including customer’s credit balance
P 1,500,000
of P150,000)
Answer: (1,500,000 + 150,000) = P 1, 550,000
2. Debit balance in Accounts Payable of P150,000.
Answer: Should be included in accounts receivable
and not offset against the balance of Accounts Payable.
 Financial Asset is initially measured at fair value
plus transaction costs that are directly attributable
to the acquisition.
 Accounts Receivable, a short term receivable, is
recorded initially at face amount or original
invoice amount.
*For short term receivables, fair value is equal to face
amount.
 Accounts receivable shall be measured
subsequently at Net Realizable Amount (NRA) Direct write-off

NRA- amount of cash expected to be collected or
the estimated recoverable amount.
 In estimating NRA of trade receivables, the ff.
deductions are made:
a) Allowance for freight charge
b) Allowance for sales return
c) Allowance for sales discount
d) Allowance for doubtful accounts
Allowance for freight charge
 No entry must be made if accounts are only doubtful of
collection. No allowance account is set-up.
 When accounts are proven to be worthless, expense is
recognize and accounts receivable is credited.
 If during the year, the account previously written off
has been collected, the two methods are the same.
 If the account previously written off is collected in the
subsequent period, entries are:
 Accounts receivable xx
Doubtful Accounts xx

Example: Sold goods amounting to P150,000. Terms  Cash xx

are 2/10, n/30, FOB destination, freight collect. Freight Other Income xx
charge is P3,000.
Example: During December 2019, A Co. write off P50,000.
 Accounts receivable P150,000 On January 2020, the P50,000 previously written off are
Freight out 3,000 collected.
Sales P150,000
Allowance for freight charge 3,000 Dec 2019
 Bad debts P50,000
Payment within discount period Accounts receivable P50,000

 Cash 144,000 Jan 2020

Sales discount 3,000  Accounts Receivable 50,000
Allowance for freight charge 3,000 Bad Debts 50,000
Accounts Receivable 150,000
 Cash 50,000
Allowance for Sales return/Sales discount Other income 50,000
 Set up an allowance account at the end of the
year or at the reporting period. Classification of Doubtful Accounts in operating
expenses
Sales discount
 There are two methods of recording credit  If under the charge of SALES manager, Doubtful
sales: account/Bad debt is classified as selling
1) Gross method expense/distribution cost.
2) Net method  If under the charge of OFFICER other than sales
manager, classified as Administrative expense.
* if silent, gross method is used
*if silent, DA/bad debts shall be classified as
Allowance for Bad debts/doubtful accounts administrative expense.
 Two methods for recording bad debt
loss/expense:
1. Allowance method
2. Direct write-off method

* if silent, allowance method is used

 Recoveries of account written off are to simply

reverse the original entry of write off. Recovery of
account previously written off has no effect on
Accounts receivable.