Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture C

Week 6–7: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Identify items to be included in the line-item trade and other receivables.
b. Compute doubtful accounts using various methods.

Big Picture in Focus: ULOa. Identify items to be included in the

line item trade and other receivables.

Metalanguage
In this section, the most essential terms relevant to the accounting for
receivable and to demonstrate ULOa will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through the intermediate accounting.
Please refer to these definitions in case you will encounter difficulty in the
understanding accounting concepts.
Please proceed immediately to the “Essential Knowledge” part since the
essential terms you will encounter in this lesson are also defined in the next section.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to
understand the following essential knowledge lay down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus,
you are expected to utilize other books, research articles and other resources that
are available in the university’s library e.g. ebrary, search.proquest.com etc., and
even online tutorial websites.
1. Receivables – refers to financial assets that represent a contractual right to
receive cash or another financial asset from other entity.
For retailers or manufacturers, trade receivables and nontrade receivables are
used.
Trade receivables – refers to claims arising from sale of merchandise
or services in the ordinary course of business. This includes accounts
receivable and notes receivable.
Nontrade receivables – represents claims arising from the sources
other than the sale of merchandise or services in the ordinary course of
business.
For banks and other financial institutions, loans receivable is used, as this is
equivalent to trade receivables of a merchandising company.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. Trade and Nontrade Receivables: Classification And Presentation

Common types trade receivables:

Accounts receivable – account maintained for the sale of goods and
services in the ordinary course of business and arising from an oral promise
to pay.
Notes receivable – account maintained for sale of goods and services in the
ordinary course of business and arising from a written promise to pay,
evidence by a promissory note.

Examples of nontrade receivables:

 Advances to or receivables from shareholders, directors, officers or
employees.
 Advances to affiliates
 Advances to suppliers for the acquisition of merchandise
 Subscription receivable (that is realizable within one year, otherwise, it shall
be a deduction from the subscribed share capital in equity section)
 Creditor’s account with debit balances arising from overpayment.
 Special deposit on contract bids
 Accrued income such as dividend receivable, accrued rent receivable,
accrued royalties receivable and accrued interest receivable
 Claims receivable such as claims against common carriers for losses or
damages.

Classification of trade and nontrade receivables

As current asset – for those receivables which are expected to be realized in
cash within the normal operating cycle or one year, whichever is longer.
As noncurrent asset – for those receivables which do not qualify as current
asset.

Presentation of trade and nontrade receivables

These receivables which are currently realizable shall be presented on the
face of the statement of financial position as one line item called trade and other
receivables. On the other hand, the details or composition of the trade and other
receivables shall be disclosed in the notes to financial position.

For example, the disclosure may appear as follows:

Accounts receivable 5,000,000
Allowance for doubtful accounts (200,000)
Notes receivable 1,000,000
Accrued interest on notes receivable 150,000
Advances to officers and employees 100,000
Dividends receivable 250,000
Total trade and other receivables 6,300,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

CUSTOMERS’ CREDIT BALANCES

A customer’s account balance (accounts receivable) usually bears a debit balance

as this is its normal balance. However, in a certain case, some accounts receivable
may have credit balance. This means that the account has a negative balance
resulting from overpayment of the customers against the amount they actually owe
or excess return over the balance of the account.

When the accounts receivable reflects a negative amount or a credit balance, it shall
be separated from the other receivables and be classified as current liabilities and
not offset against the other receivables with debit balances.

Example:
Customer A
Debit Credit
Sales 300,000 Collection 400,000

Balance 100,000

Customer B
Debit Credit
Sales 400,000 Collection 400,000
Return 50,000

Balance 50,000

3. MEASUREMENT OF ACCOUNTS RECEIVABLE

 Initially, all financial assets shall be measured at fair value plus transaction
costs that are directly attributable to the acquisition. Mostly, fair value is equal
to the transaction price. However, for a short-term financial asset, fair value is
equal to the face amount. Thus, accounts receivable shall be measured
initially at face amount because it is currently realizable.
 After initial recognition, accounts receivable shall be measured at amortized
cost, that is, equal to its net realizable value.
 The net realizable value of an accounts receivable is the amount of cash
expected to be collected or the estimated recoverable amount.
Net Allowance for doubtful
Accounts receivable at
realizable = - accounts, discount,
face amount
value returns and freight

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

NET REALIZABLE VALUE

The initial amount recognized for accounts receivable shall be reduced by

adjustments which in the course of business will reduce the amount recoverable
from the customer. Accordingly, in estimating the net realizable value of trade
accounts receivable, 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/bad debts

A. Allowance for freight charge

Terms related to freight charges

 FOB shipping point – means the ownership of the goods purchased is
transferred to the buyer upon loading to carrier.
 FOB destination – means the ownership of the goods purchased is
transferred to the buyer only when the goods are received by the buyer.
 Freight collect – means the buyer pays the freight charges
 Freight prepaid – mean the seller pays the freight charges.

The freight terms determine which party should pay the freight and which actually
pays it. Allowance for freight charge shall be established, in the point of view of the
seller, if the seller should be the one to pay but the buyer actually pays it. That is,
“FOB destination, freight collect” shipping terms, meaning, the seller is still the owner
of the goods purchased unless the goods will arrive at the buyer’s premise, but the
buyer will pay the shipping cost first in behalf of the seller.

For example, an entity has a P100,000 accounts receivable at the end of the
accounting period. The term are 2/10, n/30, FOB destination, freight collect. The
customer paid freight charge of P5,000.

To record the sale:

Accounts receivable 100,000
Freight out 5,000
Sales 100,000
Allowance for freight charge 5,000

To record the collection within the discount period:

Cash [(100,000 x 98%) – 5,000] 93,000
Sales discount 2,000
Allowance for freight charge 5,000
Accounts receivable 100,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

B. Allowance for sales returns

The measurement of accounts receivable shall also recognize the probability that
some goods will be returned by customer due that are unsatisfactory as to quality
and will require reduction of the amount they owe.

For example, an amount of P50,000 of the total accounts receivable at year-end

represents selling of goods that probably be returned. The journal entry to recognize
the allowance for sales return will be:
Sales return 50,000
Allowance for sales return 50,000

C. Allowance for sales discount

Entities may offer cash discount for them to collect cash from credit customer as
soon as possible. A cash discount is known as purchase discount on the part of the
buyer and sales discount on the part of the seller. Example of cash discount term is
2/10, n/30, meaning the credit period the sale is 30 days so the buyer should pay the
obligation within that period, and if paid within 10 days, the buyer can avail a 2%
discount.

Methods of recording credit sales

I. Gross method
The accounts receivable and sales are recorded at gross amount of the
involve.

Illustration:
1. Sale of merchandise for P100,000, terms 5/10, n/30.
Accounts receivable 100,000
Sales 100,000
2. Assume collection is made within the discount period.
Cash (100,000 x 95%) 95,000
Sales discount 5,000
Accounts receivable 95,000

3. Assume collection is made beyond the discount period.

Cash 100,000
Accounts receivable 100,000

II. Net method

The accounts receivable and sales are recorded at net amount of the
invoice that is price minus discount.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Illustration:
1. Sale of merchandise for P100,000, terms 5/10, n/30.
Accounts receivable 95,000
Sales 95,000

2. Assume collection is made within the discount period.

Cash 95,000
Accounts receivable 95,000

3. Assume collection is made beyond the discount period.

Cash 100,000
Accounts receivable 95,000
Sales discount forfeited 5,000

Note: The sales discount forfeited account is classified as other

income.

If customers are granted cash discount and the discount period is still open at
end of the reporting period, an allowance for sales discount shall be established if
it probable that such customers will avail the discount based on past experience.

For example, of the accounts receivable of P100,000 at the end of the period, it is
reliably estimated that discounts to be taken will amount to P5,000. The
adjustment to record the expected sales discount is:

Sales discount 5,000

Allowance for sales discount 5,000

D. Allowance for doubtful accounts/bad debts

To increase the sales, any entity might gamble in selling goods and services to
customers through credit rather than immediately collect in cash. Lucky for entity if it
sells to some reputable customers that will pay as what is being agreed upon. But for
some receivable which are very difficult to collect because customers are unwilling or
intentionally disregarding what they owe, it is really a risk on the part of the entity.
When an account becomes uncollectible, the entity has sustained a bad debt loss.

Methods of accounting bad debt loss

I. Allowance method
This requires recognition of bad debt loss if the accounts become
doubtful as to collection. An “Allowance for doubtful accounts” is
established and presented as a deduction of the Accounts receivable
to determine its net realizable value. The journal entry to record
doubtful accounts is:
Doubtful accounts xx

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Allowance for doubtful accounts xx

If the doubtful accounts are subsequently assessed as worthless,

meaning, the doubt of its uncollectible has been ascertained and it will
never be collected, then such account shall be “written-off” from the
accounts receivable and allowance account. To journal entry to record
the write-off is:
Allowance for doubtful accounts xx
Accounts receivable xx

When a previously written off account has been collected or recovered,

the accounting procedure of that is to first reestablish both Accounts
receivable and Allowance for doubtful accounts equal to the amount
collected, then record the collection.
1st entry:
Accounts receivable xx
Allowance for doubtful accounts xx

2nd entry:
Cash xx
Accounts receivable xx

The above entries can be condensed in just one entry. That is because
the amounts of accounts receivable debited in the 1st entry and
credited in the 2nd entry are the same, and can be offset to each other.
The single entry will be:
Cash xx
Allowance for doubtful account xx

II. Direct write-off method

This requires recognition of bad debt loss only when the account
proved to be worthless or uncollectible and directly charged off against
the customer’s account. No entry is made when the account is only
doubtful. Only entry when considered worthless is made.
Bad debts xx
Accounts receivable xx

Below is the comparison of the accounting procedures under allowance method and
direct write-off method.

Transactions Allowance method Direct write-off method

1. Accounts of
P30,000 are Doubtful accounts 30,000
No entry
considered doubtful Allow. for DA 30,000
of collection.
2. The accounts are Allow. for DA 30,000 Bad debts 30,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

subsequently A/R 30,000 A/R 30,000

discovered to be
worthless or
uncollectible.
3. The same A/R 30,000 A/R 30,000
account that are Allow. for DA 30,000 Bad debts 30,000
previously written
off are Cash 30,000 Cash 30,000
unexpectedly A/R 30,000 A/R 30,000
recovered of
collected. Or simply: Or simply:

Cash 30,000 Cash 30,000

Allow. for DA 30,000 Bad debts 30,000

(If the recovery is subsequent

to the year of the writeoff, the
recovery may simply credited
to other income, since the
bad debts account is already
closed on the year of
writeoff.)

Self Help: You can also refer to the sources below to help you
further understand the lesson.

Valix, C., Peralta, J. F., & Valix, C. A. M. (2020). Intermediate Accounting. (2019 ed.,
Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.
Valix, C., Peralta, J. F., & Valix, C. A. M. (2017). Financial accounting- first part.
(2017 ed., Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.
Edmonds, T., Edmonds, C. McNair, F. & Olds, P. (2016). Fundamental financial
accounting concepts. (9th ed.). New York, NY: McGraw-Hill Education.

Let’s Check

Activity 1. Getting acquainted with the essential terms in the accounts receivable is
not enough, what also matters is you should also be able to explain its concepts.
Now, I will require you to explain thoroughly your answers.

1. Describe the classification and presentation of receivables in the statement of

financial position.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
2. Explain the initial and subsequent measurement of trade accounts receivable.
______________________________________________________________
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______________________________________________________________
______________________________________________________________
______________________________________________________________
3. Differentiate the allowance method from direct write off method of accounting for
bad debts.
______________________________________________________________
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______________________________________________________________
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______________________________________________________________
4. Explain the two methods of recording accounts receivable and credit sales.
______________________________________________________________
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______________________________________________________________
______________________________________________________________

Activity 2. Multiple choice questions.

1. Trade receivables are classified as current assets if they are reasonably

expected to be collected:
a. Within one year
b. Within the normal operating cycle
c. Within one year or normal operating cycle, whichever is longer
d. Within one year or normal operating cycle, whichever is shorter

2. Which of the following statements is not valid in determining balance sheet

disclosures of accounts receivable?
a. accounts receivable should be identified on the balance sheet as pledged if
they are used as security for a loan even though the loan is shown on the
same balance sheet as a liability
b. the portion of installment accounts receivable from customers which falls due
more than 12 months from the balance sheet date usually would be excluded
from current assets
c. allowances to be deducted from accounts receivable for discounts, returns
and adjustments to be made in the future on accounts can be shown in the
current balance sheet
d. trade receivables are best shown separately from nontrade receivables
where amounts of each are material

3. A valuation account set up to reduce the unrecorded amount of notes and

accounts receivable to the amount anticipated as collectible is called:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. allowance for doubtful accounts

b. bad debts expense
c. customers’ accounts written off
d. notes receivable discounted

4. From the standpoint of account classification, the allowance for doubtful accounts
is included in which account category?
a. assets
b. liabilities
c. owner’s equity
d. as a footnote on the financial statements

5. One of the objectives for the creation of allowance for uncollectible accounts is to
be able to charge the loss against the income of the period to which the loss is
associated. The method which should be used to attain this objective is:
a. percentage of sales
b. percentage of open accounts
c. aging of accounts receivable
d. direct write off of bad debts

6. When allowance method of recognizing bad debt expense is used, the typical
write off of a specific customer’s account:
a. has no effect on net income
b. decreases net income
c. decreases current assets
d. decreases working capital

7. The allowance for cash discounts, which would appear as a deduction from
accounts receivable on a balance sheet and would be based on an estimate of
cash discounts to be taken on accounts receivable, is an effect of the application
of the:
a. consistency principle
b. matching principle
c. materiality principle
d. revenue principle

8. What is the effect of the recovery of accounts previously written off?

Accounts receivable Allowance for bad debts
a. Increase Increase
b. Decrease Increase
c. Increase Decrease
d. Decrease Decrease

Let’s Analyze
I. Multiple choice problem solving.

1. On the December 31, 2019 balance sheet of Mann Co., the current receivables
consisted of the following:
Trade accounts receivable $93,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Allowance for uncollectible accounts (2,000)

Claim against shipper for goods lost on transit
(November 2004) 3,000
Selling price of unsold goods sent by Mann on
Consignment at 130% of cost (not included in
Mann’s ending inventory) 26,000
Security deposit on lease of warehouse used for
Storing some inventories 30,000
Total $150,000
At December 31, 2019, the correct total of Mann’s current net receivables was
a. $94,000 c. $120,000
b. $124,000 d. $150,000

2. The following information relates to Jay Co.’s accounts receivables for 2019:
Accounts receivables, 1/1/19 $ 650,000
Credit sales for 2019 2,700,000
Sales returns for 2019 75,000
Accounts written off during 2019 40,000
Collections from customers during 2019 2,150,000
Estimated future sales returns at 12/31/19 50,000
Estimated uncollectible accounts at 12/31/19 110,000
What amount should Jay report for accounts receivables, before allowances for
sales returns and uncollectible accounts at December 31, 2019?
c. $1,200,000 c. $1,125,000
d. $1,085,000 d. $925,000

3. Maiden Company provided some information on their financial records on

December 31,2016:
Accounts receivable, Jan 1 1,920,000
Collections of account receivable 6,240,000
Bad debts 200,000
Inventory, Jan 1 2,880,000
Inventory, Dec 31 2,640,000
Accounts payable, Jan 1 1,000,000
Accounts payable, Dec 31 1,500,000
Cash sales 1,200,000
Purchases 4,800,000
Gross profit on Sales 2,160,000
What is the ending balance of accounts receivable on December 31, 2016?
a. 1,680,000 b. 2,880,000 c. 3,120,000 d. 4,080,000

4. For the month of December 2019, the records of Magi Corporation show the
following information:
Cash received on accounts receivable P35,000
Cash sales 30,000
Accounts receivable, December 31, 2018 80,000
Accounts receivable, December 31, 2019 74,000
Accounts written off as uncollectible 1,000

The corporation uses the direct write off method in accounting for uncollectible

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

accounts receivable. What are the gross sales for the month of December 2019?
(a) P59,000 (b) P60,000 (c) P65,000 (d) P72,000

5. B Corporation began operations in 2007. For the year ended December 31,
2017, B made available the following information:
Total merchandise purchases for the year P350,000
Merchandise inventory at December 31, 2017 70,000
Collections from customers 200,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales
are on a credit basis and all receivables are collectible, what should be the
balance in accounts receivable at December 31, 2017?
(a) P50,000 (b) P192,000 (c) P250,000 (d) P290,000

II. Comprehensive problem

Credible Company provided the following T-account summarizing the transactions

affecting the accounts receivable for the current year:

ACCOUNTS RECEIVABLE
Jan. 1 balance 600,000 Collections from 5,300,000
customers
Charge sales 6,000,000 Write off 35,000
Shareholders’ 200,000 Merchandise returns 40,000
subscription
Deposit on contract 120,000 Allowances to customer 25,000
for shipping damages
Claims against common 100,000 Collections on carrier 40,000
carrier for damages claims
IOUs from employees 10,000 Collection on 50,000
subscription
Cash advance to 100,000
affiliates
Advances to a supplier 50,000

Required:
1. Compute the correct amount of accounts receivable.
2. Prepare one compound entry to adjust the accounts receivable.
3. Compute the amount to be presented as “trade and other receivables” under
current assets.
4. Indicate the classification and presentation of the other items.

In a Nutshell

Write atleast five important lessons that you have learned in this topic.

1. ______________________________________________________________
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______________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. ______________________________________________________________
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______________________________________________________________

3. ______________________________________________________________
______________________________________________________________
______________________________________________________________

4. ______________________________________________________________
______________________________________________________________
______________________________________________________________

5. ______________________________________________________________
______________________________________________________________
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Q&A List
Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords
Accounts receivable
Net realizable value

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