ACCOUNTS

RECEIVABLE
Reference:
`Valix, C. T., Peralta, J. F., & Valix, C. A. M. (n.d.).
Intermediate Accounting 2019 (2019th ed., Vol. 1).
Prepared by: Gemarie Cerbas
 Trade Receivables and Nontrade
Receivables
 Classification and Presentation
 Initial and Subsequent Measurement
 Net Realizable Value
Receivables are financial assets that represent
a contractual right to receive cash or another
financial asset from another entity.

TRADE RECEIVABLES
NONTRADE RECEIVABLES
TRADE RECEIVABLES
It refers to claims arising from sale of merchandise
or services in the ordinary course of business.
Examples:
Accounts Receivable
Are open accounts arising from the sale of goods and services in
the ordinary course of business and not supported by promissory notes.
Notes Receivable
Are those supported by formal promises to pay in the form of
notes.
NONTRADE RECEIVABLES
It represent claims arising from sources other than
the sale of merchandise or services in the ordinary
course of business.
Examples:
a. Advances to or receivables from shareholders,
directors, officers or employees
b. Advances to affiliates
c. Advances to supplier
d. Subscription receivable
e. Debit balances of creditors’ accounts
f. Special deposits on contract bids
g. Accrued income
h. Claims receivable
Classification
Current Assets Noncurrent Assets
Trade Receivable Expected to be realized
in cash within the
normal operating cycle
or one year, whichever
is longer.
Nontrade Receivable Expected to be realized If collectible beyond
in cash within one one year.
year, the length of the
operating cycle
notwithstanding.
Presentation
One line item Trade and other
receivables
Accounts receivable xx
Allowance for doubtful accounts xx
Notes receivable xx
Accrued interest on notes receivable xx
Advances to officers and employees xx
Dividends receivable xx
Total trade and other receivable xx

The details of the total trade and other receivables

shall be disclosed in the notes to financial statements
INITIAL MEASUREMENT
Accounts receivables hall be measured initially at
face amount or original invoice date.

SUBSEQUENT MEASUREMENT
Accounts receivables hall be measured
subsequently at net realizable value.
Amount of cash expected to be
collected or the estimated
recoverable amount.
NET REALIZABLE VALUE
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
A. ALLOWANCE FOR FREIGHT CHARGE
FOB Destination FOB Shipping Point Freight Collect Freight Prepaid
The ownership of the The ownership of the The freight The freight
goods purchased is goods purchased is charge on the charge on the
vested in the buyer upon vested in the buyer upon goods shipped is goods shipped is
receipt thereof. shipment thereof. not yet paid. Itis already paid by
actually paid by the seller.
The seller shall be The buyer shall be
the buyer.
responsible for the responsible for the
freight charge up to the freight charge from the
point of destination. point of shipment to the
point of destination.
Illustration
Accounts Receivable 10,000
Discount Terms 2/10, n/30
Freight Terms FOB Destination, Freight Collect
Freight Charge 500

a. To record the sale

Accounts receivable 10,000 The
Freight Out 500
Sales 10,000
Allowance for Freight Out 500

b. To record the collection within the discount period

Cash 9,300
Sales Discount 200
Allowance for freight charge 500
Accounts receivable 10,000
B. ALLOWANCE FOR SALES RETURN
Illustration
Accounts Receivable 15,000

*The amount 5,000 of the total accounts receivable represents selling price of goods that will
probably be returned.

a. To record sales return

Sales return 5,000
Allowance for sales return 5,000
Sales Discount
Illustration -Customer is entitled to 5% discount within 10 days
from the invoice date.
Sales 10,000 -If fails to pay within discount period, gross amount of
Discount Terms 5/10, n/30 invoice price must be paid within 30 days from the
invoice date.

Gross Method Net Method

a. To record sales Accounts receivable 10,000 Accounts receivable 9,500
Sales 10,000 Sales
9,500

b. Collection is Cash 9,500 Cash 9,500

within discount Sales discount 500 Accounts Receivable 9,500
period Accounts Receivable 10,000
c. Collection is Cash 10,000 Cash 10,000
beyond discount Accounts Receivable 10,000 Accounts Receivable 9,500
period Sales discount forfeited 500
C. ALLOWANCE FOR SALES DISCOUNT
Illustration
Accounts Receivable at the end of the period 100,000

*It is reliably estimated that discount to be taken will amount to 5,000.

a. To record expected sales discount

Sales discount 5,000
Allowance for sales discount 5,000
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Illustration
The amount 3,000 of the total accounts receivable are considered doubtful of collection.

Allowance Method Direct Writeoff Method

a. To record Doubtful accounts 3,000 No entry is necessary.
doubtful Allowance for doubtful accounts 3,000
accounts
b. To record Allowance for doubtful accounts 3,000 Bad debts 3,000
worthless Accounts receivable 3,000 Accounts Receivable 3,000
accounts
c. To record Accounts receivable 3,000 Accounts receivable 3,000
recovery of Allowance for doubtful accounts 3,000 Bad debts 3,000
accounts
Cash 3,000 Cash 3,000
written off Accounts receivable 3,000 Accounts receivable 3,000
Doubtful Accounts in Income Statement
If the granting of credit and collection of accounts are under the charge of

Sales Manager Distribution Cost

Officer other that Administrative Expense

Sales Manager
Answer the given questions. Choose the letter
of the correct answer.

References:
Valix, C. T., & Valix, C. A. M. (n.d.). Theory Financial
Accounting (2018th ed.).
Valix, C. T., & Valix, C. A. M. (n.d.). Practical Financial
Accounting (2019th ed., Vol. 1).
1. Trade receivables are classified as current
assets if these are reasonably expected to
be collected.
a. Within the normal operating cycle.
b. Within one year.
c. Within one year or within the operating cycle,
whichever is shorter.
d. Within one year or within the operating cycle,
whichever is longer.
2. Which method of recording bad debt loss is
consistent with accrual accounting?
a. Allowance method
b. Direct writeoff method
c. Percent of sales method
d. Percent of accounts receivable method
3. What is the theoretically correct method of
recording cash discounts related to accounts
receivable?
a. Allowance method
b. Gross method
c. Net method
d. All three methods are theoretically correct.
Problem
You Company provided the following information for the current year:
Accounts receivable on January 1 130,000
Credit sales 540,000
Collections from customer, excluding recovery 475,000
Accounts written off 12,500
Collections of accounts written off in prior year
(customer credit was not reestablished) 2,500
Estimated uncollectible receivables per aging
of receivables at December 31 16,500

What is the balance of accounts receivable, before allowance for doubtful accounts on
December 31?
a. 182,500
b. 185,000
c. 195,000
d. 199,000
Solution
Accounts Receivable
Accounts receivable-Jan. 1 130,000 Collection from customer 475,000
Credit Sales 540,000 Accounts written off 12,500
Accounts receivable-Dec 31 182,500