Receivables

Fundamental Accounting Theory and Practice I

 OBJECTIVES
1. Define receivables and identify the different types of receivables
2. Account for accounts receivable
• Initial recognition and valuation
• Subsequent measurement
• Disposal
3. Account for credit card sales
4. Account for notes receivable
• Determining maturity date
• Computing interest
• Initial recognition and valuation
• Subsequent measurement
• Disposal
5. Describe the FS presentation of receivables
6. Perform analysis of receivables using key ratios
Receivables
• Amounts due from individuals and companies and represent claims that are expected to be
collected in cash.
• The significance of a company’s receivables as a percentage of its assets depends on:
• industry
• time of the year
• whether it extends long-term financing
• its credit policies
Types of Receivables
Accounts Receivable
• Sale of goods and
services
• Generally, collected
within 30-60 days
Notes Receivable Others Receivable
• Formal instruments of • Non-trade receivables
credit • e.g. interest receivable,
• Normally, extends for time loans to company
periods of 60-90 days or officers, advances to
longer employees
• Requires the debtor to pay
interest

TRADE RECEIVABLES refer to accounts receivables and notes

receivables arising from sales transactions.
Accounts Receivables
Initial Recognition
• Recognized at fair value (i.e. invoice amount)

TRANSACTION JOURNAL ENTRY

Accounts Receivable (DR) XXX
Sale on account/on credit Sales (CR) XXX

Sales Returns & Allowances (DR) XXX

Inventory returned or allowance provided Accounts Receivable (CR) XXX

Cash (DR) XXX

Collection of accounts receivables Accounts Receivable (CR) XXX

Cash (DR) XXX

Collection of account receivables at a discount Sales Discount (DR) XXX
Accounts Receivable (CR) XXX

Finance charges when accounts receivable was not paid in full Accounts Receivable (DR) XXX
and within the terms Interest Income (CR) XXX
Example:
• March 01: Sold merchandise on account to Dodson Company for $5,000, terms 2/10,
n/30.
• March 03: Dodson Company returned merchandise worth $500 to Molina.

Date Journal Entry

Accounts Receivable 5,000

March 01
Sales 5,000

Sales Returns and Allowances 500

March 02
Accounts Receivable 500
Example:
• March 09: Molina collected the amount due from Dodson Company from the March 1
sale.

Date Journal Entry

Cash 4,410
March 09 Sales Discount 90
Accounts Receivable 4,500
Example:
• March 16: Molina collected the amount due from Dodson Company from the March 1
sale.

Date Journal Entry

Cash 4,500
March 16
Accounts Receivable 4,500
Subsequent Measurement
• Reported as cash (net) realizable value
• At the end of each reporting period, company must assess if there is any objective
evidence that receivables are impaired.
• Impaired means unlikely to be received or collected
• Impairment Loss
• recognized when the present value of the estimated cash flows from the receivable
is less than carrying amount of the receivable.
• recognized in the income statement as a loss.
Subsequent Measurement: Impairment
Direct Write-Off
Allowance Method
Method
Only when receivable is deemed Upon estimation of uncollectible
Recognize Bad Debt receivables at end of each period
uncollectible regardless of period
Expense

Shows receivables at Cash Net

Shows only ACTUAL Presentation Realizable Value (NRV)
LOSSES Presents ESTIMATED LOSSES

Does not follow Matching Principles Follows matching principle

matching principle
Direct Write-off Method
• Write-off accounts receivable when it is determined to be uncollectible
• Bad debt expense – reported in the income statement as an expense (usually as selling
expense)

Transaction Journal Entry

Bad debt expense (DR) XXX

Direct Write-off
Accounts Receivable (CR) XXX

Paid receivables Cash (DR) XXX

previously written off Bad debt expense (CR) XXX
Example:
• April 01: Molina Company determined that $10,600 receivables are no longer collectible:
Customer A $5,000, Customer B $3,600, and Customer C $2,000.
• April 15: Customer B paid its written off accounts, $3,600.

Date Journal Entry

Bad debt expense 10,600

April 01
Accounts Receivable 10,600

April 15 Cash 3,600

Bad debt expense 3,600
Allowance Method
• estimating receivables not expected to be collectible at the end of each period

Transaction Journal Entry

Journal entry upon Bad debt expense (DR) XXX
estimation Allowance for Doubtful Accounts (CR) XXX
Journal entry when a specific
Allowance for Doubtful Accounts (DR) XXX
accounts receivable is deemed
uncollectible Accounts Receivable (CR) XXX

Journal entry upon recovery & Accounts Receivable (DR) XXX

payment of an accounts Allowance for Doubtful Accounts (CR) XXX
receivable written off Cash (DR) XXX
Accounts Receivable (CR) XXX
Allowance for Doubtful Accounts
• Reported as contra-asset of Accounts Receivables in financial position
Example:
• April 01: Molina Company determined that $10,600 receivables are no longer collectible:
Customer A $5,000, Customer B $3,600, and Customer C $2,000. Journalize write-off.
• April 15: Customer B paid its written off accounts, $3,600.

Date Journal Entry

April 01 Allowance for Doubtful Accounts 10,600

Accounts Receivable 10,600
Accounts Receivable 3,600
Allowance for Doubtful Accounts 3,600
April 15
Cash 3,600

Accounts Receivable 3,600

2 Methods of Estimating Impairment
1. PERCENTAGE OF SALES METHOD
• Percentage is based on the past experience and anticipated credit policy
• Percentage is applied to total credit sales or net credit sales
• Amount computed is Bad Debt Expense

2. PERCENTAGE OF RECEIVABLES METHOD

• Estimates what percentage of receivables will result in losses from uncollectible
accounts
• Amount computed is the ending balance of Allowance for Doubtful Accounts
• Also called AGING THE ACCOUNTS RECEIVABLE – customer balances are
classified by the length of time they have been unpaid
Example:
Menge Company has accounts receivable of $93,100 at March 31. Credit terms are 2/10, n/30. At March
31, Allowance for Doubtful Accounts has a credit balance of $1,200 prior to adjustment. Net credit sales
for the year is $105,000.
Journalize and determine (i) bad debt expense, (ii) allowance for doubtful accounts, and (iii) net accounts
receivable if the company uses 1% of net credit sales.

Journal Entry
Bad debt expense=1% x $ 105,000=$ 1,050 Bad debt expense 1,050
Allowance for Doubtful Accounts 1,050

Allowance for Doubtful Accounts

DR CR Accounts Receivable $93,100
Bal. 1,200 Less: Allowance for
Doubtful Accounts (2,250)
1,050
Net Accounts Receivable $90,850
$2,250
Example:
Menge Company has accounts receivable of $93,100 at March 31. Credit terms are 2/10, n/30. At March
31, Allowance for Doubtful Accounts has a credit balance of $1,200 prior to adjustment. Net credit sales
for the year is $105,000.
Journalize and determine (i) bad debt expense, (ii) allowance for doubtful accounts, and (iii) net accounts
receivable if the company uses 5% of accounts receivable.

Journal Entry
Ending ADA =5 % x $ 93,100=$ 4,655 Bad debt expense 3,455
Allowance for Doubtful Accounts 3,455

Allowance for Doubtful Accounts

DR CR Accounts Receivable $93,100
Bal. 1,200 Less: Allowance for
Doubtful Accounts (4,655)
3,455
Net Accounts Receivable $88,445
$4,655
 Example:
Menge Company has accounts receivable of $93,100 at March 31. Credit terms are 2/10, n/30. At March
31, Allowance for Doubtful Accounts has a credit balance of $1,200 prior to adjustment. Net credit sales
for the year is $105,000.
Journalize and determine (i) bad debt expense, (ii) allowance for doubtful accounts, and (iii) net accounts
receivable if the company uses below aging schedule.
Days Outstanding Balance % uncollectible Uncollectible

0-30 days $ 60,000 2% $ 1,200 Journal Entry

31-60 days 17,600 5% 880
Bad debt expense 6,080
61-90 days 8.500 20% 1,700
Allowance for Doubtful Accounts 6,080
Over 90 days 7,000 50% 3,500
Total $ 93,100 $7,280
Accounts Receivable $93,100
Ending ADA =$ 7 , 280 Allowance for Doubtful Accounts
Less: Allowance for
DR CR
Doubtful Accounts (7,280)
Bal. 1,200
6,080 Net Accounts Receivable $85,820
$7,280
Disposal
• Rationale:
• Company liquidity is LOW
 Receivables may be the only reasonable source of cash when money is tight and the
company is unable to borrow.
• Collecting Accounts Receivable is Troublesome
 Billing and collection are often time consuming and costly.
Disposal
• Ways of Disposal
• Discounting
 the business receives the cash immediately but remains responsible for collecting
the debts from customers.
 Receivables serves as collateral for the loan.
• Factoring
 the business receives the cash immediately and the factor (a finance company or
bank) collects the debts from customers.

Journal Entry
Cash (DR) XXX
Service Charge Expense (DR) XXX
Accounts receivable (CR) XXX
Example:
Molina Company factors accounts receivable amounting to $10,000 to Dodson bank. The bank
charges a 1.5% fee for accounts receivable sold.

Journal Entry

Cash 9,850
Service Charge Expense 150
Accounts receivable 10,000
Accounting for Credit

Card Sales
Accounting for Credit Card Sales
• Parties: Credit Card
 Credit Card Issuer Issuer
 Retailer
 Customer

Transaction Journal Entry

Credit Card Sale Accounts Receivable – Credit Card (DR) XXX

Service Charge Expense (DR) XXX
Sales (CR) XXX Customer
Retailer
Cash Cash (DR) XXX
Receipt Accounts Receivable – Credit Card (CR) XXX
Accounting for Credit Card Sales
• Advantages:
 Issuer of the credit card does the credit investigation of the customer.
 Issuer maintains customer accounts.
 Issuer undertakes collection process and absorbs losses.
 Retailer receives cash more quickly from credit card issuer.
Example:
Tireson Company purchased $1,000 from Molina Company, using Visa First Bank Card.
First Bank charges a service fee of 3%.

Journal Entry

Accounts Receivable – Credit Card 970

Service Charge Expense 30
Sales 1,000
Notes Receivable
Notes Receivable
• Supported by a formal credit instrument called a promissory note – a written promise
to pay a specified amount of money on demand or at a definite time.
• Parties:
 Maker/Issuer
 Payee
• Uses:
 When individuals or businesses lend or borrow money
 When the amount of the transaction and the credit period exceed normal limits
 In settlement of an accounts receivable
Notes Receivable
1. Determining maturity date
2. Computing interest
3. Initial recognition and valuation
4. Subsequent measurement
5. Disposal
Determining the maturity date
• On demand – due now or upon demand by the payee
• On a stated date – specific date is provided (e.g., May 2, 2022)
• At the end of a stated period of time (e.g., 60-day note, 2-month note)
 Expressed in Months (e.g. maturity date of 3-month note dated May 1 is August 1)
 Expressed in Days (e.g. Maturity date of a 60-day note July 17 is September 15)
 exclude issue date
 include due date

Term of the Note 60 days

July (31 – 17) 14 days
August 31 days 45 days
September 15 days
Computing interest
𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝑥 𝑇𝑖𝑚𝑒 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟=𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

• If term is expressed in months, TIME FACTOR is n/12.

• If term is expressed in days, TIME FACTOR is n/365 or n/360

TERM OF NOTE INTEREST COMPUTATION

90
P80,000, 6%, 90 days 80,000 𝑥 6 % 𝑥 = 𝑃 1,183.56
365
9
P500,000, 10%, 9 months 5 00,000 𝑥 10 % 𝑥 = 𝑃 37,500
12
1
P800,000, 8%, 1 year 8 00,000 𝑥 8 % 𝑥 = 𝑃 64,000
1
Initial recognition and valuation
• Record at face value.

Journal Entry

Notes Receivable (DR) XXX

Accounts Receivable/Cash (CR) XXX
Subsequent measurement
• Short-term notes are valued similar to accounts receivable – at cash (net) realizable
value
• These are also tested for impairment and any impairment noted is recognized in the
Allowance for Doubtful Accounts account.
Disposal
• Accrual of interest receivable
 accrue interest earned but not yet received at period end
• Honor of notes receivable
 maker pays the note in full (face value + interest earned) at its maturity date
• Dishonor of notes receivable
 note is not paid in full at maturity
• Sale of notes receivable
 similar to the sales of accounts receivable
Summary of Transactions: Honor of Notes Receivable

Transaction Journal Entry

Accrual of interest Interest Receivable (DR) XXX

receivable Interest Revenue (CR) XXX

Honor of notes receivable Cash (DR) XXX

Notes Receivable (CR) XXX
Interest Receivable and/or Interest Revenue (CR) XXX
Example:
• Molina Company received an 8-month note amounting $5,000 with 6% interest on July 31,
2023, as a commitment to pay outstanding accounts receivable of the same amount.

Date Journal Entry

Jul 31 Notes Receivable 5,000
Recognition of NR Accounts Receivable 5,000
Dec 31 Interest Receivable 125
Accrual of Interest Interest Revenue 125
Receivable
Cash 5,300
Mar 31
Notes Receivable 5,000
Cash Collections
Interest Receivable 125
Interest Revenue 175
Summary of Transactions: Dishonor of Notes Receivable
Transaction Journal Entry

Dishonor Notes Receivable

If collection is still expected Accounts Receivable (DR) XXX
Notes Receivable (CR) XXX
Interest Receivable and/or Interest Revenue (CR) XXX

Dishonor Notes Allowance for Doubtful Accounts (DR) XXX

Receivable Notes Receivable (CR) XXX
If collection is unlikely* Other Expenses (DR) XXX
Interest Receivable (CR) XXX

*No interest revenue will be recorded because collection will not occur.
Example:
• On Mar 31, 2024, customer has dishonored its 8-month note to Molina Company amounting
$5,000 with 6% interest. Collection is expected.

Date Journal Entry

Accounts Receivable 5,300

Mar 31 Notes Receivable 5,000
Dishonor Notes Interest Receivable 125
Receivable Interest Revenue 175
Example:
• On Mar 31, 2024, customer has dishonored its 8-month note to Molina Company amounting
$5,000 with 6% interest. Collection is not expected.

Date Journal Entry

Mar 31 Allowance for Doubtful Accounts 5,000

Dishonor Notes Other Expense 125
Receivable Notes Receivable 5,000
Interest Receivable 125
Disposal
• Discounting
 the business receives the cash immediately but remains responsible for collecting the
debts from customers.
 Receivables serves as collateral for the loan.
• Factoring
 the business receives the cash immediately and the factor (a finance company or
bank) collects the debts from customers.
Journal Entry

Cash (DR) XXX

Service Charge Expense (DR) XXX
Notes Receivable (CR) XXX
Presentation and
Analysis
Presentation and Analysis
Accounts Receivable Turnover (ARTO)
• a tool to assess liquidity; measures the number of times, on average, the company
collects accounts receivable during the period

Average Collection Period/Day in Receivables

• Average Collection Period/Day in Receivables – a variant of ARTO; measure the
number of days accounts receivable remains outstanding
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