Accounts Receivable

Receivable – financial asset that represents contractual right to reserve cash or other financial asset. (Refers to the
claims of owners)

Has no separate presentation item in the financial statement. To be presented as “trade and other receivable”.

Classification and Presentation of Receivable

 Trade Receivable – these are claims arising from the ordinary course of business. (Receivable is recorded due to
normal operating of the business “utang ni customer”)

 Non – Trade Receivable – these are claims not in the ordinary course of the business. (Giving advance payment
to suppliers, offices, entities in exchange of their services.) Example: Dividends Receivable, Subscription
Receivable, Deposits, and etc.)

How to Present regarding the classification:

 All trade receivable is all classified as current asset since this are related to the operating cycle of the business
which are collectible within the year.
 Non – current asset could be classified as current assets or non-current assets.
- For it classify as current asset it should be on 1 year or normal operating cycle which ever is longer. (There are
some entities that have normal operating cycle more than a year)
- For it to be classify as non-current asset it should be beyond 1 year or normal operating cycle.

Account Receivable

Debit is the Normal balance of account Receivable

There are instances that a receivable may have credit balance (is to all receivable account this rule applies?)
Credit balance may occur due to overpayment of a receivable account. Ex. Overpayment of the customer,
discounts, returns.

Treatment for credit balance of accounts Receivable

It should not be deducted or offset against the normal balance or other receivable account.
The Classification of a credit balance would be a current liability (the liability account is accounted separately)

Initial Measurement of Accounts Receivable

First book value of the account

Measure on fair value (transaction price).

Subsequent Measurement of Accounts Receivable

Total value of the account at the end of accounting period

Measure on amortized cost (net realizable Value)

PFRS 9, paragraph 5.1.1 – the financial asset should initially measure fair value plus transaction cost. While the
subsequent measure should be amortized cost.

Note: Every receivable account has different type of treatment.

Transaction costs – These are being incurred to obtain a loan or lending money of the entity. It is immaterial to Accounts
Receivable but material to other Receivable Account.

How to Determine the net realizable value of Accounts receivable

Deduct the Allowances account to Accounts Receivable

Example of allowances account:

1. Allowance for freight charges

2. Allowance for sales returns (estimates based on historical data of the entity)
3. Allowance for sales discounts (also estimates)
4. Allowance for bad debts (the account who credit the balance of accounts receivable into net value)

Cash Sales – sales that are paid by customer using cash upon getting the Inventory.

Credit Sales – Sales on account (account receivable or trade Receivable)

Two methods of Credit sales

Gross Method – exactly the amount of the sales is what is recorded

Net Method – if there are some discounts then the value of receivable should already be deducted when posting
the entry.

Example :

Company X sold P 1,000,000 goods on account which has terms of 3/10, n/30.

1. To record sale transaction

2. To record collection within the discount period
3. To record collection beyond period

Gross Method

1. Accounts Receivable 1,000,000

Sales 1,000,000
To record sale transaction

2. Cash 970,000
Discounts and Allowances 30,000
Accounts Receivable 1,000,000

3. Cash 1,000,000
Accounts receivable 1,000,000

Net Method

1. Account Receivable 970,000

Sales 970,000
- It is presumed that the customer would pay its liability within the discount period.

2. Cash 970,000
 Accounts Receivable 970,000

3. Cash 1,000,000
Accounts Receivable 970,000
Sales Discount Forfeited 30,000
- Since the book value of recorded is only 970,000 another account will be open to balance the value.
- The account “sales discount forfeited” is consider as other income account.

Doubtful Accounts (Bad Debts)

- Happen due to the accounts receivable since there are no guarantee that whole 100% value of accounts
receivable will be collected.
- Classification could be distribution cost or administrative and general expense

Provision – estimated on how much will be collected on accounts receivable either it is 90%,80% and etc.

Worthless Accounts – accounts that are proven to be uncollectible. Ex. Bankruptcy, death

Recovery – Accounts that are recently written off in the book but recovered. Or in other written off accounts that are
paid.

Two Method for Doubtful Account)

Allowance Method - it focuses most on estimates.

Provision:

Bad Debts xxx

Allowance for Bad Debts xxx
Worthless Accounts:

Allowance for Bad Debts xxx

Accounts Receivable xxx
- The account “allowance for bad debts will only bounce back. (hindi bato mag unbalance since bad debts is
open?)

Recovery: (increases Cash, Increases allowance for bad debts)

Accounts Receivable xxx

Allowance for Bad Debts xxx
- A reversing entry should be made since the balance for the paid value is already written off.

Cash xxx
Accounts Receivable xxx
Direct Write Off Method (Actual) – focuses on actual accounts.

Provision:

No entry needed

Worthless Accounts:

Bad Debts xxx

Accounts Receivable xxx
Recovery: ( Increases cash, Increases Bad debts)

Accounts Receivable xxx

Bad Debts xxx

Cash xxx
Account Receivable xxx

Account Receivable
Beginning Balance Collection of account
Sales on Account Sales returns and allowances
Sales Discount
Write off
Ending

Allowance for Bad Debts

Write off Beginning Balance
Bad Debts (Provision)
Recovery

Ending Balance

- Recovery does not have any effect on Accounts Receivable unless the Recovery is still included in the collection.
Therefor there should be a debit account for account Receivable.

Estimation of Doubtful Accounts

- Pertains only to allowance method

Two Approaches for estimating Doubtful Accounts

 1. Statement of Financial Position Approach
Method:
 Aging of Accounts Receivable
- not consistent to matching principle.
- Most reliable basis since there are classification of accounts whether it is past due or not yet past due.
- It is harder when an entity has many customer

 Percentage of Receivable – not consistent to matching principle.

- The rate cannot be easily computed since the basis is the total balance of Accounts Receivable.
o More on simplified approach
2. Income Statement Approach
Method:
Percentage of sales – most consistent in matching principle (matching principle -pertains to proper allocation of
expense written to revenue account.)

Rate = Bad debts loss / Total sales in the prior year

- If it happens to be excessive or inadequate the balance should be corrected using the Method of Aging of
receivable.

Note:

The method in the estimation of doubtful accounts rest upon the discretion of the management. There is no standard
that requires to use all methods in estimating doubtful accounts.

If the company believes that exchanging method would result into more reliable information then it may do so. (change
in accounting estimate)

How to compute for the rate of allowance for bad debts

Aging of Accounts Receivable and Percentage of Receivable

% Of Accounts receivable = Required Allowance

Allowance for Bad Debts

Write off Beginning
Balance - The value computed is not equal to the bad debts expense
Bad Debts
(Provision)
Recovery

Ending Balance

Percentage of Sales

% of total sale

Bad Debts expense

- Allowance for bad debts can have a debit ending balance due to excessive write-off method