TABLE OF CONTENTS

Chapter 1 Accounting: Its Development and Basic Concepts 1

Chapter 2 Business Transactions and the Related Accounting Values or 25

Elements Chapter 3 The Accounting Equation, The Theory of Debits and Credits 43

and
Financial Statements 67

Chapter 4 Accounting Cycle for Service 119

Company Chapter 5 The Adjustment Process 136

179
Chapter 6 Completion of the Accounting Cycle
234
Chapter 7 Accounting for Merchandising
241
Business Chapter 8 Imprest Cash System
268
Chapter 9 Recording Transactions in Special

Journals Chapter 10 Accounting for Receivables and

284
Payables
299
Chapter 11 Adjusting the Accounts and Preparation of Worksheet and Financial
305
Statements
314
Chapter 12 Voucher System

Chapter 13 Manufacturing

Operations Bibliography

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 CHAPTER 10

ACCOUNTING FOR RECEIVABLES

This chapter deals with the accounting for receivables. The first topic covers the
accounting for trade receivables and the related accounts. The second topic covers the
accounting for promissory notes. There are two parties involved in the promissory note, the
maker and the payee. It also includes the discussion on a) the determination of maturity date
and maturity value of the note: b) discounting of the note.

Learning Objectives:

The student should be able to:

1. Define receivables.
2. Differentiate the two methods in the accounting of uncollectible accounts such as
allowance and direct write off method.
3. Compute bad debts based on a) receivables and b) credit sales.
4. Prepare journal entries on bad debts or uncollectible accounts.
5. Determine the maturity date of the note.
6. Compute the maturity value of the note.
7. Compute the interest earned by the note.
8. Compute the proceeds in case of note discounting.
9. Compute the amount of discount.
10. Determine the discount period.
11. Integrate honesty in computing values required.

The use of credit is commonly practiced in business and even by individual. Credit is
very important especially if the fund or capital is not sufficient. Example, buying and selling
of goods and services on account with credit terms such as 30 days or 45 days or 60 days or
even longer period. It can increase sales in the part of the seller. It is also advantageous to the
buyer. If the buyer could purchase goods on credit this buyer may also sell the goods on
credit. If the credit term granted to customers is shorter than the credit term granted by the
suppliers, the firm can already collect from customers to be paid to the suppliers. The buyer
does not need to use the fund of the business firm to pay the account instead his collection
will be used as payment to suppliers. As a creditor, sound credit policies and due care in
granting credits must be exercised. It is one of the factors that contributes to the success and
failure of the business organizations.

RECEIVABLES

Receivables are financial assets that represent a contractual right to receive cash or
another financial asset from another entity. For business firms receivables are classified into
trade receivables and nontrade receivables.

Receivables arising from the sale of goods and services in the ordinary course of
business are called trade receivables. The common types of trade receivables are accounts
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268
receivables and notes receivables. If the receivables are not supported by promissory notes
they are called accounts receivables while those supported by promissory notes are called
notes receivables.

On the other hand, the receivables arising from other sources not from the sale of
goods and services are termed as nontrade receivables.

Nontrade receivables includes: (1) interest receivables, (2) advances to employees,

loans to employees and affiliated companies, (3) receivable from insurance companies,
government agencies and others, (4) overpayment to suppliers and other creditors (abnormal
balances in accounts payable) will be reclassified as receivable.

Presentation of Receivables in the Statement of Financial Position

Trade receivables which can be collected within the normal operating cycle or one
year whichever is longer are classified as current assets.

Nontrade receivables which can be collected within one year are classified as current
assets but if to be collected beyond one year regardless of the length of the normal operating
cycle, such nontrade receivables are classified as noncurrent assets.

Uncollectible Accounts or Bad Debts

Business firms selling their goods and services on credit are not certain of collecting
100% of their receivables. A certain percentage of receivables may not be collected due to
several factors. No matter how efficient the company implements its credit policies and
collection procedures, a certain portion of receivables may not be collected. This amount is
called bad debts expense.

Bad debts are estimated based on companies past experience.

Causes of uncollectibity of accounts:

1. Bankruptcy of the debtor
2. Disappearance of the debtor. (Transfer of residence or workplace from one place to another
place which cannot be traced/located by the creditor.)
3. Death, insanity, disability of the debtor
4. Discontinuance of the business of the debtor.

These factors will result to worthlessness of the receivable.

Based on these situations the uncollectible amount will be recorded as bad debts.

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The Accounting for Bad Debts

There are two methods in the accounting for bad debts

1. Allowance method
2. Direct write off method

To illustrate:

Allowance Method Direct Write Off Method

1. The accounts amounting to P5,000 are considered as doubtful of collection
Bad debts 5,000
Allowance for bad 5,000 No entry
debts
2. The above accounts were discovered as worthless or uncollectible

Allowance for bad debts 5,000 Bad debts 5,000

Accounts receivable 5,000 Accounts receivable 5,000

3. The same accounts that were written off were unexpectedly collected or
recovered.
Accounts receivable 5,000
Allowance for bad debts 5,000 No entry

Cash 5,000 Cash 5,000

Accounts receivable 5,000 Gain 5,000
on
recov
Methods of estimating doubtful accounts/bad debts ery
1. Percentage of net credit sales
2. Percentage of receivable
3. Aging the accounts receivable

Percentage of Sales

Sales may be used in computing bad debts. The most commonly used is credit sales.
Other companies are using the total sales. For this illustration the credit sales is preferred. If
sales will be used as the basis in computing the bad debts, credit sales is multiplied with the
experience rate of uncollectible.

Bad debts are computed by multiplying the amount of sales by the company’s
experience rate of uncollectible accounts. The allowance for bad debts per book is not
considered in the computation.

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270
To illustrate: Apple Company experienced a 1% uncollectibilty of its sales on account. Sales
on account amounted to P3,000,000. Accounts receivable is P1,190,000.

The entry to record bad debts should be:

Bad Debts Expense 30,000 Allowance

for doubtful accounts 30,000
(3,000,000 x 1%)

Percentage of accounts receivable

Using the same data that as of December 31, 2020, the accounts receivable has an outstanding
balance of P1,190,000 with allowance for doubtful accounts of P15,000 and that the
company’s past experience is 3% of the accounts receivable are uncollectible. .

The entry to record the bad debts is:

Bad debts 20,700

Allowance for bad debts 20,700
Required allowance (P1,190,000 x 3%) P35,700
Per books ( 15,000 )
Adjustments P20,700
=======
Aging of accounts receivable

The most commonly practiced in estimating the uncollectible accounts, is through

aging of accounts receivable. The receivables are classified as current or not due and past due
or overdue. The overdue accounts may be classified as overdue by 1-30 days, 31-60 days, 61-
90 days, 91-120 days, 121-180 days 181-360 days and more than one year overdue.

To illustrate: Assuming that Apple Company’s aging schedule of receivable as of

December 31, 2018 showed the following:
Outstanding Company’s (balance x rate)
Balance experience rate Required allowance
Current or not yet due P600,000 1% P6,000
1-30 days overdue 200,000 2% 4,000
31-60 days 150,000 3% 4,500
61-90 days 100,000 5% 5,000
91-120 days 75,000 10% 7,500
121-180 days 50,000 15% 7,500
181-360 days 10,000 25% 2,500
More than one year 5,000 50% 2,500

P1,190,000 39,500
========== ==========

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The entry to record the bad debts is:

Bad debts 24,500

Allowance for bad debts 24,500

Required allowance P39,500

Per books (15,000)
Adjustments P24,500
======

Statement of Financial Position Presentation

Accounts Receivable 1,190,000

Allowance for bad debts ( 39,500)

Net Realizable value 1,150,500

========

NOTES RECEIVABLE & NOTES PAYABLE

Notes receivable and Notes Payable are evidenced by a promissory note. A promissory note
is a written unconditional promise to pay the lender or someone else who acquires the
note, a sum certain in money, on demand or at definite time, signed by the maker.

Notes may arise from the following transactions:

1. Loans involving a bank or an individual or lending institutions.
2. Purchases on account
3. Services rendered
4. Settlement of existing accounts with notes

There are two parties involved in a promissory note:

5. Maker – the one who made and signed the note and makes payment upon due date. He
is known as borrower or debtor
6. Payee – the one whose order the note is payable and receives payment upon due date.
He is known as a lender or creditor

A promissory note can either be an interest bearing or non-interest bearing note. It is

dependent upon the arrangement or agreement of both parties the maker and the payee.

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 INTEREST BEARING NOTE

March 01, 2021

I promise to pay Jude Marsh One Hundred Thousand Pesos (P100,000) at

10% , 90 days after date

(Sgd) Lovely Sia

payee

maker

NON-INTEREST BEARING NOTE

March 1, 2021

I promise to pay Jude Marsh, the sum of One Hundred Thousand Pesos
(P100,000), 90 days after date.

(Sgd) Lovely Sia

CALCULATION OF INTEREST

Interest rates are customarily stated in terms of a period of a year or annually,

regardless of the actual period of time involved. Example, a note amounting to P100,000 at
10%. This means that the 10% interest is good for one year. If the term of the note is 90 days
interest will be computed as follows:

Interest = Principal x Rate

x Time I = 100,000 x 10% x

90/360

I = 2,500
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273
If the note is less than a year, interest will be computed using the actual number of days
divided by number of days in a year.

Some companies are using 365 days in a year which is the actual number of days.

In commercial transactions, interest is commonly calculated using 360 days in a year.

Accounting for promissory notes and interests:

To illustrate: A 90 day, 10% interest bearing on March 1, 2021 payable to Jude Marsh by
Lovely Sia, with face value of P100,000.

IN THE BOOKS OF THE MAKER IN THE BOOKS OF THE PAYEE

(Lovely Sia) (Jude Marsh)

Issuance of the Note Receipt of the Note

Cash 100,000 Notes Receivable 100,000

Notes Payable 100,000 Issued a Cash
P100,000 10%,90- day note. 100,000
Received a P100,000 10%, 90-day
note.
Upon payment of the note at maturity date Upon collection of the note at maturity date

Notes Payable 100,000 Cash 102,500

Interest Expense 2,500 Notes Receivable
Cash 102,500 100,000
Payment of the note. Interest Income 2,500 Collection of
the note.
In case the note is issued in settlement of In case the note is received in settlement of
account. account

Accounts Payable 100,000 Notes Receivable 100,000

Notes Payable 100,000 Issued a Accounts Receivable 100,000
P100,000 10%,90- day note. Received a P100,000 10%, 90-day
note.

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274
DETERMINATION OF MATURITY OR DUE DATE

The maturity date can be determined depending on the wording used in the note:

1. On demand – “On demand, I promise to pay…”

The maturity date cannot be determined because it is dependent upon
the will if the payee. The holder can demand any time from the date of
the note.

2. On a stated date – “on February 19, 2021, I promise to pay…”

The maturity date is already stated on February 19, 2021.
No computation is needed to determine the due date.

3. At the end of a stated period

a. “one year after date, I promise to pay….”

The maturity date is on the same day and month of the date of the note and in
the following year.
Example: The date of the note is February 19, 2021. The maturity date is on
February 19, 2022.

b. “One month after date, I promise to pay…”

Example: The date of the note is February 19, 2021. The maturity date is on
March 19, 2021.

c. “One hundred twenty days after date, I promise to pay…”

If the term of the note is expressed in days, the exact number of days must be
counted to determine the maturity date.

To illustrate: Lovely issued a 12%, 120- day note to Jude Marsh on March 1, 2021.

How to determine the maturity date if the term of the note is in number of days?
1. Determine the term of the note Term of the note 120
2. From the term of the note deduct the days Days remaining in March (31-1)
remaining number of days in the - 30
month the note is issued. -----
3. Deduct the number of days in Number of days remaining 90
succeeding months until the balance April -30
does not exceed the number of days in ------
a month. Balance 60
4. The due date is the last month to be May - 31
deducted and remaining days will be ------
the day of the maturity date. June 29
====

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275
HONORED AND DISHONORED NOTE

The note is said to be honored when the maker pays it at the due date but if the maker
failed to pay the note at the maturity date, the said note is dishonored.

In case of dishonored notes, the payee of the note may debit Dishonored Notes
Receivable or Accounts Receivable for the face value of the note. If the interest is due,
uncollected interest is debited to Accounts Receivable and credit to Interest Income.

To illustrate: Lovely issued a P100,000 10%, 90 - day note to Jude Marsh on March 1, 2021
At maturity date, the maker failed to pay.

IN THE BOOKS OF THE MAKER IN THE BOOKS OF THE PAYEE

(Lovely Sia) (Jude Marsh)

To record the dishonored note (assuming that the note was not discounted)

Interest Expense 2,500 Accounts Receivable 102,500

Interest Payable 2,500 Notes Receivable 100,000
Interest Income 2,500

To record the dishonored note (assuming that the note was discounted) the payee is obliged to
pay the person or institution where the note was discounted

Interest Expense 2,500 Accounts Receivable 102,500

Interest Payable 2,500 Cash 102,500

DISCOUNTING OF NOTES WITHOUT RECOURSE

The holder of the note might be in need of additional capital to finance his business
operations. Instead of holding the note, he may transfer the note to the bank by endorsing the
said note. The bank will compute the discount and deduct it from the maturity value of the
note for the period of time the bank holds the note until the maturity date.

To illustrate: Lovely issued a P100,000 12%,120-day note to Jude Marsh on March 1,

2021, which will mature in June 29. The note was discounted in May 25 at Allied Bank at
15%.

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276
 The discount and cash proceeds are computed as follows:

1. Compute for the Maturity

Value Maturity value = Principal +
Interest
Principal P100,000
Interest (100,000 x 12% x 120/360) 4,000
Maturity Value P104,000
========

2. Compute for the discount

Discount = Maturity Value x Discount Rate x Discount Period

Discount = P104,000 x 15% x 35/360 = P1,517

=====

Discount period – is the remaining term of the note (from the date of discounting to
the maturity date.

How to determine the discount period?

1. Determine the date of discounting
and deduct from the number of days May 25 to 31 (31-25) 6 days
in a month
2. Add the number of days of the June 29
following months until reaching the -----
due date Discount period 35 days
======

The discount period can also be computed by deducting the expired portion of the note
from the term of the note.

Face Value = 100,000

Term of the note – 120days

Expired portion Discount Period – 35 days

TERMINOLOGIES
March 1, 2021 May 25,2021 June 29,2021
(Date of (Date of Discounting) (Maturity Date)
Note)
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277
 3. Compute the Net Proceeds from discounting

Net Proceeds = Maturity Value – Discount

Maturity Value P104,000

Discount (
Net Proceeds 1,517)
P102,483
=======
4. Compute the carrying amount of the note receivable.

Carrying amount = Principal + Accrued interest receivable

Principal P100,000
Accrued Interest receivable (100,000 x 12% x 85/360) 2,833
Carrying amount of the note receivable P102,833
=======

5. Determine the gain or loss on the discounting of the note.

Net proceeds P102,483

Carrying amount of the note receivable (102,833)
Loss on note discounting (P 350)
========
Gain or loss on note receivable discounting = the difference between the net
proceeds from discounting of the note and the carrying amount of the note
receivable.

The entry to record the discounting of note:

2021
May 25 Cash 102,483
Loss on note receivable discounting 350
Notes Receivable 100,000
Interest Income 2833

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278
TERMINOLOGIES

Principal – refers to the face value of the note or the amount borrowed

Interest – refers to the rental for the use of money or charges for borrowed money. It is
computed by multiplying the principal amount by interest rate multiplied by time.
I=PxRxT
Interest Rate – refers to the percentage or factor imposed as charges for the borrowed money.
It is the rate appearing on the face of the note.

Interest Expense – refers to the interest that a debtor is obliged to pay to the creditor.

Interest Income – refers to the interest that a creditor is entitled to receive from the debtor.

Maturity Value – refers to the amount that is due at the maturity date. It is equal to
Principal
+ interest earned.
Maturity Date – refers to the date when the note becomes due for payment or collection. It is
also known as the due date.
Date of the Note – refers to the date when the note was made and signed.

Term of the note – refers to life of the note. It may be expressed in days, months or years.

Maturity Value of a Non Interest Bearing Note – it is equal to the face amount of the note.

Maturity Value of and Interest Bearing Note – it is equal to face amount of the note + interest.
Interest Bearing Note – refers to the note that provides for the payment of interest for the
period from the issuance date to the maturity date.

Time – refers to the period from the date of the note up to the maturity date. It may be
expressed in days, months, or years.

Discounting Notes – refers to the act of transferring a note with recourse to a bank. With
recourse means that the bank can collect from the entity or person who transferred the
note to the bank incase the maker failed to pay the note at maturity date.

Proceeds – refers to the amount received by the endorser from the endorsee. It is equal to
Maturity Value less discount.
Discount – refers to the amount deducted from the maturity value. D = MV x DR x DP.
D – Discount; MV - Maturity Value; DR – Discount Rate; DP – Discount Period

Discount Rate – refers to the rate charged by the bank upon discounting.

Discount Period – refers to number of days from the date of discounting up to the maturity
date of the note.

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279
Exercise 10 – 1

Tamar Enterprises was experiencing every year uncollectible accounts of 5% of Accounts

Receivable. The credit sales for 2021 amounted to P10,000,000 and the balances of
accounts receivable and allowance for bad debts as of December 31, 2021 are
P5,000,000 and P200,000 respectively.

Instruction: Prepare journal entry to record bad debts.

Exercise 10 – 2

Instruction: Based on the data given:

1. Compute the interest of the following notes upon maturity:
2. Compute for the maturity value.
3. Determine the maturity date.

PRINCIPAL INTEREST RATE TERM OF THE DATE OF THE

NOTE NOTE
1. 1,500,000 15% 120 days August 12, 2021
2. 2,520,000 10% 6 months February 20, 2021
3. 2,950,000 8% 1 year September 28, 2021
4. 3,000,000 12% 180 days April 15, 2021
5. 750,000 16% 90 days October 24, 2021

PRINCIPAL INTEREST MATURITY MATURITY DATE

VALUE
1. 1,500,000
2. 2,520,000
3. 2,950,000
4. 3,000,000
5. 750,000

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280
Exercise 10 – 3

Natnat Company issued a P2,000,000, 120 – day, 15% note on September 28, 2021 to
Tracy Enterprises for cash.

Required: Prepare journal entries to record:

a. Issuance of the note by the maker
b. Receipt of the note by the payee
c. Payment of the note by the maker at maturity date
d. Receipt of payment of the note by the payee at maturity date.

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281
Exercise 10 – 4

Jessa Marketing received a note from Shannie on February 20,2021 with the following
description:

Face Amount 3,000,000

Term of the note 120 days
Date of the note 2-20-2021
Interest rate 15%
Date of 4-15-2021
discounting at 15%
the bank
Rate of discount
charged by the
Required:
bank the maturity date
1. Determine
2. Compute for the maturity value
3. Determine the discount period
4. Compute for the discount
5. Compute for the proceeds received by the company
6. Give the journal entry to record the receipt of the proceeds at the date of discounting

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282
Exercise 10 – 5

On June 15, 2021 Gorgonia received a P4,500,000, 10% 180-day note from Vicente
dated June 15, 2021. The note was discounted at the rate of 15% on October 31, 2021 at
the bank.

Instruction:

Prepare journal entries:

1. In the books of the maker
a. Upon issuance of the note
b. Discounting of the note
c. Payment

2. In the books of the payee

a. Receipt of the note
b. Discounting
c. Collection

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283
 BIBLIOGRAPHY

Accounting Standards Council. Philippine Accounting Standards and Philippine Financial

Reporting Standards. Made Easy Books

De Leon G and De Leon, N. (2019). Cost Accounting. GIC Enterprises & Co., Inc.

Millan, Zeus Vernon B. (2019). Intermediate accounting 1a based on Philippine reporting

standards.

Valix, C, Peralta, J & Valix, C. A. (2019). Financial accounting Vol. 1. GIC Enterprises & Co.,
Inc.

Valix, C, Peralta, J & Valix, C. A. (2019). Financial accounting Vol. 2. GIC Enterprises & Co.,
Inc.

Valix, C, Peralta, J & Valix, C. A. (2019). Financial accounting Vol. 3. GIC Enterprises & Co.,
Inc.

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