BCSVillaluz

Practical Accounting 1
HAND-OUT NO. 2: Accounts Receivable

RECEIVABLE
Receivables are financial assets that represent a contractual right to receive cash or another financial asset from another.

Common Examples of Receivables

1. Accounts receivable – receivables supported by oral or informal promises to pay. These are not supported by formal
promissory notes.
2. Notes receivable – receivables supported by written or formal promises to pay in the form of promissory notes.
3. Loans receivable – receivables arising from loans extended by financial institutions, such as banks, financing companies,
and lending institutions. These are also supported by promissory notes and are generally backed by collateral securities.
4. Advances
5. Accrued income
6. Deposits
7. Claims receivable – receivables from insurance companies for casualties sustained, defendants under suit, government
agencies for refundable taxes and other remittances, common carriers for damaged or lost goods, and suppliers for returned
or damaged goods.

Trade and Non-trade Receivables

For non-financial institutions, receivables are classified into:
(1) Trade receivables – these are claims arising from sale of goods or services in the ordinary course of business.
(2) Nontrade receivables – these are claims arising from sources other than sale of goods or services in the ordinary course
of business.

The normal operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or
cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months.

FINANCIAL STATEMENT PRESENTATION

Trade and non-trade receivables that are currently collectible are combined and presented on the statement of financial position in a
single line item “trade and other receivables”.

ABNORMAL BALANCES IN ACCOUNTS

Customers’ credit balances
➢ Credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance payments from
customers.
➢ These are classified as current liabilities and are not offset against the debit balances in other customers’ accounts.

Adjusting Journal Entry:

Accounts receivable xx
Customer’s credit balances xx

Suppliers’ debit balances

➢ Debit balances in accounts payable resulting from overpayments, advance payments to suppliers.
➢ These are classified as current assets and are not offset against accounts payable.

Adjusting Journal Entry:

Advances to suppliers xx
Accounts payable Xx

INITIAL MEASUREMENT OF RECEIVABLES

Receivables are initially recognized at fair value plus transaction costs under IFRS 9 Financial instruments.

SUBSEQUENT MEASUREMENT
➢ Accounts receivable are subsequently measured at net realizable value (NRV). This is computed as accounts receivable
less allowance for doubtful accounts.

ACCOUNTING FOR DOUBTFUL ACCOUNTS

There are two methods of accounting for bad debts:
1. Allowance method – an allowance is recognized for bad debts when the collectability of accounts becomes doubtful.
➢ This method conforms with the accrual basis, matching, and conservatism. When it becomes certain that accounts are
uncollectible or worthless, the accounts are written off.

BRIAN CHRISTIAN S. VILLALUZ, CPA

CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Auditing (Theory and Problems) Page 1 of 3
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➢ When accounts previously written off are subsequently recovered, the write-off is reversed and reestablished and the
collection is recorded.
2. Direct write off method – this method does not conform to the concepts of accrual basis of accounting, matching, and
conservatism because bad debts are recognized only when uncollectability becomes certain.

METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

1. Percentage of credit sales
2. Percentage of receivables
3. Aging of receivables

Problem 1:
At the beginning of 2020, Gap Company had a credit balance of P260,000 in the allowance for uncollectible accounts. Based on past
experience, 2% of credit sales would be uncollectible.

During the current year, the company wrote off P325,000 of uncollectible accounts. Sales for the year totaled P11,250,000, of which
20% is cash sales.

1. What is the uncollectible accounts expense for 2020?

2. What amount should be reported as allowance for uncollectible accounts at year-end?

Answers: 180,000, 115,000

Problem 2:
OK Company provided the following accounts abstracted from the unadjusted trial balance at year-end:

Debit Credit
Accounts receivable 5,000,000
Allowance for doubtful accounts 40,000
Net credit sales 20,000,000

The company estimated that 3% of the gross accounts receivable will become uncollectible. What amount should be recognized as
doubtful accounts expense for the current year?

ANSWER: 190,000

Problem 3:
TK Company used the allowance method of accounting for doubtful accounts. The following summary schedule was prepared from an
aging of accounts receivables outstanding on December 31, 2020:

Number of days outstanding Amount Percentage estimated to be uncollectible

0 – 30 days 5,000,000 2%
31 – 60 days 2,000,000 10%
Over 60 days 1,000,000 20%

The following additional information is available for the year 2020:

Net credit sales for 2020 40,000,000

Allowance for doubtful accounts:
Balance, January 1 450,000 credit
Balance before adjustment, December 31 20,000 debit

The company based the estimate of doubtful accounts on the aging of accounts receivable. What amount should be reported as
doubtful accounts expense for 2020?

ANSWER: 520,000

Problem 4:
QR Company provided the following information relating to accounts receivable for the year 2020:

Accounts receivable, 1/1/20 P 1,300,000

Credit sales 5,400,000
Collections from customers (excluding recovery) 4,750,000
Accounts written off 125,000
BRIAN CHRISTIAN S. VILLALUZ, CPA
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Auditing (Theory and Problems) Page 2 of 3
 BCSVillaluz
Collection of accounts written off 25,000

What is the balance of accounts receivable on December 31, 2020?

ANSWER: 1,825,000

Problem 5:
Smolder Company provided the following transactions affecting accounts receivable during 2020:

Sales – cash and credit P 5,900,000

Cash received from non-credit customers 2,100,000
Cash received from credit customers, all of whom took advantage of the
discount terms 4/10 n/30 3,024,000
Accounts receivable written off as worthless 50,000
Credit memorandum issued to credit customers for returns and allowances 250,000
Cash refunds given to non-credit customers for returns and allowances 20,000
Recoveries on accounts receivable written off as uncollectible in prior periods
not included in cash received from customers stated above 80,000

Balances on January 1, 2020:

Accounts receivable P 950,000
Allowance for doubtful accounts 100,000

The company provided for uncollectible account losses by crediting the allowance for doubtful accounts in the amount of P70,000 for
the year 2020.

1. What is the balance of accounts receivable on December 31, 2020?

2. What is the balance of allowance for doubtful accounts on December 31, 2020?

ANSWERS: 1,300,000; 200,000

END OF HANDOUT

BRIAN CHRISTIAN S. VILLALUZ, CPA

CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Auditing (Theory and Problems) Page 3 of 3