ACC 103: Conceptual Framework & Accounting Standards

Module #24 Teacher’s Guide

Lesson title: Accounting for Trade Receivables Materials:

(Accounts Receivable) Calculator, Reviewer Notebook,
Learning Targets: Textbook
At the end of the module, students will be able to:
1. Describe the recognition of Trade Receivables References:
2. Identify the Financial Statement Presentation Millan, Zeus Vernon B.; Intermediate
3. Explain the Initial measurement of accounts Accounting 1
receivable
4. Apply the concepts of Trade discounts and -https://keydifferences.com/difference-
cash discounts between-trade-discount-and-cash-
discount.html

A. LESSON PREVIEW/REVIEW

Introduction
Let’s have your 24th day in Conceptual Framework & Accounting Standards by learning new things
about accounts receivables. Things get better every single day as long as you are trying. Answer the
pre-test below to gauge your understanding. You can do it!

Write TRUE OR FALSE on the space provided:

_________1. All claims held against customers and others for money, goods, or services are reported
as current assets. -
_________2. Trade receivables include notes receivable and advances to officers and employees.
_________3. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.
_________4. In the gross method, sales discounts are reported as a deduction from sales.
_________5. The net amount reported for short-term receivables is not affected when a specific
account receivable is determined to be uncollectible.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

B. MAIN LESSON

Lesson Content
Make sure to highlight or underline the important parts!

Receivables
Receivables are assets that represent contractual rights to receive cash or other asset from
another entity.

Common examples:
Accounts Receivables supported by oral or informal promises to pay; not
receivable supported by promissory notes
Notes receivable Receivables supported by written or formal promises to pay in the
form of promissory notes or post-dated checks
Loans receivable Receivables arising from loans extended by financial institutions,
such as banks, financing companies, and lending institutions;
supported by promissory notes and are generally backed collateral
securities or post-dated checks
Advances Receivables arising from advances to officers and employees,
advances to suppliers, and advances to affiliates
Accrued income Receivables arising from income earned but not yet collected,
such as interest income, dividend income, and the like
Deposits Receivables from reimbursable deposits paid to cover potential
damages or losses, deposits for guarantee of performance or
payment, and deposits for returnable items
Claims receivable Receivables from insurance companies for casualties sustained,
defendants under suit, government agencies for refundable taxes
and other remittances, common carriers for damaged or lost
goods, and suppliers for returned or damaged goods

Describe the Recognition of Trade Receivables

Trade vs. Non-trade receivables

Trade Receivables
 receivables arising from the sale of goods or services in the ordinary course of
business
 classified as current assets when they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer

Non-trade Receivables
 Receivables arising from other sources
 Classified as current assets only when they are expected to be realized in cash within
one year

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

The normal operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents.

Financial statement Trade and non-trade receivables that are currently collectible are
presentation combined and presented on the statement of financial position in a
single line item described “Trade and other receivables”
Initial measurement Fair value plus transaction cost;

Trade receivables that do not have a significant financing component

are measured at their transaction price in accordance with PFRS 15
Revenue from Contracts with Customers.

Transaction price is “the amount of consideration to which an

entity expects to be entitled in exchange for transferring promised
goods or services to a customer, excluding amounts collected on
behalf of third parties (e.g., some sales taxes).” (PFRS 15)

As a practical expedient under PFRS 15, an entity may not

discount a trade receivable if it is due within 1 year.
Recognition recognized when the entity has a right to consideration that is
unconditional; this is normally the case when the control over the
promised goods or services is transferred to the customer

Terms of Sale Contract

FOB Shipping point vs. FOB Destination

1. Under FOB shipping point, ownership is transferred to the buyer upon shipment.
Therefore, sales and accounts receivable are recognized on shipment date.

2. Under FOB destination, ownership is transferred only upon receipt of the goods by the
buyer. Therefore, sales and accounts receivable are recognized only when the buyer receives
delivery of the goods.

Accounting for Freight Charges

Freight prepaid seller has paid the freight in advance

before shipment; does not mean that the
seller is the one who is supposed to pay
for the freight
Freight collect freight is not yet paid upon shipment;
shipping cost will be collected by the
carrier from the buyer upon delivery; does
not mean that the buyer is the one who is

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

supposed to pay for the freight

 As a rule, the entity who owns the goods being shipped should pay for the
shipping cost.
Special accounting arises on the following terms
FOB shipping point, freight prepaid The buyer owns the goods being shipped
but the seller already paid the shipping
cost.
FOP destination, freight collect The seller owns the goods being shipped
but the carrier will be collecting the
shipping costs from the buyer.

Trade discounts vs. Cash discounts

Basis for Comparison Trade Discount Cash Discount

Meaning A discount given by the seller A deduction in the amount of

to the buyer as a deduction in invoice allowed by the seller to
the list price of the commodity the buyer in return for
is trade discount. immediate payment is cash
discount.

Purpose To facilitate bulk sales. To facilitate a prompt payment.

Invoice It is shown in the invoice as a It is not shown in the invoice.

deduction itself.

When allowed? At the time of purchase. At the time of payment.

Allowed to all Yes No

customers

Entry in books No Yes

Vary with Time period, when payment is Quantity of goods purchased or

made. amount of purchases made.

Skill-building Activities
Let’s try to practice what you have learned! Check your answers against the Key to Corrections found
at the end of this SAS. Write your score on the space provided.

MULTIPLE CHOICE. ENCIRCLE THE LETTER OF YOUR CHOICE.

1. The category "trade receivables" includes

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

a. advances to officers and employees.

b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these

2. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these

3. What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.

4. When a customer purchases merchandise inventory from a business organization, she may be
given a discount which is designed to induce prompt payment. Such a discount is
called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.

5. Trade discounts are

a. not recorded in the accounts; rather they are a means of computing a price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased.
d. all of the above.

Check for Understanding (Graded Quiz)

To the teacher:
 This serves as the student’s basis if he/she understood the topic.
 The answer for this activity is found at the end of this activity sheet and is only found in this TG
and not the SAS.

To better test your knowledge on the topic, encircle the best answer below without looking in your
content notes. Be honest at all times. Your teacher will provide you the key answer in this activity.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

Multiple Choice:
1. If a company employs the gross method of recording accounts receivable from customers,
then sales discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts
receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.

2. Why do companies provide trade discounts?

a. To avoid frequent changes in catalogs.
b. To induce prompt payment.
c. To easily alter prices for different customers.
d. Both a. and c.

3. The accounting for cash discounts and trade discounts are

a. the same.
b. always recorded on the net.
c. not the same.
d. tied to the timing of cash collections on the account

4. Of the approaches to record cash discounts related to accounts receivable, which is more
theoretically correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. All three approaches are theoretically correct.

5. All of the following are problems associated with the valuation of accounts receivable
except for
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.

6. AG Inc. made a 10,000 sale on account with the following terms: 1/15, n/30. If the
company uses the net method to record sales made on credit, how much should be
recorded as revenue?
a. 9,800.
b. 9,900.
c. 10,000.
d. 10,100.

7. AG Inc. made a 10,000 sale on account with the following terms: 1/15, n/30. If the
company uses the gross method to record sales made on credit, what is/are the debit(s) in

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

the journal entry to record the sale?

a. Debit Accounts Receivable for 9,900.
b. Debit Accounts Receivable for 9,900 and Sales Discounts for $100.
c. Debit Accounts Receivable for 10,000.
d. Debit Accounts Receivable for 10,000 and Sales Discounts for $100.

8. AG Inc. made a 10,000 sale on account with the following terms: 2/10, n/30. If the
company uses the net method to record sales made on credit, what is/are the debit(s) in
the journal entry to record the sale?
a. Debit Accounts Receivable for 9,800.
b. Debit Accounts Receivable for 9,800 and Sales Discounts for 200.
c. Debit Accounts Receivable for 10,000.
d. Debit Accounts Receivable for 10,000 and Sales Discounts for 200.

II. True or False

_________9. Accounts receivables are also called open accounts.

_________10. Trade and nontrade receivables that are currently collectible are combined
and presented on the statement of financial position in a single line item described as “Trade and
other receivables.”

C. LESSON WRAP-UP
FAQs
Is it possible for an Accounts receivable to have a credit balance? If so, how is it being
accounted?
- Customers’ accounts (accounts receivable) may at times have credit balance resulting from
overpayments, advance payments or errors. Credit balances in customers’ accounts are
presented as current liabilities and not offset against receivables.

Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.

Thinking about Learning

From a rating of 1-10, determine if you have learned all the learning objectives. What is the reason for
your rating?
________________________________________________________________________________
________________________________________________________________________________

What part of the module gave you a hard time to comprehend?

________________________________________________________________________________
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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

Any other questions or concerns you want to raise?

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KEY TO CORRECTIONS
Introduction/Review/Pre-test

Activity 1: Pre-test: MULTIPLE CHOICE

1. False
2. False
3. True- Trade discount refers to the reduction in list price known as discount, allowed by a
supplier to the consumer while selling the product generally in bulk quantities
4. True
5. True

Activity 4: Skill-building Activities- MULTIPLE CHOICE

1. D 2. D 3. C 4. D 5. D

No. 1- Trade receivables refer to claims arising from sale of merchandise or services in the ordinary
course of business operations. The usual types are accounts receivable and notes receivable.
No. 2- The following accounts in the given choices are not claims arising from the ordinary course of
business operations.
No. 4- A cash discount is a reduction in the amount of an invoice that the seller allows the buyer. This
discount is given in exchange for the buyer paying the invoice earlier than its normal payment date.

Activity 6: Check for Understanding. The teacher will provide the key answers in this activity.
1. A 2. D 3. C 4. A 5. C

No. 2- The discount that induces prompt payment is Cash Discount.

6. B 7. C 8. A

No. 6- The allowance method is preferred over the direct write-off method because the income
statement will report the bad debts expense closer to the time of the sale or service, and the balance
sheet will report a more realistic net amount of accounts receivable that will actually be turning to
cash.

No. 7- Sales Revenue P10,000

Sales Discount (1%) 100
Net Sales P 9,900

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 ACC 103: Conceptual Framework & Accounting Standards
Module #24 Teacher’s Guide

No. 8- Debit: Accounts Receivable 10,000

Credit: Sales Revenue 10,000

9. True 10. True

“Put your best foot forward.”

-Nothing Follows-

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