Accounts Receivable

Receivables

• Financial asset that represents a contractual right to receive cash of another financial asset from
another entity.

• It represents the amount collectible from customers and others, most frequently arising from sale of
merchandise, claims of money lent, or the performance of services.

• Under PFRS 15 paragraph 108, a receivable is an entity’s right to consideration that is unconditional.
A right to consideration is unconditional if only the passage of time is required before payment of
that consideration is due.
For accounting purposes, receivables include the following:

1. Amounts collectible from customers and others, most frequently arising from sales of merchandise,
claims for money lent, or the performance of services. They may be on open accounts or evidenced by
time drafts or promissory notes.

2. Accrued revenues, such as accrued interest, commissions, rental and others

3. Other items such as loans and advances to officers, employees, affiliated companies, customers or
other outside parties; legitimate claims against suppliers and insurance companies; and other claims
arising from nonrecurring transactions such as calls for subscription receivables and disposal of
property.
 Classification of Receivables

As to source:

1. Trade Receivables – refer to claims arising from sale of merchandise or services in the ordinary course
of the business operations.
a. Accounts Receivable/customer’s account/trade debtors – these are open accounts not
supported by promissory note arising from sale of merchandise or services in the ordinary
course of business.
b. Notes receivable – is a formal claim against another that is evidenced by a writted promise
called promisorry note, or a written order to pay at a later time called time draft.
2. Nontrade receivables – these are receivables that arise from sources other than from sale of goods or
services in the normal course of business.

Specific examples of non-trade receivables include:

a. Loans to officers and employees

b. Advances to affiliates
c. Accrued interest and dividends
d. Deposits to guarantee performance or payment or to cover possible damages or losses
e. Subscriptions for the entity’s equity securities
f. Deposit with creditors
g. Claims for losses and damages
h. Claims for tax refunds or rebates
i. Claims against common carriers for damaged or lost goods
As to presentation in Statement of Financial Position:

Receivables

Did they arise from sale of

goods and services in the
normal course of business?

Are they collectible within 12

Report as current assets months from the end of the
reporting period?

Report as non-current asset

Trade receivables are generally classified as current assets because they are collectible within the
normal operating cycle.

Normal operating cycle is the period required for cash to be converted into inventories through
purchase and production, inventories into receivables through sale, and receivables back into cash or
cash equivalents through collection.

Non-trade receivables that are expected to be collected within 12 months from the end of the reporting
period are also classified as current assets, regardless of the length of the entity’s normal operating
cycle.

Non-trade receivables that are not reasonably expected to be collected within twelve months from the
end of the reporting period are reported as non-current assets.

Subscription receivable with call date beyond twelve months from the end of the reporting period is
appropriately reported as deduction from shareholders’ equity.
 Initial Recognition

Based on IFRS 9 Financial Instruments, an entity shall recognize a financial asset in its statement of
financial position when and only when, the entity becomes a party to the contractual provision of the
instrument. Thus, trade receivables are recognized simultaneous to the recognition of the related
revenues, either from sale of goods or rendering of services.

Trade receivables that do not have a significant financing component are measured at the transaction
price in accordance with PFRS 15 Revenue from Contracts with Customers.

Transaction price is “the amount of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (e.g., some sales taxes).” (PFRS 15)
 Accounting for Accounts Receivable and related revenues

a. Trade discounts/volume discount/quantity discount

Trade discounts are given to encourage prospective customers to buy the goods in large quantities.
These discounts are deducted from the list price to arrive at the invoice price and are never recognized
in the accounting record since the journal entry is based on the amount on the sales invoice.

b. Cash discount/Settlement Discount

Cash discounts are reductions from invoice price as an inducement for prompt payment of an account
within the discount period (e.g. 2/10, n/30). This is also called sales discount from the point of view of
the buyer.
3 methods of cash discounts:

Gross price method – sales and receivables are recorded at the gross amount. Sales discounts taken by
customers are debitedto the Sales Discounts account which is reported as a reduction of sales. This is
considered to be more practical than the net method.

Net price method - Sales and receivables are recorded at the net amount. Sales discounts not taken by
customers are credited to the Sales discounts Forfeited (discounts not taken) account, which is
reported in the “other income” line item of the statement of comprehensive income. This method is
considered to the theoretically correct since the receivable and sales are recorded using the cash
price equivalent.

Allowance method – account receivable and sales are recorded at gross amount and a corresponding
allowance for sales discount is recorded.
 Illustrative Problem: Trade Discount
Diesel manufacturing sold to Bulldogs company merchandise on account with a list price of P120,000, less
trade discounts of 15%,10% and 5%. The invoice price of the merchandise computed as follows:

List price P120,000

Less 15% x 120,000 18,000
102,000
Less 10% x 102,000 10,200
91,800
Less 5% x 91,800 4,590
Invoice Price 87,210

Alternatively, the invoice price may simply be computed as

120,000 x .85 x .90 x .95 = 87,210

Accounts Receivables 87,210

Sales 87,210
To record the sale transaction
 Illustrative Problem: Cash Discount

Naragsak Company entered into the following during the year:

• Jan. 02 - Sold 10,000 units of merchandise to Rex Company at a selling price of P100 less trade
accounts of 10% and 5% with terms of 2/10, 1/20, n/20
• Jan. 04 - Sold 15,000 units of merchandise to Zeus Company at a selling price of P100 less trade
accounts of 10% with terms 2/10, 1/20, n/30
• Jan. 06 - Rex returned 2,000 units of goods to the company
• Jan. 10 - Rex paid his account availing of the cash discount
• Feb. 02 - Zeus Company paid his account

Required: Prepare all the necessary entries assuming the company used:
1) Gross method 2) Net Method 3) Allowance Method
Illustrative Problem: Cash Discount – Gross Price Method

Date Account Title

Accounts Receivable 855,000
Jan. 02
Sales 855,000

Accounts Receivable 1,350,000

Jan. 04
Sales 1,350,000

Sales Return 171,000

Jan. 06 Accounts Receivable 171,000
(2,000 x 100 x .90 x .95)
Cash
670,320
Sales Discount
Jan. 10 13,680
Accounts Receivable
684,000
(8,000 x 100 x .90 x .95 x .02)

Cash 1,350,000
Feb. 02
Accounts Receivable 1,350,000
Under the gross price method, inasmuch as the sales discount is recorded only when taken, it is
possible that sales may have been recorded in one reporting period, but the cash may have been
taken by the customer upon payment in the subsequent period.

Assuming Naragsak Company uses fiscal year that ends January 11 as its reporting period and
receivable from Zeus paid the accounts on January 14. Below are to record the transactions:

Transaction Date Account Title Amounts

To record the
adjustment at the end Sales Discount 27,000
Jan. 11
of the reporting Allowance for Sales Discount 27,000
period

To record the Allowance for Sales Discount 27,000

Jan. 12
reversing entry Sales Discount 27,000

To record the Cash 1,350,000

payment within the Jan. 14 Sales Discount 27,000
discount period Accounts Receivable 1,323,000
Illustrative Problem: Cash Discount – Net Price Method

Transactions Date Account Title Amounts

Accounts Receivable 837,900
To record the sales Jan. 02
Sales 837,900

Accounts Receivable 1,323,000

To record the sales Jan. 04
Sales 1,323,000

Sales Return
167,580
To record sales return Jan. 06 Accounts Receivable
167,580
(2,000 x 100 x .90 x .95. .98)
Cash 670,320
If paid within the
discount period
Jan. 10 Accounts Receivable 670,320
(2,000 x 100 x .90 x .95)

Cash 1,350,000
If paid beyond the
discount period
Feb. 02 Accounts Receivable 1,323,000
Sales Discount Forfeited 27,000
Illustrative Problem: Cash Discount – Allowance Method
Transactions Date Account Title Amounts
855,000
Accounts Receivable
17,100
To record the sales Jan. 02 Allowances for Sales discount
837,900
Sales

1,350,000
Accounts Receivable
27,000
To record the sales Jan. 04 Allowances for Sales discount
1,323,000
Sales

Sales Return 167,580

Allowance for Sales discount 3,420
To record sales return Jan. 06
Accounts Receivable 171,000
(2,000 x 100 x .90 x .95 x .02)
Cash 670,320
If paid within the Allowance for Sales Discount 13,680
Jan. 10
discount period Accounts Receivable 684,000
(8,000 x 100 x .90 x .95 x .02)
Cash 1,350,000
If paid beyond the Allowance for Sales Discount 27,000
Feb. 02
discount period Sales Discount 27,000
Accounts Receivable 1,323,000
 Credit Card

Credit card is plastic card which enables the holder to obtain credit up to predetermined limit form the
issuer of the card for the purchase of goods and services. Services charge or credit card fees, normally
ranging from 1% to 5% of net credit card sales, reduce the value of the accounts receivable. The account
Credit Card Service Charge would be reported as an operating expense in Profit or loss.
 Illustrative Problem: Credit Card

On January 1, of the current year, Oxide sold merchandise to customers using BPI Master Card totaling
P1,000,000. On January 6, BPI Master Card remitted in full the amount minus service charge of 5%
To prepare the necessary journal entries:

Date Account title Amounts

Accounts receivable – BPI Master card 1,000,000
Jan. 1 Sales 1,000,00
To record the BPI Master card sales
Cash (1M x 95%) 950,000
Service Charge (5% x P1M) 50,000
Jan. 6 Accounts Receivable – BPI Master card 1,000,000
To record the remittance of BPI Master card
to Oxide