RECEIVABLE

CLASSIFICATI Receivable
ON OF
s

RECEIVABLES
Current (shortterm) within a
year or during
the current
operating cycle
whichever is
longer
Non-current
(long-term)-all
other receivables

Represent financial
assets arising from
a contractual right
to receive cash or
another
financial
asset from another
entity.

CATEGORIES OF
RECEIVABLES

Trade Receivables

result from the

normal operating activities of the business, that is,
the sale of the companys goods or services to
customers.
SUBCLASSIFICATIONS:
Accounts Receivable-nonwritten promises by
customers to pay for goods or services but
evidenced by signed invoices and acknowledged
delivery receipts.
Notes Receivable-unconditional written agreement
to receive a certain sum of money on a specific date.

CATEGORIES OF
RECEIVABLES

Non-trade Receivables

arise from
transactions other than from sale of goods and
services in the normal course of business.
EXAMPLES
Advances to officers and employees
Advances to subsidiaries
Deposits to cover potential damages or losses
Deposits as a guarantee of performance or
payment
Dividends and interest receivable

RECOGNITION OF ACCOUNTS
RECEIVABLE

When the entity becomes a party to the

contractual provision of the instrument and
has a legal right to receive cash.
When the criteria for REVENUE
RECOGNITION are fulfilled.
*The REVENUE RECOGNITION PRINCIPLE
states that, under the accrual basis of
accounting, you should only record revenue
when an entity has substantially completed a
revenue generation process; thus, you record
revenue when it has been earned.

VALUATION

THE FOLLOWING ITEMS THAT

SHOULD BE CONSIDERED IN
ACCOUNTS RECEIVABLE

DISCOUNT

It is offered at the time of sale or at the time

of payment
TRADE DISCOUNT
CASH DISCOUNT

Gross amount-sales discounts only if the

customers pays within the discounting period.
Net amount (invoice price-cash discount)-record
sales discount only if the customer fails to pay
within the discount period.

1. To
record
credit
sales

2. To
record
collection
within the
10-day
period
3. To
record
collection
after the
10-day
period
4. To
record
forfeited

GROSS METHOD
Accounts Receivable
Sales
5000

NET METHOD
5000

Accounts Receivable
4900
Sales Revenue
4900
(5,000 x 98%)

Cash
Sales Discount
Sales
3000

2940
60

Cash
Accounts Receivable
2940

2940

Cash
Accounts Receivable
1500

1500

Cash
Accounts Receivable
1470

1500

Sales discount
forfeited
30
None

Accounts Receivable
10
Sales discount forfeited
10

FREIGHT

FOB

(Free-on-Board)-used

to
identify when legal title passes and to
identify which party involved in the sale
is ultimately responsible for the
payment of the associated freight
charges.
FOB Shipping
FOB Destination

CREDIT CARD SALES

Once purchases are made by a

customer, the bank or credit card
company pays the retailer and the
customer repays the bank or credit
card company

SALES RETURNS AND

ALLOWANCES

Sales Return-represent rejected

or unacceptable merchandise sent
back to the entity.
Sales Allowance-price reductions
made to encourage customers to
keep merchandise which do not
meet their specifications or having
minor damage.

ACCOUNTING FOR
UNCOLLECTIBLE OR
IMPAIRED ACCOUNTS
RECEIVABLE

DIRECT WRITE-OFF METHOD

FOR UNCOLLECTIBLE
ACCOUNTS

Under the direct write-off method,

when a company determines a
particular
account
to
be
uncollectible, it charges the loss to
Bad Debt Expense and credits to
the receivable account.
Bad debt Expense
xxx
Accounts Receivable
xxx

DIRECT WRITE-OFF METHOD

FOR UNCOLLECTIBLE
ACCOUNTS

Recovery of Accounts Receivables

Previously Written-Off
Accounts Receivable
xxx
Bad Debts Recovery
xxx
Cash
xxx
Accounts Receivable

ALLOWANCE METHOD

The allowance method of accounting for bad

debts
involves
estimating
uncollectible
accounts at the end of each period.
TECHNIQUES OF ESTIMATING
UNCOLLECTIBLE ACCOUNTS
Percentage applied on total outstanding
receivable
Percentage of Sales
Aging of Receivables

ALLOWANCE METHOD

Write-off
Allowance for doubtful accounts
xxx
Accounts Receivable
xxx
Recording Estimated Uncollectible
Bad debt expense
xxx
Allowance for doubtful accounts
xxx
Recovery of an Uncollectible account
Accounts Receivable
xxx
Allowance for doubtful accounts
xxx
Cash
xxx
Accounts Receivable
xxx

SAMPLE PROBLEM

Roxy Company had the following information for 2016 relating to accounts
receivable:
Accounts receivable on January 1
1,300,000
Credit Sales
5,400,000
Collections from customers, excluding
recovery
4,750,000
Accounts written off
125,000
Collection of accounts written off
in prior year
25,000
(customer credit was not re-established)
Estimated uncollectible receivables per
aging of receivables at December 31
165,000
On December 31, 2016, what is the balance of Accounts Receivable. Before
allowance for doubtful accounts?

SOLUTION

Accounts Receivable-January 1
Add: Credit Sales
TOTAL

130000
0
540000
0
670000
0

475000
Less: Collections from customers
0
Accounts written off
ACCOUNTS RECEIVABLEDECEMBER 31

487500
125000
0
182500
0

SAMPLE PROBLEM

Based upon its assessment of collectability of its

receivable, Eden Company expects to incur
impairment loss of P20,000. On January 1, 2016,
the allowance for doubtful accounts balance was
P10,000. During 2016 Eden wrote off P18,000 of
uncollectible receivables and recovered P5,000
of bad debts written off in prior years. If credit
sales for 2006 totalled P1,000,000 the allowance
for doubtful accounts balance at December 31,
2016, should be?

SOLUTION

Balance of ADA 1/1/16

Add: Recovery of bad
debts
Impairment loss
(Provision)

10000
5000
20000 25000

Total
Less: Accounts written off
during the year
BALANCE OF ADA
12/31/16

35000
18000
17000

SAMPLE PROBLEM

Belle Company began operations on January 1, 2016. The

following information is available for the year ended
December 31,2016.
Total Merchandise Purchases
P700,000
Merchandise Inventory at 12/31/2016
140,000
Collections from customers
400,000
All merchandise is marked to sell at 40% above cost.
Assume that all sales are credit sales and all receivables
are collectible. The balance in accounts receivable at
December 31, 2016 should be?

SOLUTION

Total merchandise purchases

Less: Merchandise
Inventory,12/31/16

700000

Cost of Sales

560000

Add: Mark-up (560,000 x 40%)

224000

Total credit sales

784000

Less: Collections

400000

ACCOUNTS RECEIVABLE,12/31/16

384000

140000

SAMPLE PROBLEM

Marian Company used the allowance method of accounting for bad debts. The following
summary schedule was prepared from an aging of accounts receivable outstanding on
December 31 of the current year:

Number of days outstanding

0-30 days
31-60 days
Over 60 days

Amount
5000000
2000000
1000000

Probability of collection
0.98
0.9
0.8

The following additional information is available for the current year:

Net credit Sales for the year
4,000,000
Allowance for doubtful accounts:
Balance, January 1
450,000 (cr)
Balance before adjustment, December
20,000 (dr)
The entity based its estimate of doubtful accounts on the aging of accounts receivable. What
amount should be recognized as doubtful accounts expense for the current year.

SOLUTION

0-30 days (5,000,000 x 2 %)

100000

31-60 days (2,000,000 x 10 %)

200000

Over 60 days

200000

Required allowance-December 31

500000

Add: Debit balance in allowance

DOUBTFUL ACCOUNT EXPENSE

20000
520,000

SAMPLE PROBLEM

Roanne Company used the allowance

method of accounting for uncollectible
accounts. During 2013, the entity had
charged P800,000 to bad debt
expense, and wrote off accounts
receivable
of
P900,000
as
uncollectible. What was the decrease
in working capital?

SOLUTION

Only
bad
debt
expense
decreases working capital. The
write off does not affect
anymore the working capital
because
the
effect
is
offsetting.

SAMPLE PROBLEM

Ladd Company provided the following information for the

current year:
Allowance for doubtful accounts-January 1
180,000
Sales
9,500,000
Sales returns and allowances
800,000
Sales discounts
200,000
Accounts written off as uncollectible
200,000
The entity provided for doubtful accounts expense at the rate
of 3% of net sales. What is the allowance for doubtful
accounts at year-end?

SOLUTION

Allowance for doubtful accountsJan 1

Doubtful account expense
(9,500,999-800,000-200,000 x 3
%)
Total
Accounts written off
ALLOWANCE FOR DOUBTFUL
ACCOUNTS-DECEMBER 31

180000
255000
435,000
(200000)
235,000