Saint Louis College

Beacon of Wisdom in the North

City of San Fernando (La Union)
College of Commerce, Secretarial, and Accountancy

LESSON PLAN IN ACCOUNTS RECEIVABLE

I. LEARNING OUTCOMES

By the end of the lesson, the students should be able to:

A. explain in detail the concepts under accounts receivables;
B. classify accounts receivables according to their types through given scenarios;
C. determine the correct initial and subsequent measurement of accounts
receivable;
D. differentiate the gross method and net method of recording credit sales;
E. apply all the steps in basic accounts receivable concepts and formulas in
estimating doubtful accounts, worthless accounts written off and recoveries of
accounts written off in solving word problems;
F. accurately compute for the initial and subsequent measurement of accounts
receivable given a calculator;
G. give suggestions on solving accounts receivable problems during class
discussions;
H. demonstrate persistence when solving problem sets related to accounts
receivable using a worksheet; and
I. reflect on the importance of managing accounts receivables for a business
considering real life situations.

II. CONTENT
Topic: Accounts Receivable

A. Prior Knowledge:
1. Accounts receivable as one of the items under current assets
2. Accounts receivable in layman’s term as the amount of money that a company
expects to receive from its customers in the future
3. Bad Debts as a contra-asset account

B. New Knowledge:
1. Items included and excluded in accounts receivable
2. Measurement and presentation of accounts receivable
3. Different methods of estimating doubtful accounts

C. Value
1. Persistence in calculating the correct amount presented as accounts
receivable
2. Appreciation for the importance of managing accounts receivable effectively
in a business environment

III. RESOURCES
A. References:
● Intermediate Accounting 1A (2020 edition) by Zeus Vernon Millan
● Intermediate Accounting Volume I (2020 edition) by Conrado Valix, et al.
B. Materials:
● Powerpoint Presentation

IV. PROCESS
Teacher’s Activity Student’s Response Remarks
ERECE, Princess Ruth R.
Daily Routine
❖ Prayer
❖ Greetings
 ❖ Checking of Attendance

A. Introduction
1. Motivation
It was announced during our last meeting that our
topic for today is Accounts Receivable. Given that,
I expected that you have done an advanced
reading regarding our topic for today. Before we
start our discussion, Different questions will be
flashed on the screen, and the one who gets the
correct answer will get a recitation point which will
form part of your OTR.

Are you ready to start the activity class? Yes, Ma’am.

Great! Let’s begin the activity

1. The following are items included in The answer is letter D
accounts receivables except: Ma’am, since raw materials
a. Advances are included as part of
b. Accrued income inventories rather than
c. Deposits receivables.
d. Raw Materials

That is correct, Now for the second question

2. What is the initial measurement of accounts The answer is A, Ma’am.

receivable?
a. Face Amount
b. Fair Value - Transaction Costs
c. Net Realizable Value
d. None of the Choices

Excellent! Let’s Proceed to the next question

3. In estimating the net realizable value of The answer is D, Ma’am

accounts receivables the following deductions are
made except.
a. Allowance for freight charge
b. Allowance for Sales returns
c. Allowance for doubtful accounts
d. None of the choices
since all the items in the
choices should be deducted
to compute for the Net
Realizable Value of accounts
receivable.

Very Good! Now Let’s move forward to the second

to the last question. Are you still with me, class? Yes, Ma’am

4. The following are methods in estimating The answer is B, Ma’am

doubtful accounts, except?
a. Aging Method of Estimating
Doubtful Accounts
b. Allowance Method
c. Percentage of Accounts Receivable
Method
d. Percentage of Sales Method

Brilliant! Now for the Last Question

5. What is the subsequent measurement of The answer is A, Ma’am.

accounts receivable?
a. Amortized Cost
 b. Lower of Cost and Net Realizable
Value
c. Advances
d. Cost

Wow! I can say that all of you have done the

reading assignment given last meeting, and you
already have knowledge about the topic we’ll
discuss today.

I hope everyone is still with me. Kindly give me a

heart reaction if you are still with me, class.

All right, Glad you are still with me.

With no further ado, let's move on to the next part

of our discussion.

B. INTERACTION
1. Presentation
MONILLAS, Sophia Anne

Before we dig into the concepts of accounts

receivable, let us discuss receivables first in
general.

What is the first thing that comes into your mind These are assets ma’am and
when you hear the word receivables? are collectibles from the
debtor.

That’s right. Receivables are assets that represent

contractual rights to receive cash or other assets
from another entity. One example of receivable is
accounts receivable, which is our topic for today.
Accounts receivable are receivables supported by
oral or informal promises to pay. These are not
supported by formal promissory notes.

Do you have any idea about the classifications of Yes ma’am. Receivables are
receivables? classified into two which are
trade and non-trade
receivables.

Correct. A receivable is classified as either trade Current, Ma’am because you

or non-trade. Trade receivables arise from the sale said earlier that it arises from
of goods or services in the normal course of ordinary course of business.
business. These are typically short-term
receivables and are a result of the company's core
operations. Given these, how would you classify a
trade receivable? Is it current or non-current?

Exactly! Non-trade receivables on the other hand

are receivables arising from other sources other
than the company’s core operations. Unlike trade
receivables, non-trade can be current or non-
current depending on the receivable’s maturity
date.
Can anyone give me some examples of non-trade Examples of non-trade
receivables? receivables include amounts
owed by employees, tax
refunds, insurance claims,
and interest receivable on
loans.

Very good! To further check if you can already

accurately distinguish trade from non-trade
receivables, I will present some scenarios and try
to identify whether it is trade or non-trade
receivables.

First, Munar Restaurant purchased ingredients

from Calica Supermarket. Is it trade or non-trade? Trade, Ma’am.

Right, it is a trade receivable. Why do you think so? Because the purchase
transaction is part of the
normal course of a
supermarket which is to sell
goods such as ingredients.

Precisely. What about Chloe Chloe clothing line Trade also, Ma’am.
items sold by retailers?

Correct. Can you explain why it is a trade Because the items sold by
receivable? retailers arises from the
ordinary course of Chloe
Chloe, which is a clothing
business.
Very good.

Last, Turalba laundry shop sells its washing Non-trade receivable,

machine to a customer. Is it trade or non-trade? Ma’am.

Your answer is correct. Can you further explain It is non-trade, Ma’am

why it is considered as non-trade? because the sale of the
washing machine is not part
of the normal operation of
the laundry shop.

Correct. Even though washing machines are used

in the laundry shop, it’s sale is considered as non-
current because the laundry shop’s main operation
is to provide laundry services and not the buy and
sell of washing machine. So it is non-trade
receivable because it is not a normal operation of
a laundry shop to sell washing machines.

Do you have any clarifications regarding the None, Ma’am.

classification of receivables?
BALLESTEROS, Mark Louie

After explaining concepts and classifying Accounts

Receivables, let us go over to the more
“computation” part of accounting for Accounts
Receivable. Unlike cash which is measured only at
Face Amount. Accounts Receivable is measured
using initial and subsequent measurement.

Can someone give me the measurement used in Sir, the initial measurement
both initial and subsequent? for A/R is at Face Value or we
can also call it at Original
Invoice Price, while for the
subsequent measurement at
Net Realizable Value.

Very Good! Having said that, let me elaborate

more about measuring Accounts Receivable.

First is,

Initial Measurement

❖ at face value or original invoice amount

When goods are sold on account, the seller issues

an invoice to the buyer. This invoice presents the
price of the goods sold and this also serves as the
Face Value of the Accounts Receivable.

The second measurement is,

Subsequent Measurement

❖ at net realizable value (NRV) which means

the amount of cash expected to be collected
or the estimated recoverable amount

In estimating the NRV of trade accounts receivable,

deductions for the following are made:

a. Allowance for Freight Charge

- FOB Destination-ownership of the

goods sold is vested in the seller until it
reaches the buyer. Thus, the seller shall
be responsible for freight charge

- FOB Shipping Point-ownership of the

goods sold is vested in the buyer upon
shipment. Thus, the buyer shall be
responsible for freight charge.

- Freight Collect-freight charge is not

yet paid and will be collected from the
buyer.

- Freight Prepaid-freight charge is

already paid by the seller
b. Allowance for Sales Returns-recognizes the
probability that some customers will return goods
that are unsatisfactory or will claim a reduction of
the amount due in case of shipment shortages and
defects.

c. Allowance for Sales Discount-these are

estimates of cash discounts granted to customers
for their prompt payment at the end of the period
based on past experience.

d. Allowance for Doubtful Accounts-estimates of

uncollectible accounts. It recognizes the risk that
some customers will not pay their accounts.

Given these items for the subsequent Sir, I would like to try.
measurement, can someone give me a simple
illustration on how we can compute for NRV? We can compute for the NRV
using this simple formula:

Accounts Receivable

Less: Allowance for Doubtful

Accounts Allowance for
Sales Discounts Allowance
for Sales Returns Allowance
for Freight Charge

Net Realizable Value

Great Job, so that is how we compute the Net

Realizable Value of our Accounts Receivable.

All these items in computing for NRV will be further

explained as we move forward in our discussion.

Are there any questions? None so far, Sir.

Since there are no questions for now, let us move

on to the computation of the Cash Discount.

Under Traditional GAAP how many methods can Sir, there are two methods
be used to account for Sales Discount? Anyone? we can use to compute sales
discounts. First is the Gross
Method and the second one
is the Net Method.
That is right!

Why do you think companies offer Sales Discounts? Sir, in my opinion,

companies offer sales
discounts to attract
customers.
Yes, you are right about that. In addition,
companies offer sales discounts in order to
encourage prompt payment from the customers.

Let us now elaborate more about the two methods

of sales discount.

Accounting for Sales Discount

1. Gross method - the accounts receivable and
sales are recorded at the gross amount of the
invoice. Discounts are recorded only when they are
taken by the buyer.
2. Net method - the accounts receivable and sales
are recorded at net amount of the invoice (invoice
price minus the cash discount) Note: Under the Net
Method, Sales Discount Forfeited is classified as
other income.

TAGUINOD, Mikaela Mair Averel M.

Now that we’re done with the initial concepts on

accounts receivable, we can already proceed with
the concept of Bad Debts which is a very important
part in accounting for accounts receivable.

Before we discuss in depth about Bad Debts, can Based on what I’ve
anyone give his or her knowledge on what Bad understood from my
Debts are? advanced reading, bad
debts are debts that are
unlikely to be paid by
customers or clients, and
that businesses need to
account for these potential
losses.

Very Good! You were able to identify the key

points on how we can easily understand the
concept of Bad Debts.

From the name of the account itself, “Bad” and

“Doubtful”, Allowance for Bad Debts or Allowance
for Doubtful Accounts basically represents the
estimated amount of accounts receivable that will
not be paid by customers. Of course, it is inevitable
to have debtors who suddenly become insolvent,
therefore leaving your receivables unpaid. That is
why businesses have this account in order not to
overstate its Accounts Receivable.

Now, how do we account for allowance for bad Ma’am, can I try?
debts? Who can identify how bad debts are
reported on the Financial Statements?

Yes, go ahead. I think it is reported on the

Statement of Financial
Position under Assets.
Correct. Allowance for Bad Debts can be found on
the Statement of Financial Position or Balance
Sheet.

Follow-up question, if it is reported under the asset No, Ma’am. Allowance for
section, then would you mean that we will also Bad Debts are presented as
recognize it as an increase in asset just like cash a deduction to the Accounts
and accounts receivable? Receivable account.

Very Good! Here is a sample statement of financial

position or balance sheet. As you can see, the
AFBD account is indented below the Accounts
Receivable. The allowance for bad debts is a
contra-asset account that reduces accounts
receivable to reflect the estimated amount of bad
debts. Its purpose is to ensure that accounts
receivable is stated at its net realizable value
which is the amount that the business expects to
collect.

How about Bad Debts Expense? How is this Ma’am unlike Allowance for
different from Allowance for Bad Debts Account? Bad Debts, which can be
found on the Balance Sheet,
Bad Debts Expense is a
nominal account, which can
be found on the expense
section of the Income
Statement.

Right! Bad Debts Expense or Doubtful Accounts

Expense are uncollectible accounts for the year.
This account is closed to the Allowance for Bad
Debts account at year end which results in the said
account’s increase.

Basically, accounting for bad debts is very simple

as long as you familiarize yourself with the T-
Account for Bad Debts.

Before I proceed, can someone tell me the normal Ma’am, the allowance for
balance of Allowance for Bad Debt? bad debt account should be
a credit account

Okay, good. Follow-up question, why do you think Since it is a contra-asset

that a bad debt’s normal balance is Credit? Why account, its normal balance
not Debit? should be the opposite of
the accounts receivable
normal balance. The A/R
balance is debit, therefore
the AFBD should be credit
in order to decrease the
amount of A/R.

Exactly. That’s a very good analysis! As you can

see here in the presentation of Allowance for Bad
Debts T-Account, the beginning balance is on the
credit side along with recoveries and bad debts
expense. The debit side on the other hand is
composed of the written-off accounts and the
Allowance for Bad Debts ending balance. Aside
from the use of T-accounts, you can also opt to
follow this formula that can also be derived from
the T-Account.

Can anyone enumerate the methods of estimating Ma’am there are three ways
bad debts? to estimate bad debts. We
have the Percentage of
Sales, Percentage of
Accounts Receivable, and
Aging of Accounts
Receivable.

Correct. To easily understand these three

methods, here is a table to show their differences
in terms of approach, computation, and outcome.

As you can see, the first two methods have the

same approach and outcome. Problems involving
aging of receivables and percentage of accounts
receivable are used to arrive at the required
balance of Allowance for Bad Debts account while
the percentage of sales determines the amount of
Bad Debt Expense to be recorded in the Income
Statement.

For the computation, simply consider the name of

the method. For example, in the percentage of
accounts receivable, we can get the required
balance of Allowance for Bad Debts by multiplying
the given percentage by the ending amount of
Accounts Receivable. The same goes for the
Percentage of Sales, all we have to do is to multiply
the given percentage by the amount of sales. And
lastly, the Aging of Receivables, is quite similar to
the Percentage of Accounts Receivable method.
The only difference is the percentage used for
each term in the aging schedule.

It is important that you familiarize yourself with this

table because it is easier for you to answer a given
problem when you know what method was used in
the problem, what is given, and what is/are the
unknown amounts.

Do you have any questions or clarifications about Ma’am, how will we know
the methods of estimating bad debts? what method of estimating
bad debts will be used in a
given problem?

In solving accounts receivable problems, my tip

for you to easily identify the method to be used is
to look at the required amount first before reading
the whole problem. In this way, you will know what
method will be used and which among the
provided amounts will be used to compute the
required. Thank you, Ma’am!
You’re welcome. Any further questions? None, Ma’am.

If none, then I believe you are now ready to solve

problems on accounts receivable.

2. Application
NERONA, Kimberly Rose D.

To have a better understanding, let’s solve this

problem.

Thunder Company is engaged in the sale of

various home and office furnishings. It caters to
both cash and credit customers. The following
transactions affecting the accounts receivable of
Thunder Company took place during the year
2023:

· Sales (cash and credit) – 591,050

· Cash received from cash customers –

205,175

· Cash received from credit customers

(P281,300 was received from customers
who took advantage of the discount feature
of the company's credit terms 3/10, n/30 –
320,800

· Accounts written off as worthless – 4,955

· Credit memoranda issued to credit

customers for sales returns and allowances
– 26,275

· Recoveries on accounts written off as

uncollectible in prior periods (not included
in cash collections stated above) – 6,615

An aging of the receivables indicates that P17,300

of the accounts receivable balance is deemed
uncollectible.

The following balances were taken from the

December 31, 2022 statement of financial position.

· Accounts Receivable - P95,842

· Allowance for Bad Debts - P9,740

Compute for the following:

1. Balance of accounts receivable and

allowance for bad debts to be shown in
 December 31, 2023 statement of
financial position.

2. Amount of bad debts expense reported

in profit or loss for the year ended
December 31, 2023.

Before we proceed, I will give you 5 minutes to

read and analyze the problem so it will be easier
for you to follow as we solve this problem together.

Five minutes have already passed, I believe that

everyone is ready to solve the given problem.

For the first requirement, we need to identify the

ending balance of accounts receivable.

Included in the computation

Can anyone enumerate the items that are needed
ma’am is the balance of
to arrive at the accounts receivable for December
accounts receivable for the
31, 2023?
year 2022.

Good. What else? We will also include ma’am

the Sales on account
amounting to P385,875 by
subtracting Cash received
from customers amounting
to P205,175 from Sales of
both cash and credit
amounting to P591,050.

Great! What about the cash collections? Can We will subtract the cash
somebody try? collections from credit
customers amounting to
P320,800.

Very good. Aside from the cash collections, what

We will also subtract the
other items should we subtract?
cash discount given to
customers which has a credit
term of 3/10, n/30. To get the
cash discount we need to
consider the amount taken
by those who took the
discount feature of the
company. So P281,300
divided by 100% less the 3%
discount which is 97% yields
to 290,000. Then we just
simply subtract P290,000
with P281,300 to get the
amount of P8,700.
 We also need to deduct the
Accounts written off as
worthless, ma’am amounting
to P4,955.

Lastly, ma’am, we need to

deduct the credit
memoranda issued to credit
customers for sales returns
and allowances amounting
to P26,275.
Very Good! So that composes the ending balance
of accounts receivable that will be shown in the
balance sheet.

Take note that recovery of accounts previously

written off in the amount of P6,615 was not included
in the analysis of accounts receivable because said
amount was not included in the cash collections
given.

After enumerating the necessary items added and

subtracted, what will be the balance for accounts
receivable in December 31, 2023? P120,987 ma’am.

Correct. Next is the balance for allowance for bad

debts.

So can anyone give me the answer for the second

requirement? It is P17,300 ma’am. It was
already stated in the
problem that the amount of
the uncollectible account is
P17,300.
Very good. Take note of this class, there are
problems in which the required amounts are
already given in the problem and not needed to be
solved so always be careful in your analysis of the
problem.

For the last requirement, how will we solve for the

amount of bad debt expense using the formula that Included in the computation
was provided earlier? ma’am is the unadjusted
balance of allowance for
doubtful accounts
amounting to P9,740.

Right. Anything else? We will also deduct ma’am

the accounts written off as
worthless amounting to
P4,955 and we will add the
recoveries previously
written off amounting to
P6,615. From that we can
now already compute the
balance of allowance before
adjustments amounting to
P11,400.
Correct. So, after computing for the balance of Ma’am, we will now deduct
allowance before adjustments, how will we the balance before
compute for the bad debts? adjustment from the
required allowance for the
year end amounting to
P17,300 which yields to the
balance of the bad debts
expense of P5,900.

Very good! I am glad that you were able to

correctly apply every concept on accounts
receivable in solving the given problem.

3. Integration
PULIDO, Jessa Mae S.

Before we end this class, let’s see if you have

successfully grasped today’s lesson.

If you can still remember, what is the initial and Initial measurement is Fair
subsequent measurement of Accounts Receivable? Value + transaction price
and Subsequent
measurement is Amortized
cost.

That is right. Let us take note also that amortized

cost is actually the net realizable value of accounts
receivable.

What is the first step in classifying accounts Classify and present

receivables? receivables as either current
or non-current assets. Know
the initial and subsequent
measurement of the
accounts receivables.
Accounts receivable arise
from credit sales. The
amount to be recorded as
accounts receivable from
sales on account shall be the
“Invoice Price” which is the
amount after deducting
trade discounts from the List
Selling Price. Take note that
trade discounts are not
accounted for and are
ignored for recording
purposes.

Very Good. How about if the given accounts BEGINNING BALANCE +

receivable is beginning, what is the formula used Credit Sales + Recovery of
to compute for the ending balance? accounts written off + FOB
Shipping point, Freight
Prepaid - Sales returns and
allowances - Sales discounts
– Collections - Collection of
 recovery of WO - Write off =
ENDING BALANCE

Right! That is the correct formula in computing the

ending balance.

Now, why do businesses make sales on account? The primary reason why
businesses make sales on
account is to offer the
customers the ability to pay
“on account” to increase the
sales. Unfortunately, some
customers do not pay. When
they do not pay this is
considered an expense. The
lack of payment from the
customers is classified as
“bad debt expense”.

Since you’ve mentioned bad debts, what should Net realizable value is
you do to determine the net realizable value of amount of cash expected to
accounts receivables? be collected or the
estimated recoverable
amount. Hence, we need to
identify the adjustments
necessary in determining
the net realizable value of
accounts receivables.
Adjusted Accounts
Receivable - Allowance for
doubtful accounts, end =
NET REALIZABLE VALUE.

After learning about the concepts on accounts Managing accounts

receivable, what do you think is the importance of receivable is crucial for
managing accounts receivable among businesses? businesses to maintain a
healthy cash flow,
profitability, and risk
management, while also
building strong
relationships with their
customers. In addition to
this, businesses also have to
manage their bad debts well
because it can have a
negative impact on a
company's financial health
and profitability if not
monitored and properly
managed.
Assignment:

For your assignment, write your answer with complete solution in a 2-column worksheet. Take
a photo of it and upload it in the classwork assigned in our Google Classroom. Submit your
assignment on or before May 10, 2023, 11:59 PM.

Please be ready as I will assign one of you to present his/her answer and solution in class on
May 11, 2023 (Thursday).

An entity provided the following information for the current year:

Accounts Receivable - January 1 2,000,000

Credit Sales 10,000,000

Collection from customers, excluding recovery of accounts written off 8,000,000

Accounts written off as worthless 100,000

Sales Returns 500,000

Recovery of accounts written off 50,000

Estimated future sales returns on December 31 150,000

Estimated uncollectible accounts on December 31 per aging 300,000

What is the “Net Realizable Value” of Accounts Receivable on December 31?

a. 3,400,000
b. 3,100,000
c. 2,950,000
d. 2,900,000

Suggested solution:

Accounts Receivable

2,000,000 8,000,000

10,000,000 100,000

50,000 500,000

50,000

3,400,000

(150,000)

(300,000)

2,950,000

Accounts Receivable - January 1 2,000,000

Credit Sales 10,000,000

Collection from customers, excluding recovery of accounts written off (8,000,000)

Accounts written off as worthless (100,000)

Sales Returns (500,000)

Recovery of accounts written off -

Estimated future sales returns on December 31 (150,000)

Estimated uncollectible accounts on December 31 per aging (300,000)

Net Realizable Value 2,950,000