Accounts Receivable - Module 3, Part 1
Receivables
● Definition: Financial assets representing a contractual right to receive
cash/financial assets from another entity.
● Written promises: Notes Receivable
● Oral promises: Accounts Receivable
Classification
1. Trade Receivables
● Claims from sale of merchandise/services.
● Expected to be collected within normal operating cycle or one year.
● Classified as Current Asset.
2. Nontrade Receivables
● Receivables not arising from routine sales.
● Realized in cash within one year or beyond.
● Classified as current or non-current asset depending on expected
collection period.
● Presentation: Shown as "Trade and Other Receivables" in the Statement of
Financial Position; details in notes to financial statements.
Examples of Nontrade Receivables
● Advances to officers, employees, shareholders, subsidiaries/affiliates, and
suppliers.
● Subscription receivable.
● Debit balances in creditor accounts due to overpayments.
● Special deposits on contract bids.
● Accrued income (e.g., dividends receivable).
● Claims against:
● Insurance (casualties)
● Defendants (lawsuits)
● Government (tax refunds)
● Common carriers (damaged/lost goods)
● Creditors/customers (returned/lost goods, returnable containers)
Customer’s Credit Balances
● Result from overpayments, returns, allowances, advance payments.
● Classified as current liabilities, not offset against A/R unless immaterial.
Measurement of Receivables
● Initial Measurement: At fair value plus directly attributable transaction costs
(PFRS 9).
● Short-term: at face value/invoice amount.
● Long-term, interest bearing: at face value.
● Long-term, non-interest bearing: at present value of future cash flows
discounted at market rate.
● Subsequent Valuation: At Net Realizable Value (NRV) – the cash expected to be
collected.
● Deductions:
● Allowance for freight charges
● Allowance for sales return
● Allowance for sales discount
● Allowance for doubtful accounts
Freight Terms
● FOB Destination: Buyer owns goods on receipt; seller pays freight.
● FOB Shipping Point: Buyer owns goods at shipment.
● Freight Collect: Buyer to pay freight charges.
● Freight Prepaid: Seller has already paid freight.
Accounting for Freight & Sales Returns
● Freight Out: Charged to expense if seller pays freight.
● Allowance for Sales Returns: Estimate of potential returns; reduces A/R and
sales.
Trade Discounts vs. Cash Discounts
● Trade Discounts: Reductions from list price; not recorded in accounts, sales
recorded net of discount.
● Cash Discounts: Inducements for prompt payment (e.g., 2/10, n/30).
● Can use Gross or Net Method in accounting.
Accounting Methods for Bad Debts
● Direct Write-off Method
● Recognize bad debt only when the account is deemed worthless.
● Not IFRS acceptable if material.
● Allowance Method
● Recognize bad debt based on estimates for doubtful accounts.
● Required under IFRS.
Allowance Method Approaches:
● Percentage-of-Sales: Estimate based on % of credit sales (matching).
● Percentage-of-Receivables: Estimate based on % of receivables, possibly using
an aging schedule.
● Aging of Accounts Receivable: Different percentages applied to receivables
depending on how long overdue.
Entries: Example Journal Entries
Sales with Cash Discount – Gross Method:
June 3:
Accounts Receivable 2,000
Sales 2,000
June 12:
Cash 1,960
Sales Discount 40
Accounts Receivable 2,000
Sales with Cash Discount – Net Method:
June 3:
Accounts Receivable 1,960
Sales 1,960
June 12 (if discount taken):
Cash 1,960
Accounts Receivable 1,960
June 12 (if discount not taken):
Cash 2,000
Accounts Receivable 1,960
Sales Disc. Forfeited 40
Uncollectible Receivables
● A loss that decreases both A/R asset and income/shareholder equity.
Direct Write-off Example
● Write off:
Bad Debts Expense XXX
Accounts Receivable XXX
● Recovery:
Accounts Receivable XXX
Bad Debts Expense XXX
Cash XXX
Accounts Receivable XXX
Allowance Method Example
● Estimate bad debts:
Bad Debts Expense XXX
Allowance for Doubtful Accts XXX
● Write off specific account:
Allowance for Doubtful Accts XXX
Accounts Receivable XXX
● Recovery of written-off account:
Accounts Receivable XXX
Allowance for Doubtful Accts XXX
Cash XXX
Accounts Receivable XXX
Statement of Financial Position (Sample Current Assets
Section)
Merchandise Inventory XXX
Prepaid Expense XXX
Accounts Receivable XXX
Less: Allowance for Doubtful Accts (XXX)
Cash XXX
Total Current Assets XXX
Summary:
● Recognize A/R at initial fair value (+ transaction costs).
● Subsequently measure at NRV, less all expected reductions.
● Use allowance method (estimated uncollectibles) for IFRS compliance.
