Prepared by: Ms. HAZEL JADE E.

VILLAMAR
E-mail Address: _hazeljade.villamar@clsu2.edu.ph________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 2105 / Intermediate Accounting 1

Module 2
TOPIC 1 (ACCOUNTS RECEIVABLE)

Overview

This course covers the detailed discussion, appreciation, and

application of the Philippine Financial Reporting Standards (PFRS) on the
assets, financial and non-financial of a business enterprise. Emphasis is
given on the interpretation and application of the accounting standards on
Financial Assets and their required disclosures. The related internal control,
ethical issues and management of assets are also covered. Exposure to
computerized system in receivables, inventory and lapsing schedules is a
requirement.

I. Objectives

At the end of the module, the following are expected:

A. Identify the proper presentation of receivables as either current or noncurrent
assets.

B. State the timing of recognition and measurement of trade and other

receivables.

C. Prepare amortization tables.

D. Account for impairment of receivables.

II. Learning Activities

Introduction to Accounts Receivable

We often go to the grocery buy necessities such as foods, beverages supply

etc. in which we usually pay in cash and then take possession of the product.

In companies however, they must be willing to accept cash or on credit in exchange

of the goods. This means that the entity would be willing to accept payment at a later
date, and you (the buyer) would incur an obligation towards the entity.

Transaction on credit usually results to:

a. Higher sales – since buyers are more willing to purchase on credit rather than
pay on cash

b. Potential loss – the entity shoulders the risk of loss, which will happen if the buyer
does not pay the amount it owes.

If the buyer does not pay the seller will recognize

1. A bad debts expense which will be shown in the balance sheet.

2. A reduced amounts of accounts receivable shown in the balance sheet.

Example
Assume that on March 1, Ingat Co. Sold 90000 worth of laptops to clients with a
credit term of net 20 days.
Entry:
Accounts Receivable 90000
Sales 90000
Under accrual basis income is recognized when earned regardless of whether paid
or not. In this case income is earned and recognized but payment of cash shall be
recognized after 20 days. (note: credit term net of 20 days represents the days the
buyer may pay the full amount.)
SALES OF GOODS IN CREDIT

When a company sells goods on account, the transaction results to an

increase in income statement as a sales revenue and COGS, an increase and
decrease in balance sheet as an Accounts Receivable and Inventory. The final
amount in the income statement of net profit (or loss) on the sale shall be reported
in the Statement of Stockholder’s Equity.

Shipping Terms and Freight Terms

Shipping terms can sometimes be confusing. Buyers need to be fully aware

of its Shipping and Freight terms before sending away the good so that the buyer
and seller can come to an agreement on who shall shoulder the costs in shipping
the goods.

Shipping terms can either be:

a. FOB Destination - the seller shall take ownership of the goods until the
buyer has received the product.
b. FOB Shipping point - the buyer takes ownership upon shipment of the
goods. Freight

Freight Terms can be:

a. Freight prepaid – seller pays the cost of shipping.

b. Freight Collect – the buyer pays cost of shipping.

To further summarize the concept kindly look at the diagram below:

Transfer of
Ownership
FOB Shipping
Point
SELLER BUYER

Transfer of
Ownership
FOB Destination
BUYER
SELLER
Example

Assume that in the illustration above, Ingat Co. shipped their laptops FOB
Destination, freight collect that costs 1000.

Freight Out 10000

Entry
Allowance for freight Charge 10000

Now assume that Ingat shipped their goods FOB Shipping point, freight collect.

Entry

None
(there shall be no entry to the selling entity’s perspective since the buyer
owns and shoulders transportation costs)

Credit Terms with discounts

When a seller gives a credit term net of 30 days the buyer is due to pay the
entire amount within 30 days after sales invoice date.

But some companies find that they do not receive payment on time even with
long credit terms so these companies offer discounts to customers who pays within
a short amount of time. These are called cash discounts or early payment discount
and the period of time to avail cash discount is called the discount period. For
example, 2/10 net of 30 days. The 2% discount on the entire amount owed shall
only apply within 10 days. If the customer does not pay within the discount period
of 10 days, the net purchase amount without the discount is payable within 30 days
after invoice date.
Example

Using the examples from above that on March 1, Ingat Co. Sold 90,000 laptops
with credit terms 2/10 net 30 days.

If the buyer is able to pay on or before March 11 (10 days) he/she may be
able to deduct 1800 (0.02 x 90000) from the 90000 purchase price of the laptops.

Thus, the entry shall be

March 1 Accounts receivable 90,000

Sales 90,000

March 11 Cash 88,200

Sales discount 1,800
Accounts receivable 90,000

If the customer fails to avail the 2% discount the entry shall be:

March 11 Cash 90,000

Accounts receivable 90,000
Methods for Recording Credit Sales

a. Gross Method – The accounts receivable and Sales are recorded at gross
amount
b. Net Method – The accounts receivables and sales are recorded at net
amount.

Example – GROSS METHOD

Sale of Goods worth 5000 terms 2/15 net 20 days

Accounts Receivable 5,000

Sales 5,000

If payment is received within discount period

Cash 4,900
Sales Discount 100
Accounts Receivable 5,000

Is payment was received beyond the discount

Period Cash 5,000
Accounts Receivable 5,000

Example – NET METHOD

Sale of Goods worth 5000 terms 2/15 net 20 days Accounts
Receivable 5,000
Sales 5,000

If payment is received within discount period

Cash 4,900
Accounts Receivable 4,900

Is payment was received beyond the discount Period

 Cash 5,000
Accounts Receivable 4,900
Sales Discount forfeited 100

Note that in Gross method they used an account of Sales discount if payment was
made within discount period while Net method uses Sales discount forfeited if
collection was made beyond discount period.

Allowance for Bad Debts

Accounts Receivable are found in the entity’s balance sheet classified as

current asset since the account is highly liquid and can easily be converted to cash
within a year. If not collected the Accounts receivable account can easily be
overstated in the balance sheet.

To present the account accurately the entities usually estimate how much of
the Accounts Receivable are not collectible. This estimate is a contra asset-account
found in the balance sheet called Allowance for Bad Debts or Allowance for Doubtful
Accounts. An increase or decrease in this account are recorded in the income
statement as Bad Debts Expense or Doubtful Account Expense.

There are two method of accounting for bad debts namely

1. Allowance Method
2. Direct Write-off Method

Allowance method for reporting Credit losses

To recognize doubtful account, the entry shall be:

Doubtful Accounts
Allowance for Doubtful Accounts

If the account is sure to be uncollectible the Accounts Receivable shall be written-

off and shall be entries as follows:
 Allowance for Doubtful Accounts
Accounts Receivable
Example:
An Accounts Receivable of 10000 from the 50000 sale of Phones on
credit are considered doubtful of collection

Doubtful Accounts Expense 10,000

Allowance for Doubtful Accounts 10,000

The accounts are subsequently discovered are proved to be uncollectible

Allowance for Doubtful Accounts 10,000
Accounts Receivable 10,000

Recovery of an account

After writing off the Accounts receivable it is still possible the seller has paid all
or part of the account that has been written off. Assume that in the previous example
10,000 of Doubtful Account has been unexpectedly collected.

Steps to record a recovery of Account under allowance method:

1. Reinstate the account written off by reversing the entry
Accounts Receivable 10,000
Allowance for Doubtful Accounts 10,000

2. Record the Accounts Receivable as if collected normally

Cash 10,000
Accounts Receivable 10,000

Direct Writeoff Method

Under direct Writeoff method Doubtfull Accounts are only recognized when
the accounts are proved to be worthless or uncollectible.

Example: A 5000 Accounts receivable are doubted to be collected.

No entry
*5,000 Accounts receivable is sure to be worthless or uncollected
Doubtful Accounts Expense 5,000
Accounts Receivable 5,000

*Suddenly, 5000 of the Accounts receivable was collected

Accounts Receivable 5,000
Doubtful Accounts Expense 5,000

Cash 5,000
Accounts Receivable 5,000
 ACCTG 2105 / Intermediate Accounting 1

References

Intermediate Accounting Volume 1, 2019 by Valiz, Peralta & Valix

Page 2 of 10