I.

Discussion

Accounts Receivable
 Receivables are financial assets that represent a contractual right to receive cash or
another financial asset from another entity. Retailers classified them into trade and
nontrade
 Trade receivables refer to claims arising from sale of merchandise or services in the
ordinary course of business. These are expected to be realized within the normal
operating cycle or one year and are classified as current assets. It includes accounts
receivable and notes receivables.
 Accounts receivables are open accounts arising from the sale of goods and services in
the ordinary course of business. It is also termed as customer’s account, trade debtor
and trade accounts receivable.
 Note receivables are those supported by formal promises to pay in the form of notes.
 Nontrade receivables represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business. If realizable in one year, it is
classified as current assets, otherwise classified as noncurrent assets.
 Loans receivables result from loans by banks and other financial institution to customers.

Examples of Nontrade Receivables

 Advances to employees. When expected to be collected in one year, it is classified as
current asset. If collected more than a year, it is a noncurrent asset
 Advances to affiliate is a long term investment
 Advances to suppliers is a current assets
 Subscription receivable. When expected to be collected in a year, it is a current asset. If
collection is more than one year, it is a deduction to subscribed share capital
 Creditor’s account. A debit balance of creditor’s account is a current liability. It may be
offset if the amount is immaterial.
 Special deposits in contract bids. It is normally a noncurrent assets unless collected in
one year, it will be classified as current asser
 Accrued income are current assets
 Claims receivable are current assets

Measurement
Accounts receivable is measured initially at face amount or invoice amount. After initial
recognition, it shall be measured at amortized cost or net realizable value. The net realizable
value is the amount of cash expected to be collected or the estimated recoverable amount.
Accounts receivable can be decreased by:
 Allowance for freight charge
 Allowance for sales return
 Allowance for sales discount
 Allowance for doubtful accounts

Terms Related to freight charge

FOB destination, means that the ownership of the goods purchased is vested in the buyer upon
receipt thereof.
FOB shipping point, means that the ownership of the goods purchased is vested in the buyer
upon shipment thereof.
Freight collect, means that the freight charge on the goods shipped is not yet paid.
Freight prepaid, means that the freight charge on the goods shipped is already paid by the
seller.

An entity has a P500,000 accounts receivable with terms 3/10, n/30, FOB destination and
freight collect. The customer paid freight charge of P10,000.

To record the sale

Accounts Receivable 500,000
Freight Out 10,000
Sales 500,000
Allowance for freight charge 10,000

To record collection within the discount period

Cash 475,000
Sales discount 15,000 (500,000 x 3%)
Allowance for freight charge 10,000
Accounts Receivable 500,000

To record collection beyond the discount period

Cash 490,000
Allowance for freight charge 10,000
Accounts Receivable 500,000

An amount of P50,000 of total accounts receivable will probably be returned.

Sales return 50,000
Allowance for sales return 50,000

Method of Recording Credit Sales

1. Gross method. The accounts receivable and sales are recorded at gross amount of the
invoice.
2. Net method. The accounts receivable and sales are recorded at net amount of the
invoice

Gross method Net method

Sales of merchandise for P200,000 terms 2/10, n/60.
Accounts Receivable 200,000 Accounts Receivable 196,000
Sales 200,000 Sales 196,000

200,000 x (100% - 2%) = 196,000

Assume collection was made within the discount period
Cash 196,000 Cash 196,000
Sales discount 4,000 Accounts Receivable 196,000
Accounts Receivable 200,000
Assume collection was made beyond the discount period
Cash 200,000 Cash 200,000
Accounts Receivable 200,000 Accounts Receivable 196,000
Sales discount forfeited 4,000

Sales discount forfeited is an income account

The entity estimated that P50,000 will be taken as a discount
Sales discount 50,000 Sales discount 50,000
Allowance for sales discount 50,000 Allowance for sales discount 50,000

Accounting for Bad Debts

1. Allowance method, recognize bad debt loss if the accounts is doubtful of collection.
2. Direct writeoff method, recognizes bad debt loss only when an account is proven
worthless.

Allowance method Direct writeoff method

Accounts of P15,000 are considered doubtful of collection.
Doubtful Accounts 15,000 No entry
Allowance for doubtful accounts 15000
They are considered worthless
Allowance for doubtful accounts 15,000 Bad debts 15,000
Accounts Receivable 15000 Accounts Receivable 15,000
Previously written off accounts were subsequently recovered
Accounts Receivable 15,000 Accounts Receivable 15,000
Allowance for doubtful accounts 15000 Bad debts 15000

Cash 15,000 Cash 15,000

Accounts Receivable 15000 Accounts Receivable 15,000

The allowance for doubtful accounts is a deduction to accounts receivable. Doubtful account
expense is considered as distribution cost if the granting of credit and collection of accounts are
under the charged of the sales manager. Conversely, when the it was grant by any officer other
than the sales manager, it is classified as administrative expense.

Estimation of Doubtful Accounts

1. Aging of accounts receivable, involves an analysis where the accounts are classified into
not due or past due. The allowance is determined by multiplying the total of each
classification by the rate or percent of loss experienced by the entity

Ex: The company has an allowance for doubtful accounts of P170,000. The following data are
summarized in aging of accounts receivables:

Balance Experience Rate Required Allowance

(Uncollectibility)
Not due 1,700,000 NIL 0
1-30 days 1,200,000 5% 60,000
31-60 days 100,000 25% 25,000
61-90 days 150,000 50% 75,000
Over 90 days 120,000 100% 120,000
Accounts to be written off 30,000 30,000
P3,300,000 310,000

Multiply the balance by the percentage of uncollectibility to get the required allowance.

Entry: Doubtful accounts 140,000

Allowance for doubtful accounts 140.000

Required allowance (310,000) – Allowance for doubtful accounts (170,000) =140,000

2. Percent of accounts receivable. A certain rate is multiplied by the open accounts at the
end of the period in order to get the required allowance balance. The rate used is usually
determined from past experience of the entity.

Ex: A company has P4,000,000 accounts receivables and credit balance on allowance of
doubtful accounts of P5,000. Doubtful accounts are estimated at 6% of the accounts receivable.

P 4,000,000 x 6% = 240,000

Entry: Doubtful accounts 240,000

Allowance for doubtful accounts 240.000

3. Percent of sales. The amount of sales or credit sales is multiplied by a certain rate to get
the doubtful account expense.

Ex: A company has P2,500,000 sales and credit balance on allowance of doubtful accounts of
P40,000. Doubtful accounts are estimated at 1% of sales..

2,500,000 x 1 % = 25,000

Entry: Doubtful accounts 25,000

Allowance for doubtful accounts 25.000

Entry for inadequate allowance

Doubtful accounts xxx
Allowance for doubtful accounts xxx

Entry for excessive allowance

Allowance for doubtful Accounts xxx
Doubtful accounts xxx

Ex: if the amount of correction due to excessive allowance is 60,000 and the debit balance of
doubtful accounts expense of P10,000. Prepare adjusting entry:
Allowance for doubtful Accounts 60,000
Doubtful accounts 10,000
Miscellaneous income 50,000

Ex: On January 1, the allowance account is P15,000 and during the year, P100,000 is written off
Allowance for doubtful Accounts 100,000
 Accounts Receivable 100,000

A. Discounting. The parties involved are the maker and payee

Endorsement is the transfer of right to a negotiable instrument by simply signing at the back of
the instrument. It may be with recourse or without recourse.
Terms related to discounting of note
1. Net proceeds refer to the discounted value of the note received by the endorser from the
endorsee. Net Proceeds = Maturity value – discount
2. Maturity value is the amount due on the note at the date of maturity.
3. Maturity date is the date on which the note should be paid
4. Principal is the amount appearing on the face of the note.
5. Interest is the amount for the full term of note. Interest = principal x rate x time
6. Interest rate is the rate appearing on the face of the note
7. Time is the period within which interest shall accrue.
8. Discount is the amount of interest deducted by the bank in advance.
9. Discount rate is the rate used by the bank in computing the discount.
10. Discount period is the period of time from the date of discounting to maturity date.

Example: (without recourse)

January 1 The entity sold merchandise for P500,000 accepting a note of P500,000 for six
months with interest to be paid at maturity at 12%
Note Receivable 500,000
Sales 500,000

March 1 The entity discounted the note without recourse at the local bank at 15%.
Cash 503,500
Loss on note receivable financing 6,500
Notes Receivable 500,000
Interest Income ( 500,000 X 12% X 2/12) 10,000

Principal 500,000
Interest ( 500,000 x 12% x 6 months/12) 30,000
Maturity value 530,000
Less: Discount ( 530,000 x 15% x 4 months/12) 26,500
Net proceeds 503,500

Example: (conditional sale)

Vaness Company provided the following transactions:
March 14 Sale of merchandise, P2,050,000 to a customer, FOB destination, 2/10, n/30.
Accounts Receivable 2,050,000
Sales 2,050,000
April 7 Receipt of a 60-day, 12% note dated April 5 from the customer. The face of the note was
the amount of the invoice minus freight charge of P50,000 paid by the customer in connection
with the March 14 sale.
Note Receivable 2,000,000
Cash 50,000
Accounts Receivable 2,050,000

April 20 The note of the customer was discounted with the bank at 15%

Principal 2,000,000
Interest ( 2,000,000 x 12% x 60 days/360) 40,000
Maturity value 2,040,000
Less: Discount ( 2,040,000 x 15% x 45 days/360) 38,250
Net proceeds 2,001,750

Cash 2,001,750
Loss on note receivable financing 8,250
Notes Receivable discounted 2,000,000
Interest Income ( 2,000,000 X 12% X 15 days/360) 10,000

June 4 Received notification from the bank that the customer dishonoured the note.
Accordingly, the entity paid the bank the amount due including protest fee and other charges of
P10,000
Accounts Receivable (2,040,000 + 10,000) 2,050,000
Cash 2,050,000

Note receivable discounted 2,000,000

Note receivable 2,000,000

July 4 Receipt of cash from the customer for the full amount of indebtedness plus interest on
the original face value.
Cash 2,050,000
Accounts Receivable 2,050,000

Example: (secured borrowing)

On August 31, 2020, Pen Company discounted with recourse a customer’s note at the bank at
discount rate of 15%. The note was received from the customer on August 1, 2020, terms 90
days had a face amount of P5,000,000 and carried an interest rate of 12%. The customer paid
the note to the bank on October 30,2020, the date of maturity.

Principal 5,000,000
Interest ( 5,000,000 x 12% x 90 days/360) 150,000
Maturity value 5,150,000
Less: Discount ( 5,150,000 x 15% x 60 days/360) 128,750
Net proceeds 5,021,250

Cash 5,021,250
Interest Expense 128,750
Liability for note receivable discounted 5,000,000
Interest income 150,000
To record discounting of note

Liability for note receivable discounted 5,000,000

Note Receivable 5,000,000
To record payment of customer