Chapter 4: Trade and Non-trade Receivables (Part 1)

Learning Objectives:
 Classify receivables as either current or noncurrent assets.
 State the timing of recognition and measurement of trade receivables.
 Estimate the recoverable historical cost of trade receivables.

Receivables are financial assets that represent contractual rights to receive cash or
other assets from another entity.
1. Trade Receivables - are receivables arising from the sale of goods or services in
the ordinary course of business.
2. Non-trade receivables – representing claims arising from other sources other
the sale of merchandise in the ordinary course of business.

Financial Statement Presentation

 Trade receivables are 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 are classified as current assets only when they are
expected to be realized in cash within one year.

 Trade and non-trade receivables that are current assets are aggregated and
presented in the statement of financial position as “Trade and other receivables.”

TRADE RECEIVABLES
1. Accounts Receivables – are open accounts arising from the sale of goods and
services in the ordinary course of business and not supported by promissory
notes.
2. Notes Receivables – are those supported by formal promises to pay in the
forms of notes.

NON-TRADE RECEIVABLES
1. Advances to or receivables from shareholders, directors,, officers and employees
2. Advances to affiliates (NC)
3. Advances to suppliers ©
4. Subscription receivable
5. Creditor’s account with Debit balance ©
6. Special Deposits on contract bids
7. Accrued Income (earned but not yet received)
8. Claims Receivable ©

ACCOUNTS RECEIVABLES
- Initially recorded at fair value + transaction cost (face value or Invoice Price if
available)
 - Subsequently recorded at Amortized Cost (Net Realizable Value / Net
recoverable amount)

Sales Discount and Sales Returns and Allowances

a. Sales Discount – a reduce price offered by a business to a product or service.

b. Sales Returns – occurs when customer return defective, damaged or otherwise
undersirable products to the seller
c. Sales Allowances – occurs when customer agree to keep such merchandise in
return for a reduction in selling price.

Types of Sales Discount

1. Trade Discount – it is the cut off on the published price or list price. It is normally
given to customers who buys large quantities. - not recorded
2. Cash Discount – incentive provided by the seller to the buyer for paying ahead
of the scheduled due date- recorded

ALLOWANCE FOR FREIGHT

FOB Shipping point vs. FOB Destination (FREE ON BOARD)
- Under FOB shipping point, ownership is transferred to the buyer upon
shipment. Therefore, sales and accounts receivable are recognized on shipment
date.

- 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

- Freight prepaid - means SELLER has paid the freight in advance before
shipment.
- Freight Collect – means the freight is not yet paid upon shipment. Freight will be
collected from the buyer upon delivery.

Note: As a rule, the entity who owns the goods being shipped should pay for the
shipping cost.

Illustration: On December 28, 2022 ABC received a sale order for a credit sale of
goods with Selling Price of 1,000. ABC shipped the goods on December 31, 2022 and
buyer received such goods on January 3, 2023. The shipping cost for the shipment is
P10. ABC collected the A/R on January 5, 2023.

Terms: FOB Shipping, freight collect, FOB Shipping freight prepaid, FOB Destination
freight collect, FOB Destination freight prepaid.

ALLOWANCE FOR DOUTBFUL ACCOUNTS

 - Considered as a contra asset account because it reduces the amount an asset,
in this case the accounts receivables.

Methods of Estimation of Doubtful Accounts

ALLOWANCE METHOD DIRECT WRITE OFF

METHOD
DR CR DR CR
Estimate Doubtful Allowance for n/a
Account DA
Write Off Allowance for A/R Doubtful A/R
DA Accounts
Recovery A/R Allowance for A/R Doubtful
DA Accounts
Collection Cash A/R Cash A/R

a. Percentage of Sales – Income Statement - Doubtful Account Expense

b. Percentage of A/R – Financial Position – Required Allowance
c. Aging of A/R – Same as percentage of A/R

-END-
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