ACCOUNTS RECEIVABLE

John Matthew Z. Espinas

MBA 602-1 Financial Accounting
Objectives

• To be able to distinguish between trade receivables and nontrade

receivables
• To know the classification and presentation of receivables
• To know the initial and subsequent measurement of accounts
receivable
• To identify the adjustments necessary in determining the net
realizable value of accounts receivable
• To understand the gross method and net method of recording credit
sales
• To know the accounting for doubtful accounts, worthless accounts
written off and recoveries of accounts written off
 Receivables

Retailers or Banks and other

Manufacturers financial institutions

Trade Receivables Nontrade Receivables

From sale of merchandise or
Claims arising from sources other
than the sale of merchandise or
services in the ordinary course of
services in the ordinary course of
business
business
Loans Receivables
Made to heterogenous customers
and the repayment periods are
frequently longer or over several
years

Accounts Receivables
Accounts arising from the sale of
goods and services in ordinary
course of business
Current Assets – expected to be realized in cash within the
normal operating cycle or one year
Notes Receivables
Those supported by formal Noncurrent assets – collectible beyond one year
promises to pay in the form of
notes
Presentation
 Shall be presented on
the face of the
statement of financial
position as one line
item called trade and
other receivables
 Details shall be disclosed
on the notes to financial
statements.
Customers’ credit balances
 Receivables resulting
from overpayments,
returns and allowances,
and advance payments
from customers.
 Classified as current
liabilities and are not
offset against the debit
balances in other
customers’ accounts.
Initial Measurement of accounts receivable
 Financial asset shall be recognized initially at fair value plus transaction cost
that are directly attributable to the acquisition
 Fair value = transaction price
 Accounts receivable shall be measured initially at face amount or original
invoice amount

Subsequent Measurement of accounts receivable

 After initial recognization, accounts receivable shall be measured at
amortized cost.
 Amortized cost = net realizable value
 Net realizable value - amount of cash expected to be collected or the
estimated recoverable amount.
Net realizable value

 The following deductions shall be made in estimating the net realizable value
of trade accounts receivable
 Allowance for the Freight charge
 Allowance for Sales return
 Allowance for sales discount
 Allowance for doubtful accounts
Allowance for Freight Charge

 FOB destination – seller shall be responsible for the

freight charge up to the point of destination
 FOB shipping point – buyer must pay the freight
charge

 Freight collect – freight charge on the goods shipped

is not yet paid. Carrier will collect the payment from
the buyer
 Freight prepaid – freight is already paid by the seller
Allowance for Freight Charge

 An entity has a P100,000 account receivable at the end of accounting period.

FOB destination and freight collect. The customer paid freight charge of
P5,000
Allowance for sales return

 AR shall recognize the probability that some customers will return goods that
are unsatisfactory or will make other claims requiring a reduction in the
amount due.
Sales discount
 Sale of merchandise for P100,000, terms 5/10, n/30

Allowance for Sales discount

Sales discount
 Sale of merchandise for P100,000, terms 5/10, n/30

Allowance for Sales discount

Sales discount
 Sale of merchandise for P100,000, terms 5/10, n/30

Allowance for Sales discount

Accounting for bad debts

 When an account becomes uncollectible, the entity has sustained a bad debt
loss.

 Two methods are followed in accounting for this bad debt loss:
 Allowance method
 Direct Writeoff method
Allowance method Direct Writeoff method