6 LEARNING OBJECTIVES 1’ v To know the classification and presentation of receivables. v To know the initial and subsequent measurement of accounts receivable. v To identify the adjustments necessary in determining the net realizable value of accounts receivable. v To understand the gross method and net method of recording credit sales. To know the accounting for doubtful accounts, worthless accounts written off and recoveries of accounts written off.DEFINITION 1 entity: 4 * TRADE AND NONTRADE RECEIVABLES } = | Nontrade receivables represent:claims arising from= LOANS RECEIVABLE © For banks and other financial institutions, receivables result primarily from loans to “customers. CLASSIFICATION Trade receivables - expected to be realized within” the normal operating cycle or one year, are classified es current assets. Nontrade receivables - expected:to be realized within the normal operating cycle or one year, are classified es current assets. If collectible beyond one year, nontrade receivables — are classified as noncurrent assets. PAS 1, Presentation of Financial Statements, paragraph 66SUB-TOPICS © 1’ PRESENTATION ) EXAMPLES OF NONTRADE RECEIVABLES * Trade and nontrade receivables which are 1. Advances to or receivables from shareholders, Currently collectible shall be presented } directors, officers or employees. If collectible ‘on the face of the statement of financial in one year, such should be classified 3s Position'as one line item celled trade . ‘current assets. Otherwise, noncurrent assets. - and other receivables. Prd 3st aaaSUBTOPICS CUSTOMERS’ CREDIT BALANCES © ““.~ EXAMPLES OF NONTRADE RECEIVABLES + Creditors’ account may have debit balances as 2 result of overpayment or returns end allowances, These are classified as current assets.” —___ [Petit balance 400000 No adjustment is nif me 200 necessary to collectible currently shauld be classified as 1 cme formally recognize current assets. [colecions sooo the customer credit Debit balance 180.000 balances because Saree 0000 yltimately these are current assets. 4 canceled for sales Claims receivable are normally classified 2: current assets. | Customer ¢ 5 oa a neon tmawe anid Cash settlement. cestnoee SAE foes sonsMEASUREMENT OF ACCOUNTS RECEIVABLE v1’ INITIAL MEASUREMENT | For short-term receivables, the fair value = face amount Cash flows relating to short-term receivables are not discounted because the effect is usuelly immaterial PERS 9, paragraph 5.1.1 SUBSEQUENT MEASUREMENT After initial recognition, accounts receivable shall be measured at amortized cost. Amortized cost = net realizable value of accounts receivable " puecearent In estimating the net realizable value, the following deductions are made: a. Allowance for freight charge b. Allowance for sales return ©. Alowance for sales discount d. Allowance for doubtful accounts PFRS 9, paragraph 6.2.1 ©NET REALIZABLE VALUE Terms related to freight charge ) FOB destination - ownership of the goods 4 purchased is vested in the buyer upon receipt } FOB shipping point- ownership of goods purchased is vested in the buyer upon shipment Freight prepaid - freight charge is paid by the 4 seller , buyer } In some cases, goods'are'sold FOB destination with the understanding Taek one arta ra tare : Accounting for freight charge On the part of the seller, the fright charges recorded by re, For example, an entity has P100,000 account receivable at the end of the period The terms are 2/10, n/30, FOB destination and freight collect, The customer paid freight charge af PS,000. 1. Torecord the sale Accounts receivable 100.000 Freight out 5000 sales 100.000 Allowance for freight charge 000 2. To record the colection within the discount period cash 93000 Sales discount 2000 Allowance for freight charge 5,00, ‘Accounts receivable 100.000NET REALIZABLE VALUE © 1° Allowance for sales return ) Sales discount } * Entities usually offer cash discounts to credit j customers. cash discount‘is'@:reduction from ‘an invoice price by reason of prompt payment. * — Acashidiscount is known as sales discount on the part of the seller and purchase discount on the part of the buyer. A cash discount may be expressed as 5/10, 1/30. This means that the customer is entitled to @ 5% discount if payment is made in 10 days from the invoice date. + For example, an amount of 50,000 of the tatal accounts receivable at year-end represents selling price of goods that will probably be returned. The journal entry to recognize the probable retum is: Sales return 50,000 Allowance for sales return 50,000 |METHODS OF RECORDING CREDIT SALES © GROSS METHOD NET METHOD The accounts receivable and sales are ‘ The accounts receivable and sales are recorded at recorded at gross amount of the invoice ‘net amount of the invoice, invoice price less discount 1. Sale of merchandise for P100,000, terms 5/10, n/30. 1. Sale of merchandise for P100,000, terms 5/10, n/30. Accounts receivable 100,000 t Accounts receivable 95,000 Sales 100,000 Sales 95.000 4 2. Assume collection is made within the discount period: , Assume collections made within the discount period: cash 95000 oon 0 | meorast oo Sales discount 5,000 ‘Accounts receivable 100000 ya. assume collection is made beyond the discount period: 3. Assume collection is made beyond the discount period: 4 a oN cash 100,000 | ‘Accounts receivable 95000 Accounts receivable 100000 Sales discount forfeited 5,000 ‘The soles discount forfeited account is classified as other income,NET REALIZABLE VALUE © 1° Allowance for sales discount ) Accounting for bad debts * Weustomers are Granted cash discounts:for “, “ Wynenen.acunent tecanesswncojeenilesthe prompt payment, then, conceptually estimates } of cash discounts on open accounts at the = Two methods are followed in accounting for end of the period based on past experience == this bad debt loss: shall be made. 1. Allowance Method = — Matching principle 4 "For example, of the accounts receivable of ‘= The allowance method requires recognition of a bad P1,000,000 at the end of the period, it is r debt loss if the accounts are doubtful of collection, teliably estimated that discounts to be taken 1 will amount to P50,000, | ‘The journal entry to recognize the doubtful accounts is: Doubtful accounts mx The adjustment to record the expected sales} elowancs fr doubthal accounts Et discount is ifthe doubtful accounts are subsequently found to be J worthless or uncollectible the accounts are writen off Sales discount 50,000 as follows: Allowance for sales discount 60,000 Allowance for doubtful accounts co ‘Accounts receivable ~NET REALIZABLE VALUE © 2. Direct writeoff method x Matching principle “1* Recoveries of account written off * This requires recognition of a bad debt lass only il acveunarsamanmarereranreamaraanil when the accounts proved to be worthless or written off as uncollectible, the customary uncollectible.. procedure is first to recharge the customer's ‘account with the amount collected and = Worthless accounts are recorded by debiting bad possibly with the entire amount previously debts and crediting accounts receivable. If the charged off if it is now expected that 4 accounts ere only doubtful of collection, no collection will be received in ful | __ ddjustment is necessary. = The-collection is recorded normally by debiting 1 "BIR recognizes only this method for income:tax ‘cash and crediting accounts receivable ‘purposes, but is not permitted under IFRS. = The'generally accepted spproach is to'simply +} Doubtful accounts in the income statement en 4 1. Distritutioncost - iF ereditand collection’are under the regardless of whether the recovery is during | charge of the sales manager ‘the year of writeoff or subsequent thereto, 2 eee eenmenctainaieslenneninde: ger (if silent)