Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Trade and Other Receivables

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

Initial measurement of receivables

Under PFRS 9, Receivables are initially recognized at the transaction price. Short-term receivables are not
discounted.

Classification of receivables according to source:

1. Trade Receivables - Receivables arising from sale of goods/services from the normal course of business
(with actual or constructive delivery).
2. Non-trade receivables - Receivables arising from other activities aside from the normal course of
business.
a. Accrued interest – current if silent
b. Accrued dividend − current if silent
c. Claims from insurance − current if silent
d. Claims from damages − current if silent
e. Loans to employees – noncurrent if silent
f. Advances to employees – noncurrent if silent
g. Advances to affiliates – noncurrent if silent
h. Advances to suppliers – current if silent
i. Supplier’s debit balances – current
j. Subscription receivables – treated as deduction to equity if silent
k. Security deposits – noncurrent if silent

Trade receivables are classified as current assets regardless if they are collectible for more than 12
months. Non-trade receivables are classified as current or non-current if:
• Current – collectible within 12 months
• Non-current – collectible for more than 12 months.

Note: Customer’s credit balances are treated as current liabilities. They should not be offset against receivables.

Subsequent measurement
After initial recognition, receivables are measured at amortized cost: Cost – Allowances – Impairment.

Accounting for variable consideration

Under PFRS 15, it is necessary for the entity to recognize revenue based on the amount of the transaction price.
When the entity determines the amount of transaction price, the entity shall consider the effects of the following:
1. Variable consideration
2. Constraining elements of variable consideration
3. The existence of a significant financing component
4. Non-cash consideration
5. Consideration payable to the customer

Consideration in the contract may vary due to discounts, returns, refunds, credits and other similar items. The
following pages will describe the various accounting methods for certain variable consideration. The transaction
price is determined at the beginning and reassessed at the end of each reporting period for any changes.

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Recognition of freight-out and sale:

Who shoulders the freight charges?
1. FOB Shipping point – the buyer should pay for the shipping fees. The seller should recognize sales at
point of shipment.
2. FOB Destination – the seller should pay for the shipping fees. The seller should recognize freight out (an
expense account) as an expense. The seller should recognize sales when the goods shipped are
already with the buyer.

Who initially pays for the freight?

1. Freight collect – Buyer initially pays for shipping fees.
2. Freight prepaid – Seller initially pays for the shipping fees.

ABC Company sold goods for P200,000; the shipping fee was P1,500

FOB Shipping FOB Shipping FOB Destination FOB Destination

Point Point (Collect) (Prepaid)
(Collect) (Prepaid)

AR 200,000 201,500 200,000 200,000

Freight out − − 1,500 1,500
Sales 200,000 200,000 200,000 200,000
Cash − 1,500 − 1,500
Allowance
for freight − − 1,500 −
(Recognized at point of shipment) (Recognized at point of delivery)

Accounting for trade discount and cash discounts:

• Trade discounts/volume discounts are automatically included as reductions to sales.
• Cash discounts on the other hand may be recognized using either of the three:
a. Gross method – Accounts receivable and sales at gross; sales discounts are recognized only
when they are paid within the discount period.

b. Net method – Accounts receivable and sales at net amount; sales discounts are already
recognized. Sales discount forfeited (other revenue) should be recognized when the discount
period lapses.

c. Allowance method − Accounts receivable at gross, recognize contra-asset (all. for sales discount)
and sales at net amount. Sales discount forfeited (other revenue) should be recognized when the
discount period lapses.

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Illustration
Sales of P200,000 on account. Terms: 2/15, n 30.

Gross method Net method Allowance method

@ Sale
Accounts Receivable 200,000 196,000 200,000
Sales 200,000 196,000 196,000
Allowance for SD 4,000

@ Collection within Discount period

Cash 196,000 196,000 196,000
Sales discount 4,000 − −
Allowance for SD − − 4,000
AR 200,000 196,000 200,000

@ Collection outside Discount period

Cash 200,000 200,000 196,000
Sales discount − − −
Allowance for SD − − 4,000
Accounts
Receivable 200,000 196,000 200,000
Sales discount
forfeited − 4,000 4,000

@ YE - AJE (within discount period)

Sales discount 4,000
No Entry
Allowance for SD 4,000

@ YE – AJE (outside the discount period)

Accounts Receivable 4,000 −
Allowance for SD − 4,000
No Entry
Sales discount
forfeited 4,000 4,000

Accounting for sales return

Accounts receivable should also include the probability of customer returns due to unsatisfactory or other claims
that will reduce the amount due. If the entity determines at the point of sale that 2% of the P100,000 sale is the
expected amount of returns. Then the entry would be

Accounts receivable 100,000

Sales return 2,000
Sales 100,000
Allowance for Sales return 2,000

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Accounting for allowance for doubtful accounts

There are two methods of accounting for bad debts for trade receivables:
1. Allowance method – the allowance method estimates the amount of expected default on its trade
receivables. The entity will use a contra-asset (i.e., allowance for doubtful accounts). GAAP requires the
use of the allowance method because it adheres to the matching principle.

When an entity estimates a probability of default:

Bad debts expense xx
Allowance for Doubtful accounts xx

When the default happens or when the receivable is deemed uncollectible:

Allowance for Doubtful accounts xx
Accounts receivable xx

When there is a recovery of accounts written-off

Accounts receivable xx
Allowance for doubtful accounts xx

Cash xx
Accounts receivable xx

2. Direct write off method – the company recognizes bad debts expense only upon actual default of a
customer. The direct write-off method is not allowed by the PFRS.

When an entity estimates a probability of default:

No entry

When the default happens or when the receivable is deemed uncollectible:

Bad debts expense xx
Accounts receivable xx

When there is a recovery of accounts written-off

Accounts receivable xx
Bad debts expense xx

Cash xx
Accounts receivable xx

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Methods in estimating doubtful accounts

1. Aging of receivables (balance sheet approach)
2. Percentage of accounts receivable (balance sheet approach)
3. Percentage of credit sales (income statement approach)

Aging of receivables
Receivables are classified according to number of days oustanding or age group. Usually analyzed by not yet due
and several age groups for past due receivables. Each group is then multiplied to the expected rate of default.
Receivables may be not yet due or past due. Because the receivables are analyzed according to age, this method
provides a more detailed and scientific approach in estimating doubtful accounts.

An account is past due when the customer’s balance is unpaid beyond the maximum credit term. For example: The
normal credit term of the company is 2/10, 1/15, n/30. Customer A’s balance is 20 days old, while customer B’s
balance is 50 days old.

Customer A’s balance is not yet due since the maximum credit term is 30 days. While customer B’s balance is
already 20 days past due.

When using this method, we obtain the required balance of the allowance for doubtful accounts at the end of
each reporting period.

Some of the concerns in using this method are as follows:

1. It violates the matching principle
2. Time consuming

Percentage of accounts receivable

A rate called the expected credit loss percentage (ECL) is multiplied to the balance of the accounts receivables.
The product will be the required balance of the allowance for doubtful accounts at the end of the reporting
period.

Some of the concerns in using this method are as follows:

1. It violates the matching principle
2. The ECL is quite time consuming and difficult to compute

Percentage of credit sales

A certain rate is multiplied to credit sales or total sales to obtain the bad debts expense for the period. Thus,
this method observes proper matching of costs with revenues.

In theory we can obtain the rate used by the entity by dividing the with the cumulative charge sales of the entity
with its cumulative bad debts expense.

Some of the concerns in using this method are as follows:

1. The rate used might be inadequate or excessive since the rate used by the company does not properly
incorporate the “age” of the receivable when using this method.

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Illustrative examples

Aging of receivables
The accounts receivable of the company amounts to P2,000,000 as of December 31, 2020. The company classifies
its trade receivables according to number of days past due as follows:

Age Amount Expected rate of Required allowance

uncollectibility
Not yet due P800,000 1% 8,000
1– 30 days due 300,000 5% 15,000
31 – 90 days due 400,000 6% 24,000
91 – 120 days due 200,000 8% 16,000
Over 120 days due 300,000 10% 30,000
Total P2,000,000 P93,000

If the allowance for doubtful accounts at the beginning of the year was P30,000. There were no write-offs during
the year. The bad debts expense for 2020 is:

Required ending balance P93,000

Less: Beginning balance 30,000
Bad debts expense P63,000

*Assuming that the over 120 days past due balance contains an 200,000 account that should be written-off. What
is the amount of bad debts expense for the period?

Required ending balance P93,000

Less: Adjustment to required balance 20,000 (P200,000 x 10%)
Add: Accounts written-off 200,000
Less: Beginning balance 30,000
Bad debts expense P243,000

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Percentage of Accounts Receivable

The accounts receivable of the company amounts to P2,000,000 as of December 31, 2020. The company estimates
that expected loss rate amounts to 5% of the accounts receivable balance. If the beginning balance is P20,000. How
much is the bad debts expense for the period?

P2,000,000 x 5% = P100,000 required balance.

Required ending balance P100,000

Less: Beginning balance 20,000
Bad debts expense P80,000

Percentage of Sales Method

The following is the information gathered from ABC Corporation for 2020:

Total sales of the company P1,000,000

Cash sales during the year 300,000
Allowance for doubtful accounts, beginning 50,000

The company estimates bad debts to be 2% of charge sales. How much is the allowance for doubtful accounts as of
December 31, 2020?

ADA, beginning P50,000

Add: bad debts expense for the period 14,000
ADA, ending P64,000

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Another illustration:
The company’s bad debts and sales for the last three years are as follows:

Year Sales Bad debts Accounts

expense written-off
2017 P4,000,000 P400,000 P70,000
2018 5,000,000 600,000 80,000
2019 6,000,000 800,000 150,000
Total P15,000,000 P1,800,000 P300,000

The company estimates its bad debts as a percentage of sales. The 2020 sales amounts to P8,000,000. The
company’s sales are all on account. How much is the allowance for doubtful accounts as of December 31, 2020?

First step: Obtain the bad debts percentage (prior debts expense ÷ prior credit sales = expected loss percentage)

P1,800,000 ÷ P15,000,000 = 12%

The bad debts expense for the year is P8,000,000 x 12% = P960,000

The balance of the ADA at 2020 would be:

ADA, Beginning P1,500,000 (1.8m – 300k)

Bad debts expense 960,000
ADA, Ending P2,460,000

Allowance for doubtful accounts

Beginning balance

Accounts written-off Bad debts expense

Recovery of Accounts
written-off

Ending balance

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Trade and other receivables JOR

(Adapted from IFRS, VALIX and EMPLEO)

Other problems encountered when accounting for doubtful accounts

1. Adjustments to doubtful accounts expense – just like with the problems encountered with the percentage
of sales method, the amount of bad debts expense might prove to be excessive or inadequate to address
this, we can employ other methods to assess the reasonableness of the bad debts expense for the period.

Any changes made to the bad debts expense for the period is taken up prospectively and considered to
be a change in accounting estimate, meaning taken to profit or loss for the period.

If the bad debts expense for the period were excessive the following entry will be made:
Allowance for doubtful accounts

Allowance for doubtful accounts xx

Bad debts expense xx

If the bad debts expense for the period were inadequate, the following entry will be made:

Bad debts expense xx

Allowance for doubtful accounts xx

2. Debit balances in allowance for doubtful accounts – The normal balance for ADA is a credit balance.
There may be instances during the year that ADA has a debit balance which is due to accounts written off
during the year. This does not mean that bad debts recorded for the period were inadequate, but
rather bad debts expense for the period were not yet recorded.

To illustrate:
Let us assume that the ADA had a beginning balance of P50,000. Accounts written-off during the period
amounted to P90,000. On December 31, the ADA before adjustment had a debit balance of P40,000.

On December 31 after an aging analysis, it was determined that the required balance for ADA should be
P25,000.

The bad debts expense for the period is computed as follows:

ADA, beginning 50,000

Less: write-offs 90,000
ADA, before adjustment (40,000)
Less: Required allowance (25,000)
Bad debts expense 65,000

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