Department of Accounting Education

Roxas Ext., Digos City

Receivables

IFRS 9 – Financial Instrument

- Nonderivative financial assets with fixed or determinable payments that are not quoted in an active market

Receivables
- Financial assets that represent a contractual right to receive cash or another financial asset from another entity

Classification
1. According to source
a. Trade receivables – these are receivables arising from sale of goods and services; expected to be realized in cash within
the normal operating cycle or one year, whichever is longer
1. Account receivables – are open accounts or those not supported by promissory notes.
2. Notes receivables – those supported by formal promises to pay in the form of notes.
b. Nontrade receivables – receivables arising from sources other than sale of goods or services
(e.g. advances made to officers and employees, advance to affiliates, deposits with utility companies and deposits with
suppliers for future delivery of goods)

Accounts CA NCA Others

1. Advances to or receivables from shareholders, directors, officers X X
and employees
2. Advances to affiliates X
3. Advances to suppliers X
4. Subscription receivable X SHE
5. Creditor’s account with debit balance X Not material (offset)
6. Special deposit on contract bids X X
7. Accrued income receivables (dividends, rent, royalties…) X X
8. Claims receivable (insurance, rebates, tax refund…) X X

2. According to expected timing of cash flows

a. Current receivables – they include
1. All trade receivables
2. Nontrade receivables that are collectible within one year
b. Noncurrent receivables – these are nontrade receivables that are collectible beyond one year

Measurement:
Receivables
Initial: Fair value + transaction costs
Short-term receivable Face value/original invoice amount (whether
interest or noninterest bearing)
Long-term receivable
a. Interest bearing Face value
b. Non-interest bearing Present value

Subsequent: Amortized cost (effective interest method)

- Noninterest bearing long-term notes receivable
Net realizable value
- Short-term receivable (AR)
- Interest bearing long-term notes receivable

Accounts Receivable
Initial: Face value / Original invoice price
Subsequent: Net realizable value

Receivables
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 Department of Accounting Education
Roxas Ext., Digos City

Deductions to receivables:
a. Allowance for freight charge

“FOB destination, freight collect”

An entity has a P100,000 accounts receivable at the end of the accounting period. The terms are 2/10, n/30, FOB destination and
freight collect. The customer paid the freight charge of P5,000.

b. Allowance for sales return

c. Allowance for sales discount

Gaisano Grand engaged in the following transactions during the month of July:
July 1 Sold merchandise to A Company for P50,000, 2/10, n/30
2 Sold merchandise to B Company for P200,000, 2/10, n/30
12 Received payment from B Company for the July 2 sale.
30 Received payment from B Company for the July 1 sale.

Prepare journal entries using gross method and net method.

d. Allowance for doubtful accounts

a. Allowance method
- requires recognition of a bad debt loss if the accounts are doubtful of collection
- required by GAAP because it conforms with the matching principle
- Accounts receivable would be properly measured at net realizable value

b. Direct writeoff method

- requires recognition of a bad debts loss only when the accounts proved to be worthless or uncollectible
- usually adapted by small businesses because it is simple to apply

Allowance method Direct writeoff method

a. Accounts are considered Doubtful accounts xx No entry
doubtful of collection Allowance for doubtful accounts xx
*Deduction from accounts receivable
b. Accounts proved to be Allowance for doubtful accounts xx Bad debts xx
worthless or uncollectible Accounts receivable xx Accounts receivable xx
c. Accounts previously Accounts receivable xx If recovered during the year:
written off are recovered Allowance for doubtful accounts xx Accounts receivable xx
* whether recovered during the year or Bad debts xx
subsequent year
Cash xx
Cash xx Accounts receivable xx
Accounts receivable xx
If recovered in subsequent years:
Accounts receivable xx
Other income xx

Cash xx
Accounts receivable xx

Presentation of Receivables

Trade and nontrade receivables that are currently collectible shall be presented on the face of the statement of
financial position as one line item called trade and other receivables. However, the details of the total trade and
other receivables shall be disclosed in the notes to financial statements.
Note: Customers’ credit balances are classified as current liabilities. If the debit balances are not material, an offset against the
customers’ accounts with credit balances may be made and only the net accounts receivable may be presented.

Receivables
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 Department of Accounting Education
Roxas Ext., Digos City

Accounts receivable 5,000,000

Allowance for doubtful accounts ( 200,000)
Notes receivable 1,000,000
Accrued interest on note receivable 150,000
Advances to officers and employees 100,000
Dividends receivable 250,000
Total trade and other receivables 6,300,000

“Customer’s account with credit balances”

Customer’s credit balances are credit balances in accounts receivable resulting from overpayments, returns and allowances, and
advance payments from customers.

These credit balances are classified as current liabilities and are not offset against debit balances in other customer’s accounts,
except when the same is immaterial.

No adjustment is necessary to formally recognize the customer’s credit balances because these are canceled for sales and cash
settlement. But an adjustment may be made only for worksheet purposes, as follows:
Accounts receivable xx
Customer’s credit balance xx

PROBLEM:
At year-end, Close-up Company reported accounts receivables of P8,200,000. An analysis of the accounts receivable showed the
following:

Accounts known to be worthless 100,000

Advance payments to creditors on purchase orders 400,000
Advances to affiliated entities 1,000,000
Customer’s accounts reporting credit balances
arising from sales returns (600,000)
Interest receivable on bonds 400,000
Trade accounts receivable 3,500,000
Subscription receivable due in 30 days 2,200,000
Trade installments receivable due 1-18 months,
including unearned finance charge of P50,000 850,000
Trade accounts receivable from officers, due currently 150,000
Trade accounts on which postdated checks are held
and no entries were made on receipt of checks 200,000

What is the correct balance of trade accounts receivable?

Receivables
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 Department of Accounting Education
Roxas Ext., Digos City

Methods of estimating doubtful accounts

1. Aging the accounts receivable or “statement of financial position approach”
2. Percent of accounts receivable or also statement of financial position approach
3. Percent of sales or “income statement approach”

Aging the accounts receivable

The aging of accounts receivable involves an analysis where the accounts are classified into not due or past due.
The allowance is then determined by multiplying the total of each classification by the rate or percent of loss experienced by the
entity for each category. The amount computed by aging of accounts receivable represents the required allowance for
doubtful accounts at the end of the period.

Percent of accounts receivable

A certain rate is multiplied by the accounts receivable balance at the end of the year in order to get the required allowance
balance. The rate used is usually determined from past experience of the entity.

Percent of sales
The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts expense. The rate may
be applied on a credit sales or total sales.
Theoretically, the rate to be used is computed by dividing the bad debt losses in prior years by the charge sales of
prior years. The rate thus applied is multiplied by the current year’s charge sales to arrive at the doubtful accounts
expense.

Correction in allowance for doubtful accounts

Since doubtful accounts are reported as estimates, there is a need to test its reasonableness by using an age of receivables. The
correction is to be reported in the income statement either as an addition to or subtraction from doubtful accounts expense.

Inadequate allowance Doubtful accounts xx

Allowance for doubtful accounts xx
Excessive allowance Allowance for doubtful accounts xx
Doubtful accounts xx

Debit balance in allowance account

The allowance for doubtful accounts normally has a credit balance. However, it may have a debit balance because it may be the
policy of the entity to adjust the allowance at the end of the period and record accounts written off during the year.

For example, on January 1, the allowance account before adjustment has a credit balance of P30,000 and during the year an
account of P50,000 is written off and recorded as follows:

Allowance for doubtful accounts 50,000

Accounts receivable 50,000

Thus, on December 31, the allowance account has debit balance of P20,000 before adjustment. At the end of the period when
adjustments are made, the debit balance should be considered.

To continue the example – if on December 31, the required allowance is P40,000, the adjustment should be:

Doubtful accounts 60,000

Allowance for doubtful accounts 60,000

Receivables
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 Department of Accounting Education
Roxas Ext., Digos City

ASSIGNMENT: ½ sheet of paper

Problem 1
Youngish Company reported the following information at year-end before adjustments:
Debit Credit
Accounts receivable 600,000
Allowance for doubtful accounts 10,000
Sales 2,000,000
Sales return 40,000
Sales discount 60,000

Requirement:
Prepare adjustment for estimated doubtful accounts under each of the following assumptions:
a. Five percent of accounts receivable may prove uncollectible.
b. Aging shows that P50,000 of accounts receivable may prove uncollectible
c. Two percent of net sales may prove uncollectible.

Problem 2
Rampant Company reported in the beginning of the year that the allowance has a credit balance of P170,000. Bad
debt recoveries and bad debts written off in the current year were P30,000 and P235,000, respectively. The allowance
accounts had been previously calculated as a percentage of net sales.

It was decided however to provide for doubtful accounts commencing with the December 31 adjusting entry on the basis of an
analysis of the age of the receivables. The following schedule was prepared.
Percent uncollectible
Not yet due 1,700,000 NIL
1-30 days past due 1,200,000 5
31-60 days past due 100,000 25
61-90 days past due 150,000 50
Over 90 days past due 120,000 100
Additional accounts to be written off 30,000

Requirement:
1. What is the required allowance for doubtful accounts on December 31?
2. How much would be the doubtful accounts expense for the current year?
3. What is the adjusting entry for the doubtful accounts expense for the current year?
4. What is the net realizable value of accounts receivable on December 31?

Receivables
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