Financial accounting and reporting
RECEIVABLES 268. Advances to Affiliates
260. Receivables
These are financial assets that represent a
contractual right to receive cash or another
financial asset from another entity.
261. Trade Receivables
These refer to claims arising from sale of
merchandise or services in the ordinary course of
business (e.g., accounts receivable, notes
receivable, etc.).
262. Accounts Receivable
These are open accounts arising from the
sale of goods and services in the ordinary course of
business and not supported by promissory notes.
263. Notes Receivable
These are receivables supported by formal
promises to pay in the form of notes.
264. Nontrade Receivables
These represent claims arising from
sources other than the sale of merchandise or
services in the ordinary course of business.
265. Classification of Trade Receivables
a. Current asset – if expected to be realized
in cash within the normal operating
cycle or one year, whichever is longer;
default in case the problem is silent.
b. Noncurrent asset – in case otherwise.
266. Classification of Nontrade Receivables
a. Current asset – if expected to be realized
in cash within one year, the length of the
operating cycle notwithstanding.
b. Noncurrent asset – in case otherwise.
267. Advances to or Receivables from
Shareholders, Directors, Officers or Employees
General rule: Current asset
Exception: Noncurrent asset if stated to be
collectible beyond 1 year.
Ch 004
Noncurrent (long-term investment).
269. Subscription Receivable
General rule: Deduction from subscribed
share capital.
Exception: Current asset if stated to be
collectible within 1 year.
270. Debit Balances in Creditors' Accounts
These balances occur due to overpayments
and/or returns and allowances.
General rule: Current asset.
Exception: If the amount is immaterial,
offset against the creditors' accounts with credit
balances.
271. Special Deposits on Contract Bids
General rule: Noncurrent asset.
Exception: Current asset if stated to be
collectible within 1 year.
272. Accrued Income
Examples: Dividends receivable, accrued
rent, accrued royalties income, accrued interest on
bond investments, etc.
Always classified as current asset.
273. Claims Receivable
Examples: Claims against common carriers
for losses or damages, claim for rebates and tax
refunds, claims from insurance entities, etc.
Always classified as current asset.
274. Customer’s Credit Balances
These balances occur due to overpayments,
returns and allowances, and advanced payments
from customers.
General rule: Current liability
Exception: If the amount is immaterial,
offset against customers’ accounts with debit
balances.
275. Measurement of Accounts Receivable
a. Initial measurement – fair value (face
amount or original invoice amount)
b. Subsequent measurement – amortized
cost (net realizable value of accounts
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Financial accounting and reporting
receivable or gross accounts receivable
less allowances)
276. Allowances Against Accounts Receivable
These are usually deducted from accounts
receivable to get the latter’s estimated recoverable
amount or realizable value.
a. Allowance for freight charges
b. Allowance for sales returns
c. Allowance for sales discounts
d. Allowance for doubtful accounts
277. FOB Destination
It is a shipping term which means that
ownership of the goods purchased is vested in the
buyer upon receipt thereof. Under this shipping
term, the seller (owner during the freight period) is
responsible for the freight charges.
278. FOB Shipping Point
It is a shipping term which means that
ownership of the goods purchased is vested in the
buyer upon shipment thereof. Under this shipping
term, the buyer (owner during the freight period) is
responsible for the freight charges.
279. Freight Collect
It means that freight charge on the goods
shipped is not yet paid when the goods were
shipped (to be paid by the buyer).
280. Freight Prepaid
It means that freight charge on the goods
shipped was already paid (by the seller) when the
goods were shipped.
281. Journal Entry to Record Shipment of
Merchandise Sold Freight Collect Under FOB
Destination
Dr. Accounts receivable, Freight out; Cr.
Sales, Allowance for freight charge
282. Journal Entry to Record Shipment of
Merchandise Freight Prepaid Under FOB
Destination
Dr. Accounts receivable, Freight out; Cr.
Sales, Cash
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283. Journal Entry to Record Shipment of
Merchandise Sold Freight Collect Under FOB
Shipping Point
Dr. Accounts receivable, Cr. Sales
284. Journal Entry to Record Shipment of
Merchandise Sold Freight Prepaid Under FOB
Shipping Point
Dr. Accounts receivable (invoice amount +
freight charge); Cr. Sales, Cash
285. Journal Entry to Record Probable Return of
Merchandise Sold to Customers
Dr. Sales return; Cr. Allowance for sales
returns
286. TRADE DISCOUNT
It is a discount that is allowed by the
wholesaler to the retailer, calculated on the list price
of the product. No ledger account is opened for this
kind of discount.
287. Cash Discount
It is a discount allowed to stimulate instant
payment of the goods purchased.
Methods of Recording Credit Sales
289. Gross Method
It is a method of recording credit sales
where the accounts receivable and sales are
recorded at gross amount of the invoice (more
commonly used).
290. Net Method
It is a method of recording credit sales
where the accounts receivable and sales are
recorded at net amount of the invoice, meaning the
invoice price minus the cash discount.
***
291. Journal Entries Under the Gross Method of
Recording Credit Sales
a. Sale of merchandise on account – Dr.
Accounts receivable (gross amount of
invoice); Cr. Sales
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Financial accounting and reporting
b. Collection of customer’s account within
the discount period – Dr. Cash, Sales
discount; Cr. Accounts receivable
c. Collection of customer’s account
beyond the discount period – Dr. Cash;
Cr. Accounts receivable
292. Journal Entries Under the Net Method of
Recording Credit Sales
a. Sale of merchandise on account – Dr.
Accounts receivable (invoice price -
cash discount); Cr. Sales
b. Collection of customer’s account within
the discount period – Dr. Cash; Cr.
Accounts receivable
c. Collection of customer's account
beyond the discount period – Dr. Cash;
Cr. Accounts receivable, Sales discount
forfeited
293. Sales Discount Forfeited
It is a miscellaneous or other income
account credited whenever there is a collection of
accounts receivable beyond the discount period
under the net method of recording credit sales.
294. Journal Entry to Record Expected Sales
Discount
Dr. Sales discount; Cr. Allowance for sales
discount (this entry may be reversed at the
beginning of the next period.)
295. Bad Debt or Doubtful Account
It is an expense that a business incurs once
the repayment of credit previously extended to a
customer is estimated to be uncollectible.
Methods of Accounting for Bad Debts
297. Allowance Method
It is a method of accounting for bad debts
which requires the recognition of a bad debt loss if
the accounts are doubtful of collection (i.e., a
provision for doubtful accounts is required at the
end of reporting period).
Ch 004
298. Direct Writeoff Method
It is a method of accounting for bad debts
which requires recognition of a bad debt loss only
when the accounts are proved to be worthless or
uncollectible.
***
299. Provision
It is the amount of an expense that an entity
elects to recognize now, before it has precise
information about the exact amount of the expense.
300. Writeoff
It is a reduction in the recorded amount of an
asset which occurs upon the realization that an
asset no longer can be converted into cash, can
provide no further use to a business, or has no
market value.
301. Journal Entries Under the Allowance Method
of Recording Bad Debts or Doubtful Accounts
a. Provision for doubtful accounts – Dr.
Doubtful accounts expense; Cr.
Allowance for doubtful accounts
b. Writeoff of accounts proved to be
worthless or uncollectible – Dr.
Allowance for doubtful accounts; Cr.
Accounts receivable
c. Recovery and collection of accounts
previously written off – Dr. Cash; Cr.
Allowance for doubtful accounts
302. Journal Entries Under the Direct Writeoff
Method of Recording Bad Debts or Doubtful
Accounts
a. Writeoff of accounts proved to be
worthless or uncollectible – Dr. Bad
debts expense; Cr. Accounts receivable
b. Recovery and collection of account
previously written off – Dr. Cash; Cr. Bad
debts expense
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Financial accounting and reporting
303. CLASSIFICATION OF DOUBTFUL ACCOUNTS
OR BAD DEBTS EXPENSE IN THE INCOME
STATEMENT
a. Distribution cost - if the granting of
credit and collection of accounts are
under the charge of the sales manager.
b. Administrative expense - if the granting
of credit and collection of accounts are
under the charge of an officer other than
sales manager.
If the problem is silent, bad debts expense is
an administrative expense.
Methods of Estimating Doubtful Accounts
305. Aging of Accounts Receivable
It refers to the method of estimating
doubtful accounts where the receivables are
classified by due date. 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
(accurate and scientific; presents fairly the
accounts receivable at net realizable value).
a. It is one of the statement of financial
position approaches in estimating
doubtful accounts.
b. It provides the ending allowance for
doubtful accounts.
306. Percentage of Accounts Receivable
It is a method of estimating doubtful
accounts where a certain rate is multiplied by the
open accounts at the end of the period in order to
get the required allowance balance.
a. It is one of the statement of financial
position approaches in estimating
doubtful accounts.
b. It provides the ending allowance for
doubtful accounts.
307. Percentage of Sales
It is a method of estimating doubtful
accounts where the amount of sales for the year is
Ch 004
multiplied by a certain rate to get the doubtful
accounts expense.
a. It is the only income statement approach
in estimating doubtful accounts.
b. It provides the doubtful accounts
expense for the period.
***
308. Journal Entry to Record Correction in
Allowance for Doubtful Account as a Change in
Accounting Estimate
a. Inadequate allowance - Dr. Doubtful
accounts expense; Cr. Allowance for
doubtful accounts
b. Excessive allowance - Dr. Allowance for
doubtful accounts; Cr. Doubtful
accounts expense
309. Allowance for Impairment
It is the loss allowance required to be
recognized for expected credit losses on financial
assets measured at amortized cost.
310. Rules on Assessment for Impairment of
Accounts Receivable
a. Individually significant accounts
receivable – should be considered for
impairment separately and if impaired,
the impairment loss is recognized.
b. Not individually significant accounts
receivable – should be collectively
assessed for impairment (use of a
composite rate that can appropriately
measure impairment on all accounts in
the category).
c. Individually significant accounts
receivable initially assessed to be
unimpaired – should be included with
other accounts receivable (those not
individually significant) with similar
credit risk characteristics and
collectively assessed for impairment.
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Financial accounting and reporting
311. Journal Entry to Record Impairment Loss on
Accounts Receivable
Dr. Doubtful accounts expense; Cr.
Allowance for doubtful accounts
312. Negotiable Promissory Note
It is an unconditional promise made in
writing made by one person to another, signed by
the maker, engaging to pay on demand or at a fixed
or determinable future time a sum certain in money
to order or to bearer.
313. Dishonored
It is the status of a promissory note that has
already matured but is still unpaid after its
presentment for payment.
314. Treatment for Dishonored Notes Receivable
These (face amount, interest and other
charges) should be removed from the notes
receivable account and transferred to accounts
receivable.
315. Initial Measurement of Notes Receivable
The initial measurement should be fair value
plus transaction costs which is equal to:
a. General rule: Present value
b. Exception: Short-term notes receivable
shall be measured at face value.
316. Present Value
It is the sum of all future cash flows
discounted using the prevailing market rate of
interest for similar notes.
317. Nominal Interest Rate
It is the interest rate written on the face of an
instrument (form).
318. Effective Interest Rate
It is the prevailing market rate of interest
(substance).
319. Classification of Notes Receivable
a. Interest-bearing note with nominal rate
is equal to effective interest rate
b. Interest-bearing note with nominal rate
is greater than effective interest rate
Ch 004
c. Interest-bearing note with (nominal rate
is less than effective interest rate
d. Noninterest-bearing note
320. Treatment for Interest-Bearing Note
Receivable with Nominal Rate Equal to the Effective
Interest Rate
It is recorded at face value (which is equal to
its present value upon issuance).
321. Treatment for Interest-Bearing Note
Receivable with Nominal Rate Greater than the
Effective Interest Rate
It is recorded at face value (which is equal to
its present value upon issuance).
322. Treatment for Interest-Bearing Note
Receivable with Nominal Rate Less than the
Effective Interest Rate
It is measured at present value which is the
discounted value of future cash flows using the
effective interest rate.
323. Treatment for Noninterest-Bearing Note
Receivable
It is measured at present value which is the
discounted value of future cash flows using the
effective interest rate.
324. Implicit Interest Rate
It is an interest rate that is not explicitly
stated in a debt agreement.
325. Subsequent Measurement of Notes Receivable
It is subsequently measured at amortized
cost using the effective interest method.
326. Formula for Amortized Cost of Note Receivable
(Effective Interest Method)
Initial measurement of note receivable -
Principal repayment ± Cumulative amortization -
Reduction for impairment or uncollectibility =
Amortized cost of note receivable
327. Loan Receivable
It is a financial asset arising from a loan
granted by a bank or other financial institution to a
borrower or client.
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Financial accounting and reporting
328. Initial Measurement of Loan Receivable
It is initially measured at fair value plus
transaction costs that are directly attributable to
the acquisition of the financial asset (transaction
price + direct origination costs - origination fee).
329. Direct Origination Costs
These are incremental direct costs of loan
origination resulting from dealings with
independent third parties for that loan and various
direct costs from specific activities of the lender for
that loan such as evaluating the prospective buyer’s
economic condition, evaluating and recording
guarantees, etc.
330. Treatment for Direct Origination Costs
General rule: These are included in the initial
measurement of loan receivable.
Exception: These are expensed outright if
the loan did not materialize.
331. Indirect Origination Costs
These are operating costs of a lending
institution not directly incurred for a specific loan
such as administrative cost, rent, depreciation and
all other occupancy and equipment costs.
332. Treatment for Indirect Origination Costs
These are expensed as incurred.
333. Origination Fee
It is an upfront fee charged by a lender for
processing of a new loan application.
334. Treatment for Origination Fee
It is recognized as unearned interest income
and amortized over the term of the loan.
335. Subsequent Measurement of Loan Receivable
It is subsequently measured at amortized
cost using the effective interest method.
336. Formula for Amortized Cost of Loan
Receivable (Effective Interest Method)
Initial measurement of loan receivable -
Principal repayment ± Cumulative amortization -
Reduction for impairment or uncollectibility =
Amortized cost of loan receivable
Ch 004
Models for the Provision for Credit Losses from
Financial Instruments
338. Incurred Loss Model (IAS 39 – Old)
It assumes that all loans will be repaid until
evidence to the contrary (known as a loss or trigger
event) is identified. Only at that point is the impaired
loan (or portfolio of loans) written down to a lower
value.
339. Expected Credit Loss Model (IFRS 9 – New)
It allows entities to take into account
expectations of future credit losses. It results in the
earlier recognition of credit losses as it will no
longer be appropriate for entities to wait for an
incurred loss event to have occurred before credit
losses are recognized.
***
337. Credit Losses
These are the present value of all cash
shortfalls from a loan receivable or any similar
financial asset.
338. Credit Risk
It is the risk that one party to a financial
instrument will cause a financial loss for the other
party by failing to discharge an obligation.
339. Impairment Loss on Loan Receivable Under
the Incurred Loss Model
It is measured as the difference between the
carrying amount and the present value of estimated
future cash flows discounted at the original
effective rate.
Measurement Bases Under the Expected Credit
Loss Model
341. 12-Month Expected Credit Loss (Stage 1)
It is the portion of the lifetime expected
credit losses that represent the expected credit
losses that result from default events on a financial
instrument that are possible within the 12 months
after the reporting date. It applies to all items (from
initial recognition) as long as there is no significant
deterioration in credit quality
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Financial accounting and reporting
342. Lifetime Expected Credit Loss (Stages 2 and 3)
It is the expected credit loss that results
from all possible default events over the expected
life of the financial instrument. It applies when a
significant increase in credit risk has occurred on an
individual or collective basis
***
Stages of the General Approach (Expected Credit Loss Model)
345. Stage 1
Loss allowance updated 12-month expected
at each reporting date credit losses
Lifetime expected credit
losses criteria
Interest income Effective interest rate on Effective interest rate on Effective interest rate on
calculated based on gross carrying amount gross carrying amount
Change in credit risk
since initial recognition
Improvement
346. Computation of Impairment Loss Under the
Stage 1 of General Approach
Carrying amount, reporting date
- Present value of expected cash flows
= Expected credit loss
* Probability of default within 12 months or
LGD
= 12-month expected credit loss allowance
- Expected credit loss allowance, previous
year
= Impairment loss
347. Computation of Impairment Loss Under Stage
2 of General Approach
Carrying amount, reporting date
- Present value of expected cash flows
= Expected credit loss
* Probability of default within the remaining
term or LGD
= Lifetime expected credit loss allowance
Ch 004
343. Loss Given Default
It is the amount of money a bank or other financial
institution loses when a borrower defaults on a
loan.
Stage 2 Stage 3
Lifetime expected credit Lifetime expected credit
losses losses
Credit risk has increasedCredit risk has increased
significantly since initial
significantly since initial
recognition (whether on recognition (whether on
an individual or collective
an individual or collective
basis). basis).
+
Credit impairment
amortized cost (gross
carrying amount less
loss allowance)
↔ Deterioration
- Expected credit loss allowance, previous
year
= Impairment loss
348. Computation of Impairment Loss Under the
Stage 3 of General Approach
Carrying amount, reporting date
- Present value of expected cash flows
= Lifetime expected credit loss
- Expected credit loss allowance, previous
year
= Impairment loss
349. Receivable Financing
It is the financial flexibility or capability of an
entity to raise money out of its receivables.
350. Forms of Receivable Financing
a. Pledge of accounts receivable
b. Assignment of accounts receivable
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Financial accounting and reporting
c. Factoring of accounts receivable
d. Discounting of notes receivable
351. Pledge of Accounts Receivable
It is a form of receivable financing where a
business uses its accounts receivable as collateral
on a loan, usually a line of credit.
352. Line of Credit
It is the preset borrowing limit that a
borrower can use at any time.
353. Discount on Loan
It exists when the interest for the term of the
loan is deducted in advance.
354. Journal Entries Related to the Pledge of
Accounts Receivable
a. Commencement of loan in which the
accounts receivable have been pledged
– Dr. Cash, Discount on note payable (if
discounted); Cr. Note payable
b. Amortization of discount on note
payable at the end of reporting period or
at the date of settlement – Dr. Interest
expense; Cr. Discount on note payable
c. Payment of bank loan – Dr. Note
payable; Cr. Cash
355. Formula for Carrying Amount of Discounted
Note Payable
Note payable – Discount on note payable =
Carrying amount of note payable
356. Assignment of Accounts Receivable
It is a form of receivable financing where a
borrower called the assignor transfer rights in some
accounts receivable to a lender called the assignee
in consideration for a loan.
Kinds of Assignment of Accounts Receivable
358. Nonnotification Basis
It is a kind of assignment of accounts
receivable where the customers are not informed
that their accounts have been assigned (more
commonly practiced).
Ch 004
359. Notification Basis
It is a kind of assignment of accounts
receivable where the customers are notified that
their accounts have been assigned to have them
make their payments directly to the assignee
***
360. Service Charge, Financing Charge or
Commission
It is the interest for the loan that an assignee
charges for the assignment agreement.
361. Equity in Assigned Accounts Receivable
It is the difference between the accounts
receivable assigned and the note payable from bank
that shall be disclosed by the entity.
362. Journal Entries Related to the Assignment of
Accounts Receivable Under Nonnotification Basis
a. Separation of assigned accounts
receivable – Dr. Accounts receivable –
assigned; Cr. Accounts receivable
b. Commencement of the loan for which
specific accounts receivable are
assigned with service charge – Dr.
Cash, Service charge; Cr. Note payable
– bank
c. Issuance of credit memo for sales
return to a customer whose account
was assigned – Dr. Sale return; Cr.
Accounts receivable – assigned
d. Collection of cash from assigned
accounts receivable less cash discount
– Dr. Cash, Sales discount; Cr. Accounts
receivable – assigned
e. Remittance of collections from
assigned accounts receivable to the
bank (assignee) plus interest – Dr. Note
payable – bank, Interest expense; Cr.
Cash
f. Writeoff of assigned accounts
receivable – Dr. Allowance for doubtful
accounts; Cr. Accounts receivable
g. Transfer of assigned accounts
receivable to accounts receivable after
making the last remittance of
collections paying off the loan balance
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Financial accounting and reporting
plus interest – Dr. Accounts receivable;
Cr. Accounts receivable – assigned
363. Journal Entries Related to the Assignment of
Accounts Receivable Under Notification Basis
a. Separation of assigned accounts
receivable – Dr. Accounts receivable –
assigned; Cr. Accounts receivable
b. Receipt of notice from bank about
collection of accounts receivable
assigned with cash discount – Dr. Note
payable – bank, Sales discount; Cr.
Cash
c. Sending of check to bank for interest
due on loan for which accounts
receivable were assigned – Dr. Interest
expense; Cr. Cash
d. Receipt of notice from bank about
collection of assigned accounts
receivable allowing for the final
settlement of the loan (with interest)
and the remittance of excess
collections and return of uncollected
assigned accounts – Dr. Cash, Interest
expense, Note payable – bank; Cr.
Accounts receivable – assigned
364. Factoring of Accounts Receivable
It is the selling of accounts receivables to a
third party to raise cash under notification and
nonrecourse bases.
365. Factor
It is the bank or finance entity to which the
accounts receivable are sold in factoring.
Forms of Factoring of Accounts Receivable
367. Casual Factoring
It is a type of factoring which simply means
normal sale of accounts receivable. If an entity finds
in a critical cash position, it may be forced to factor
some or all of its accounts receivable at a
substantial discount to a bank or a finance entity to
obtain the much needed cash.
Ch 004
368. Factoring in a Continuing Agreement
It is an arrangement where a financing entity
purchases all of the accounts receivable of a certain
entity. In this context, before the merchandise in
shipped to the customer, the company seeks for the
factor’s credit approval, if approved, the accounts
are directly sold to the factor then assumes for its
collections.
369. Journal Entry to Record the Factoring of
Accounts Receivable (Casual)
Dr. Cash, Allowance for doubtful accounts (if
any), Loss on factoring (balancing figure); Cr.
Accounts receivable
370. Factor's Credit Approval
It is required before a merchandise is
shipped to a customer when the reporting entity's
accounts receivable are under a factoring as a
continuing agreement.
371. Factoring Fee or Commission
It is charged by the factor for its services of
credit approval, billing, collecting and assuming
uncollectible factored accounts.
372. Factor's Holdback
It is a predetermined amount withheld by the
factor as a protection against customer returns and
allowances and other special adjustments.
373. Journal Entries Related to the Factoring of
Accounts Receivable as a Continuing Agreement
a. Factoring where invoice is subject to
credit terms allowing for availment of cash discount
with commission and factor’s holdback – Dr. Cash,
Sales discount, Commission (balancing figure),
Receivable from factor (factor’s holdback); Cr.
Accounts receivable
b. Return of merchandise by customer
whose account was previously factored – Dr. Sales
return and allowances (invoice price of goods
returned; Cr. Sales discount (invoice price *
discount rate), Receivable from factor (balancing
figure)
c. Final settlement with the factor after all
the receivables factored are collected – Dr. Cash;
Cr. Receivable from factor
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Financial accounting and reporting Ch 004
374. Credit Card 383. Formula for Maturity Value
It is a plastic card which enables the holder Maturity value = Principal + Interest over the
to obtain credit up to a predetermined limit from the whole term of the note
issuer of the card for the purchase of goods and
services (somewhat similar to factoring). 384. Maturity Date
It is the date on which the note should be
375. Journal Entries Related to Credit Card paid.
Transactions
a. Credit card sales – Dr. Accounts 385. Principal
receivable – credit card company; Cr. It is the amount appearing on the face of the
Sales note (face value).
b. Payment from credit card company – Dr.
Cash, Credit card service charge; Cr. 386. Interest
Accounts receivable – credit card It is the amount of interest for the full term
company of the note.

376. Discounting of Note Receivable 387. Formula for Interest

It is a form of receivable financing where a
note receivable is converted into cash by selling
them to a financial institution at a discount.
377. Endorsement
It is the transfer of right to a negotiable
instrument by simply signing at the back of the
instrument.
378. Endorsement with Recourse
It means that the endorser shall pay the
endorsee if the maker dishonors the note (default in
case the problem is silent).
Interest = Principal * Rate * Time
388. Time
It is the period within which the interest shall
accrue (date of note to maturity date).
389. Discount
It is the amount of interest deducted by the
bank in advance.
390. Formula for Discount
Discount = Maturity value * Discount rate *
Discount period

379. Endorsement without Recourse 391. Discount Rate

It means that the endorser avoids future
liability even if the maker refuses to pay the
endorsee on the date of maturity.
380. Net Proceeds
These refer to the discounted value of the
note received by the endorser from the endorsee.
It is the rate used by the bank in computing
the discount.
392. Discount Period
It is the period of time from date of
discounting to maturity date (unexpired term of the
note).

381. Formula for Net Proceeds
Net proceeds = Maturity value – Discount
382. Maturity Value
It is the amount due on the note at the date
of maturity.
393. Formula for Discount Period
Discount period = Term of the note – Expired
portion of the term up to the date of discounting
394. Journal for Discounting of Note Receivable
without Recourse
Dr. Cash, Loss on note receivable
discounting; Cr. Note receivable, Interest income

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Financial accounting and reporting
(principal * interest rate * time from date of note to
date of discounting)
Accounting Treatments for Discounting of Notes
Receivable with Recourse
396. Conditional Sale
It is a way of accounting for note receivable
discounting which treats the transaction as the sale
of note receivable subject to a condition (the
endorser has to refund the endorsee in case the
note is subsequently dishonored).
397. Secured Borrowing
It is a way of accounting for note receivable
discounting which treats the transaction as the
borrowing of cash by the endorser from the
endorsee with the note receivable held as security
by the latter for such borrowing.
***
398. Journal Entries Related to the Discounting of
Notes Receivable Under Conditional Sale
a. Discounting – Dr. Cash, Loss on note
receivable discounting (balancing
figure); Cr. Note receivable discounted (a
contra-asset deducted from other notes
receivable, requires disclosure of
contingent liability equal to this amount),
Interest income
b. Payment by the maker for the
discounted note at maturity – dr. Note
receivable discounted (Contingent
liability is extinguished also.); Cr. Note
receivable
c. Dishonor of discounted note by the
maker
• Payment to endorsee – Dr. Accounts
receivable; Cr. Cash
• Extinguishment of contingent
liability – Dr. Note receivable
discounted; Cr. Note receivable
Ch 004
399. Journal Entries Related to the Discounting of
Notes Receivable Under Secured Borrowing
a. Discounting – Dr. Cash, Interest expense
(balancing figure); Cr. Liability for note
receivable discounted, Interest income
b. Payment by the maker for the
discounted note at maturity – Dr.
Liability for note receivable discounted;
Cr. Note receivable
c. Dishonor of discounted note by the
maker
• Payment to endorsee – Dr. Accounts
receivable; Cr. Cash
• Derecognition of liability for note
receivable discounted – Dr. Liability
for note receivable discounted; Cr.
Note receivable
400. Discounting of Own Note
It is the discounting of a promissory note
where the maker is not a customer but the reporting
entity itself.
401. Journal Entry to Record Discounting of Own
Note
Dr. Cash, Discount on note payable; Cr. Note
payable (primary liability instead of contingent
liability)
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