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Class Notes: Receivables (Accounting)
1. Definition
• Receivables are amounts owed to a business by its customers or other parties,
arising from credit sales, loans, advances, or other transactions.
• They represent legal claims to cash and are usually classified as current assets
(if collectible within a year).
2. Types of Receivables
A. Accounts Receivable (Trade Receivables)
• Arises from sales of goods or services on credit.
• Usually short-term (30–90 days).
• Reported at net realizable value (NRV) = Accounts Receivable − Allowance for
Doubtful Accounts.
B. Notes Receivable
• Written promises (formal contracts) to receive cash.
• Typically include interest.
• May be short-term (due within a year) or long-term (more than a year).
C. Other Receivables
• Non-trade in nature. Examples:
• Advances to employees
• Interest receivable
• Dividends receivable
• Tax refunds receivable
3. Recognition of Receivables
• Recognized when a company delivers goods/services and has the right to
receive payment.
• Measurement:
• Accounts Receivable → recorded at invoice price.
• Notes Receivable → recorded at present value of future cash
flows (usually face value if short-term).
4. Valuation of Receivables
Receivables are reported at Net Realizable Value (NRV):
NRV = Accounts Receivable – Allowance for Doubtful Accounts
• Allowance for Doubtful Accounts (AFDA):
A contra-asset account used to estimate uncollectible accounts.
Methods for Bad Debts:
1. Direct Write-off Method
• Bad debts are recorded only when they are determined
uncollectible.
• Not GAAP-compliant (no matching principle).
2. Allowance Method (preferred under GAAP/IFRS)
• Estimates uncollectible accounts in advance.
• Two common approaches:
• Percentage of Sales Method (Income Statement
approach).
• Aging of Receivables Method (Balance Sheet
approach).
5. Notes Receivable Details
• Formal written promise with terms:
• Principal (face value)
• Interest rate
• Maturity date
• Accounting for Notes Receivable:
• Record at face value.
• Recognize interest income periodically.
• If dishonored, reclassify as accounts receivable.
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6. Special Issues in Receivables
• Sales Discounts – Cash discounts offered for early payment.
• Example: 2/10, n/30 → 2% discount if paid in 10 days; net due in
30.
• Accounting methods: gross and net method.
• Sales Returns and Allowances – Must be deducted from receivables.
• Factoring Receivables – Selling receivables to another party (factor) for cash.
• With recourse (seller bears risk).
• Without recourse (factor assumes risk).
• Pledging Receivables – Used as collateral for loans.
7. Presentation in Financial Statements
• Balance Sheet
• Current Assets: Accounts Receivable (net), Notes Receivable
(current), Other Receivables.
• Non-current Assets: Long-term notes receivable.
• Income Statement
• Bad Debt Expense (under operating expenses).
• Interest Income (for notes receivable).
8. Summary
• Receivables = amounts collectible from customers/others.
• Classified as Accounts Receivable, Notes Receivable, and Other Receivables.
• Must be valued at Net Realizable Value (allowing for bad debts).
• Issues include discounts, returns, factoring, and pledging.
• Proper management of receivables is essential for liquidity and financial health
of a business.
