ACCO 20053 Lecture #6

2020-11-09

Classification of Receivables
Loans and receivables are financial assets within the scope of IFRS 9 Financial Instruments and IFRS 7
Financial Instruments – Disclosures.
Loans = receivables maturing for more than one year.
Receivables = claims against customers maturing within twelve months.
a. Accounts Receivable – has no component of interest.
b. Notes Receivable – contain a note or a written promise to pay. They may be interest-bearing or
noninterest-bearing. When silent, a note receivable is also considered a trade receivable.

Trade receivables: arise from the sale of goods and services in the normal course of the
business. They only occur when goods are delivered or when services have been done. They
are always part of current assets regardless of its maturity date.
Non-trade receivables: these arise from sources other than the sale of goods or services
in the normal course of the business. Examples include advances and loans to certain
individuals and claims for tax refunds (rebates) and losses and damages.
Silent receivables are considered trade receivables unless otherwise stated. They are always part
of current assets regardless of maturity.
Trade receivables are always classified as current assets regardless of its maturity date. When the
maturity date extends beyond the normal operating cycle (beyond twelve months), that certain amount must
be disclosed and is still reported as part of current assets.
With regards to non-trade receivables, if they mature within the normal operating cycle, they are
considered current assets. For non-trade receivables that are expected to mature beyond the normal
operating cycle, they are considered non-current assets.

In summary:
Receivables under current assets:
Trade receivables maturing in the normal operating cycle or not.
Non-trade receivables maturing within twelve months from the end of the reporting period.
Receivables under noncurrent assets:
Non-trade receivables maturing after 12 months from the end of the reporting period.
Note that subscription receivables are deductions to shareholder’s equity.
It is to note the presentation of accounts receivable should be at its net realizable value or at its
amortized cost. The amount recognized for trade receivables is its transaction price.

Methods of Recording Receivables

Given:
July 16 2019 list price is P100,000 with trade discounts of 10%, 10% and 5%. The credit
terms are 2/10; n/30 with FOB shipping point freight prepaid for P2,000.
Note: discounts are recorded based on invoice price.

Gross Price Method (when taken)

Here, the receivables and sales are initially recorded at the gross invoice price. At initial
recognition, no cash discount is recognized until it is actually taken. When the discount is taken, the
cash discount is debited to the sales discounts account

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.
 Entry at invoice date:

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.
 76,950.0
Accounts Receivable 0
Sales 76,950.00

2,000.0
Accounts Receivable 0
Cash 2,000.00

or

78,950.0
Accounts Receivable 0
Sales 76,950.00
Cash 2,000.00

Journal Entry for payment on or before July 26, 2019:

77,411.0
Cash 0
1,539.0
Sales Discount 0
Accounts Receivable 78,950.00

Journal Entry for payment beyond July 26, 2019:

78,950.0
Cash 0
Accounts Receivable 78,950.00

Note that when a discount is taken in the subsequent period, an adjusting entry is made.

Sales Discount 1,539.00

Allowance for Sales Discount 1,539.00

Philosophy for adjusting: we make an adjustment if a cash discount is taken in the subsequent period
because sales revenue and accounts receivable would be overstated in the current period if no adjustment
is made. The said adjusting entry shall then be reversed in the beginning of the subsequent period.

Net Price Method (when not taken)

Under the net price method, both receivable and sales are recorded at net price (sales – sales
discount). The sales discount is only recognized when it is not taken.

Entry at invoice date:

Accounts Receivable 75,411.00

Sales 75,411.00

Accounts Receivable 2,000.00

Cash 2,000.00

or

Accounts Receivable 77,411.00

Sales 75,411.00
Cash 2,000.00

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.
 Journal Entry for payment on or before July 26, 2019:

Cash 77,411.00
Accounts Receivable 77,411.00

Journal Entry for payment beyond July 26, 2019:

Cash 78,950.00
Sales Discount Forfeited 1,539.00
Accounts Receivable 77,411.00

Note that when a discount is not taken in the subsequent period, an adjusting entry is
made.

Accounts Receivable 1,539.00

Sales Discount Forfeited 1,539.00

Philosophy for adjusting: if the discount is not taken and the sale will occur in the subsequent period,
an adjusting entry is made to prevent the receivable and revenue from being understated. This means that
if a discount was to occur in the subsequent period, no adjusting entry is to be made.

Allowance Method (when offered)

Here, the Accounts Receivable is recorded at gross sales price, sales revenue at net amount
(invoice price – sales discount), and the available cash discount is recorded as a credit in the valuation
account with the title Allowance for Sales Discount. Not that the allowance for sales discount, just like
sales discount, is based on the invoice price. It is recorded instantly when the discount is offered. And
just like the sales discount, the allowance for sales discount also reduces the accounts receivable to its
amortized cost.

Entry at invoice date:

Accounts Receivable 76,950.00

Allowance for Sales Discount 1,539.00
Sales 75,411.00

Accounts Receivable 2,000.00

Cash 2,000.00

or

Accounts Receivable 78,950.00

Allowance for Sales Discount 1,539.00
Sales 75,411.00
Cash 2,000.00

Journal Entry for payment on or before July 26, 2019:

Cash 77,411.00
Allowance for Sales Discount 1,539.00
Accounts Receivable 78,950.00

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.
Philosophy: since sales is recorded at net price, we assume that the discount is already recognized
through the allowance for sales discount. So, when the discount is taken for which it was already
recognized, revert the allowance for the discount incurred.

Journal Entry for payment beyond July 26, 2019:

Cash 78,950.00
Allowance for Sales Discount 1,539.00
Sales Discount Forfeited 1,539.00
Accounts Receivable 78,950.00

Philosophy: since the discount is forfeited, we cancel the allowance which recognized the discount
along with an entry to forfeited discounts to increase revenue to the amount that should be received.

Notice that when the discount is taken, it was already recognized when offered, hence the usage of
the allowance for sales discounts. But when it was not taken, no sales discount forfeited was recognized,
therefore the said account must be utilized. We cancel the allowance when it is not taken since the
allowance for discount embodies the sales discount.

At initial recognition, we see that the accounts receivable and sales revenue is understated.
Therefore, we must adjust if no discount is to occur and the transaction is to take place in the
subsequent period.

Note that when a discount is already lapsed and the transaction will occur in the subsequent period, an
adjusting entry is made.

Allowance for Sales Discount 1,539.00

Sales Discount Forfeited 1,539.00

Regardless of which method is used with the appropriate adjusting entries, the amortized cost of the
Accounts Receivable reported in the Financial Statements will be the same.

Accounting for Uncollectible Accounts

Direct Write-Off Method

Bad Debts Expense xxx

Accounts Receivable xxx

To reinstate written-off accounts collected

Accounts Receivable xxx

Bad Debts Expense xxx

Cash xxx
Accounts Receivable xxx

Allowance Method or Reserve Method

Bad Debts Expense xxx

Allowance for Bad Debts xxx

Writing-off uncollectible accounts under the allowance method:

Allowance for bad Debts xxx

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.
 Accounts Receivable xxx

Philosophy: the expense for bad debts is already recorded by the adjusting entry when the allowance was
established. So, when writing-off an uncollectible amount. Debit the allowance.

Reinstating a written-off amount under the allowance method:

Accounts Receivable xxx

Allowance for Bad Debts xxx

Cash xxx
Accounts Receivable xxx

作成した/終わった: 2020-11-09
Alcera, Vincent Luigil C.