Prepared by: SHERWIN B.

SANTOS, CPA__
E-mail Address: _sherwin.santos@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
Topic 5 (Accounts Receivable)
I. Objectives

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

a. To know the classification and presentation of receivables.

b. To know the initial and subsequent measurement of accounts receivables.

c. To identify the adjustments necessary in determining the net realizable

value of accounts receivable.

d. To understand the gross method and net method of recording credit sales.

e. To know the accounting for doubtful accounts, worthless accounts written

off and recoveries of accounts written off.

II. Learning Activities

Accounts receivable – arises from the sale of goods and services in the
ordinary course of the business that is not supported by promissory notes .

Classification of Accounts receivables

a. Trade receivables – includes Account Receivables, expected to be realized in

cash within 1 year or normal operating cycle, whichever is longer. Classified as
current assets.

B. Nontrade receivables – Receivables that are not expected to be realized in

cash within 1 year or normal operating cycle. Classified as noncurrent assets.
ACCTG 2105 / Intermediate Accounting 1

Initial measurement of accounts receivable- PFRS 9, paragraph 5.1.1,

provides that a financial asset shall be recognized initially at fair value plus
transaction costs that are directly attributable to the acquisition.
Subsequent measurement of accounts receivable- PFRS 9, paragraph
5.2.1, after initial recognition accounts receivable shall be measured at
amortized cost. Amortized cost is actually the net realizable value of accounts
receivable. (amount of cash expected to be collected/ estimated recoverable
amount)

In estimating the net realizable value of accounts receivables, the

following deductions are made:

a. Allowance for freight charge

b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

Allowance for freight charge

Terms:
a. FOB destination – ownership of the goods is transferred to the buyer
upon receipt.
b. FOB shipping point – ownership of the goods is transferred to the buyer
upon shipment.
c. Freight collect – freight charge is actually paid by the buyer
d. Freight prepaid – freight charge is actually paid by the seller

Illustration:
Entity has P200,000 on their accounts receivable at the end of accounting
period. The terms are 2/10, n/30, FOB destination and freight collect. The
customer paid freight charge of 10,000.

1. To record the sale:

Accounts receivable 200,000
Freight out 10,000
Sales 200,000 Allowance for freight charge 10,000

2. To record the collection within the discount period.

Cash 186,000
Sales Discount 4,000
Allowance for freight charge 10,000
Accounts Receivable 200,000

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ACCTG 2105 / Intermediate Accounting 1
Allowance for sales returns
In doing a business, there is a possibility that some customers will return
the goods because of unsatisfactory conditions due to defects or others cases. In
that case we need to account for that.

Illustration:
An amount of 100,000 is expected to be returned. The journal entry will be:

Sales return 100,000 Allowance for sales return 100,000

Allowance for sales discounts

Methods of recording credit sales
a. Gross method – in recording accounts receivable and sales, the gross
amount of the invoice is used.
b. Net method – In recording accounts receivable and sales the net amount
of the invoice is used; net amount is calculated by deducting the cash
discount from the invoice price.

Illustration – Gross method

1. Sale of merchandise for 200,000, terms 5/10, n/30.

Accounts receivable 200,000

Sales 200,000 2. Collection is made within the discount period.

Cash 190,000
Sales discount 10,000
Accounts Receivable 200,000 3. Collection is made beyond the discount

period.

Cash 200,000
Accounts Receivable 200,000

Illustration – Net method

1. Sale of merchandise for 200,000, terms 5/10, n/30.

Accounts receivable 190,000

Sales 190,000

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ACCTG 2105 / Intermediate Accounting 1
 2. Collection is made within the discount period.

Cash 190,000
Accounts receivable 190,000 3. Collection is made beyond the

discount period.

Cash 200,000
Accounts Receivable 190,000 Sales discount forfeited 10,000

Note: The Sales discount forfeited account is classified as other income.

Allowance for bad debts

To increase the sales some business entities, sell on credit to increase their
income. However, there are some risks that the company should consider
because selling on credit bears the risk of having some customers that will not
pay their accounts.

Two methods in accounting for bad debt loss

1. Allowance method
2. Direct write off method

Allowance method – requires recognition of a bad debt loss if the accounts are
doubtful of collection. Journal entry is:

Accounts are considered doubtful of collection

Doubtful accounts xx
Allowance for doubtful accounts xx

Doubtful accounts are subsequently found to be worthless

Allowance for doubtful accounts xx
Accounts receivable xx

Previously written off are recovered / collected

Accounts receivable xx
Allowance for doubtful accounts xx Cash xx
Accounts Receivable xx

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ACCTG 2105 / Intermediate Accounting 1

Direct write off method – does not require recognition for a doubtful account,
recognition is done when the accounts are proved to be worthless. *

Illustration
Accounts are considered to be doubtful of collection
-No entry

Accounts are proved to be worthless

Bad debts xx
Accounts Receivable xx

Previously written-off accounts are recovered / collected

Accounts Receivable xx
Bad debts xx

Cash xx
Accounts receivable xx

Notes:
*recognized by the BIR for income tax purposes
*small business
*violates matching principle
*not permitted under IFRS
*if the recovery is SUBSEQUENT TO THE YEAR OF WRITEOFF, the recovery may
simply be credited to OTHER INCOME.

Reference:

Intermediate Accounting Volume 1, 2021 ed. by Valiz, Peralta & Valix

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