20/03/22

ACC 102

ACCOUNTS RECEIVABLE

Receivables-

 Financial assets
 Represent a contractual right to receive cash/ financial asset from another entity

Classifications of receivables:

1. Trade receivables- (sale of merchandise/services)

 Claims arriving from sale of merchandise/services
 In ordinary course of business
 Realized w/in 1 year
a. Accounts receivable-
 Open accounts
 Result from sales of goods/services
 W/in ordinary course of business
 Not supported by promissory notes
b. Notes receivable-
 Supported by formal promises
 Promises to pay in the form of notes
2. Non-trade receivables-( selling of or buying asset/discarding,advances)
 Claims from other sources
 Sales other than that of merchandise/sales
 W/in ordinary course of business , 1 year
 Noncurrent assets- realizable 1 year more.
3. Loans receivable- (Loans)
 Receivables from loans to customers.
 Used by banks and other financial institutions.
 Repayment is over several years.

*Both trade & non-trade-

 That are currently collectible

 Presented in financial position statement
 Represented as 1 line item= “trade & other receivables”.

Customer credit balances- (Current liabilities)

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 Credit balance in accounts receivables

 Result from:
o Overpayment
o Returns & allowances
o Advance payments from customers
 Classified as Current liabilities

Measurement of accounts receivable:

1. Initial measurement:
o Face amount/ original invoice amount
2. Subsequent measurement:
o Amortized cost/net realizable value
o NVR of accounts receivable-
o Amount of cash expected to be collected
o Estimated recoverable account

Net realizable value-

o Initial amount recognized for accounts receivable

o Is reduced by adjustment w/in ordinary course of business
o Initial amount- uncollectible or bad debts= Net realizable value.

Deductions to get net realizable value-

1. Allowance for freight charge- (Is it taken for account in COGS or is it a contra asset
account?)

Terms related to freight-

1. FOB destination-
o Ownership of goods is transferred to the buyer
o When it arrives at the destination.
2. FOB shipping point-
o Ownership of goods is with the seller.
o When the goods are still on transit.
3. Freight collect-
o Goods shipped are not paid yet.
o Carrier will receive payment from the buyer.
4. Freight prepaid-
o Freight charge on goods shipped is already paid
o By the seller.
2. Allowance for sales return- (Contra asset account)
o Margin of error
o Expecting goods to be returned due to shortage or defect.
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3. Allowance for sales discount

Cash discounts-
o Reduction from an invoice price for paying in full
o Is offered to credit customers
o Sales discount= seller, purchase discount= buyer
o Expressed in = 3/10.n/30

Methods in recording credit sales:

1. Gross method-(Would these effects appear on the financial statement later on as a

deduction instead of on the credit side of the ledger?)
(Sales discount has a separate ledger in the books of the entity?)
o Accounts receivable sales are recorded in gross amount of invoice.
o Ledger is recorded without cash discount deductions to the amount first.
2. Net method- (There is no separate ledger for the sales discount)
Accounts receivable is recorded at net amount of invoice
Invoice price-cash discount

4. Allowance for doubtful accounts

o (How would businesses increase income through selling of credit rather than
cash?)
o Bad debts-
o Risk of customer not paying
o Account becomes uncollectible
o Bad debt loss

Two methods for accounting for bad debts:

1. Allowance method-
o Recognition of bad debt loss
o Doubtful of collection of account
2. Direct write-off people-
Recognition of bad debts only
When accounts are proved to be worthless or uncollectible.