ACCOUNTS

RECEIVABLE
• Classification and presentation of AR
• IM and SM of AR
• Adjustment to determine NRV of AR
• Gross Method and Net Method of recording of credit sales
• Accounting for doubtful acct, worthless accounts written off and
recoveries of accounts written off
DEFINITION
 Receivables are financial assets that represent a
contractual right to receive cash or another
financial asset from another entity.
 For retailer or manufacturers, receivables are
classified trade receivables and nontrade
receivables.
 For banks and other financial institutions,
receivables as LOANS to customers.
• Made to heteregenous customer and the
repayment periods are frequently longer or over
several years
INITIAL MEASUREMENT
 PFRS 9, par 5.1.1 financial asset:
• Fair Value + Transaction costs directly attributable to
the acquisition
• FV = Transaction Price (FV of the consideration given)
 For short term receivables
• FV = FcV or the original invoice amount
• Cash flows relating to ST rec’l are not discounted
because disc effects are immaterial
 AR IM – Face amount or Orig Invoice
Amount
SUBSEQUENT MEASUREMENT
 PFRS 9 par 5.2.1,
• AMORTIZED COST or NET
REALIZABLE VALUE (NRV) OF
AR
 NRV of AR – amount of cash expected to
be collected or estimated recoverable
amount.
NRV COMPUTATION
= Invoice Amount – Allowance for Freight
Charge – Allowance for Sales Discount and
Returns – Allowance for Doubtful Accounts
TERMS RELATED TO FREIGHT
CHARGE
 FOB DESTINATION – seller owns the goods
purchased until buyer receives the goods.
 FOB SHIPPING POINT – buyer owns the goods
purchased until seller receives the goods.
 FREIGHT COLLECT – freight charge is paid by
the buyer
 FREIGHT PREPAID – freight charge is paid by the
seller
NOTE: whoever owns the goods should pay for the
freight charges.
 FOB DESTINATION - FREIGHT COLLECT
AR (GROSS AR) XX
Freight Out XX
Sales XX
Allowance for Freight Charge XX
 FOB DESTINATION – FREIGHT PREPAID
AR (GROSS AR) XX
Freight Out XX
Sales XX
Cash XX
 FOB SHIPPING POINT – FREIGHT COLLECT
AR (GROSS AR)XX
Sales XX
 FOB SHIPPING POINT – FREIGHT PREPAID
AR (AR + SHIPPPING FEE) XX
Sales XX
Cash XX
CLASSIFICATION OF
RECEIVABLES
1. Trade Receivables
2. Nontrade Receivables
TRADE RECEIVABLES
 Expected to be realized in cash within the
normal operating cycle or one year, whichever
is LONGER.
 Current asset
PAS 1 par 66:
“An entity shall classify an asset as current when the entity
expects to realize the asset or intends to sell or consume it in
entity’s normal operating cycle or when the entity expects to
realize the asset within 12 months after reporting period.
NONTRADE RECEIVABLES
 Expected to be realized in cash
within one year regardless the
length of operating cycle.
 Current asset
 If collectible beyond one year,
noncurrent asset
EXAMPLES OF NONTRADE
RECEIVABLES
CLASSIFIED AS CURRENT ASSET
1. Advances to or receivables from shareholders, directors,
officers or employees if collectible within one year
2. Advances to suppliers for acquisition of merchandise
3. Subscription receivable – current asset if collectible within
one year. Otherwise, should be shown preferably as a
deduction from Subscribed Share Capital
4. Creditor’s accts may have debit balances as a result of
overpayment or return and allowances – current asset. If
not material, can be offset against creditor’s acct with credit
balances and only the net accts payable may be presented
EXAMPLES OF NONTRADE
RECEIVABLES
5. Accrued income – dividend receivable, accrued rent
receivable, accrued royalties receivable and accrued
interest receivable on bond investment
6. Claims receivable – claims against common carriers for
losses or damages, claim for rebates and tax refunds,
claims for insurance entity
NONCURRENT ASSET
7. Advances to Affiliates/Subsidiaries – Lterm investments
8. Special deposits on contract bids because they are likely
to remain outstanding for considerable long period of
time. If collectible currently, current asset
 Customer’s credit balances and advances from
customer are current liabilities and included as
part of “Trade and other payables”.
ALLOWANCE FOR SALES DISCOUNT
 If cash discounts are granted to customers, estimate
for cash discount shall be made based on past
experience at the end of the period.
To record the allowance sales discount:
Sales Discount xx
Allowance sales discount xx
 Adjustment may be reversed at the beginning of
next period for normal charging of sales discount
ACCOUNTING FOR BAD
DEBTS
 An entity that sells on credit assumes
the risk that some customer will not
pay their accounts
 When an account becomes
uncollectible, the entity has sustained
a bad debt loss. This loss is simply
one of the costs of doing business on
credit.
TWO METHODS
1. Allowance Method
2. Direct Writtenoff Method
 ALLOWANCE METHOD
 Requires recognition of bad debt loss if the
account are doubtful of collection.
Doubtful accounts XX
*Allowance for Doubtful Accounts XX
*deduction from accounts receivable.
 If subsequently found worthless or uncollectible:
Allowance for Doubtful Accounts XX
Accounts Receivable XX
 Required by GAAP as it conforms matching principle
 AR would be properly be measured at NRV
RECOVERIES OF ACCOUNTS WRITTEN
OFF
 Recharge the customer’s account with the
amount collected or previously charged off if it
is expected to be collected in full.

Accounts Receivable XX
Allowance for Doubtful Accounts XX
Cash XX
Accounts Receivable XX
 Allowance for Doubtful Accounts
Written Off Beg. Bal
Recovered ADA

End Bal
DIRECT WRITEOFF METHOD
 Requires recognition of bad debts only when
accounts proved to be worthless. If doubtful,
no adjustment or entry to be made
 Only used by small business as it is simple to
apply
 Used also by BIR
 Violates matching principle because bad debt
loss is often recognized in later accounting
period than when sales revenue is recognized
 Not recognized by IFRS
Bad Debt XX
Accounts Rec’l XX

If recovered:
AR XX
Bad Debt XX

Cash XX
AR XX

If recovery is subsequent to year of written off,

recovery may be simply credited to other income.
DOUBTFUL ACCTS IN INCOME
STATEMENT
1. DISTRIBUTION COST – If granting of
credit and collection are under the charge of
sales manager.
2. ADMINISTRATIVE EXPENSE – if under
other than the sales manager

In the absence of contrary, doubtful accounts

shall be classified as administrative expense
RECEIVABLE FINANCING
REC’L FINANCING
DEFINED……
 Financial flexibility or capability of an
entity to raise money out of its
receivables.
FORMS OF RECEIVABLE FINANCING
a. Pledge of AR
b. Assignment of AR
c. Factoring of AR
d. Discounting of NR
PLEDGE OF AR
o Can be used as a collateral to obtain loan from
the bank or any lending institution
o General type of financing because all AR serve

as collateral security for the loan

o Borrowing entity makes the collections of the

pledged account but required to turn over the

collections to bank in satisfaction for the loan
o When pledging account, no entry would be

necessary. Disclosure is made in notes to FS

 Discounted loan – interest for the term
loan is deducted in advance.

FcV of Loan XX
Less: Interest (FcV X disc. Rate) XX
Net Proceeds XX
• Journal Entries:
 Recording of loan for pledged account
Cash xx
Discount on NPxx
NP-Bank xx
 Amortization of interest at year end
Interest Exp (disc.int X _/12) xx
Disc on NP xx
 NP Carrying amount
FcV – *Disc on NP
Total Disc in NP – Interest Expense recognized
ASSIGNMENT OF AR
 Borrower called assignor transfer rights in
some accounts receivable to a lender called
assignee in consideration for a loan
 More formal type of pledging of AR
 Secured borrowing evidenced by financing
agreement and promissory note both which the
assignor signs.
 Specific type of rec’l financing because specific
AR serve as a collateral security for the loan
 The assignee only lends certain percentage of
FcV of accounts assigned because of sales
discount, sales return & allowances and
uncollectible accounts.
 The assignee usually charges interest for the loan
that it makes and requires a service or finance
charge or commission for the assignment
agreement.
 The assignor retains the ownership of the
assigned accounts
2 TYPES OF AR ASSIGNMENT
1. Notification basis – customers are
notified to make their payments
directly to the assignee
2. Nonnotification basis - customers
are not informed that their AR have
been assigned. The customers pays to
the assignor who then remits the
collection to the assignee.
COMPUTATION NONNOTIFICATION BASIS

ASSIGNED ACCOUNTS RECEIVABLE

AR Assigned Collection/Remitted
To the bank
Sales Discount
Sales Return
Worthless accounts
Balance to Transfer to AR
COMPUTATION NOTIFICATION
BASIS
Loan from Bank XX
Less: Collections XX
Balance due to Bank XX

Subseq’t collec’n by bank XX

Less: Balance due to Bank XX
Excess Collection XX
Less: Interest due XX
Remittance from Bank XX
Statement Presentation
AR – unassigned XX
AR – Assigned XX
Allowance for Doubtful Accounts (XX)
*Net Realizable Value XX

*included in “Trade and Other Receivables”

EQUITY IN ASSIGNED
ACCOUNTS
AR – Assigned XX
Less: Note Payable – Bank XX
Equity in Assigned Accounts XX
 FACTORING OF AR
 Sale of AR on a without recourse, notification basis.
 The customer are directly paying to the factor. And the
factor is the one who keeps the record and collecting
of account
 Entity sells its AR to a bank or finance entity called
FACTOR
 Gain or loss is recognize when selling AR
Proceeds of Selling - Carrying Amount of AR Factored
 Entity transfer ownership of its AR to the factor who
then will assume the responsibility on uncollectible
accounts
 FORMS OF FACTORING:
a. Casual Factoring
b. Factoring as a continuing agreement
 CASUAL FACTORING
 Entity may factor some or all of its AR at a
substantial discount to a bank or financial
entity.
 Ordinary sale of asset where the difference
between the sales price and the BV of asset
sold results to GAIN or LOSS
Sales Price (AR Factored – ADA) = Gain/(Loss)
 FACTORING AS A CONTINUING
AGREEMENT
 Finance entity purchase all of the AR of a certain entity. Before
a merchandise shipped to a customer, the selling entity requests
the factor’s credit approval.
 If approved, the acct is sold immediately to the factor after the
shipment of the goods and then will assume the credit function
and collection.
 Factor’s holdback – predetermined amount withheld by the
factor as a protection against customer returns and allowances
and other special adjustment.
- receivable from factor and classified as “current
asset”. Final settlement of this is after the full collection of
factored AR.
 Rec’l from Factor = Factor’s holdback – SD – SRA recognized
CREDIT CARD