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ACC 102 - Accounts Receivable

The document discusses accounts receivable, which represent a contractual right to receive cash or assets from another entity. It classifies receivables into three types: trade receivables from sales, non-trade receivables from other sources, and loans receivable from loans to customers. Accounts receivable are initially measured at face value but subsequently measured at amortized cost or net realizable value after deductions for allowances. There are two common methods for accounting for bad debts: the allowance method and direct write-off method.

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88 views3 pages

ACC 102 - Accounts Receivable

The document discusses accounts receivable, which represent a contractual right to receive cash or assets from another entity. It classifies receivables into three types: trade receivables from sales, non-trade receivables from other sources, and loans receivable from loans to customers. Accounts receivable are initially measured at face value but subsequently measured at amortized cost or net realizable value after deductions for allowances. There are two common methods for accounting for bad debts: the allowance method and direct write-off method.

Uploaded by

werter werter
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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20/03/22

ACC 102

ACCOUNTS RECEIVABLE

Receivables-

 Financial assets
 Represent a contractual right to receive cash/ financial asset from another entity

Classifications of receivables:

1. Trade receivables- (sale of merchandise/services)


 Claims arriving from sale of merchandise/services
 In ordinary course of business
 Realized w/in 1 year
a. Accounts receivable-
 Open accounts
 Result from sales of goods/services
 W/in ordinary course of business
 Not supported by promissory notes
b. Notes receivable-
 Supported by formal promises
 Promises to pay in the form of notes
2. Non-trade receivables-( selling of or buying asset/discarding,advances)
 Claims from other sources
 Sales other than that of merchandise/sales
 W/in ordinary course of business , 1 year
 Noncurrent assets- realizable 1 year more.
3. Loans receivable- (Loans)
 Receivables from loans to customers.
 Used by banks and other financial institutions.
 Repayment is over several years.

*Both trade & non-trade-

 That are currently collectible


 Presented in financial position statement
 Represented as 1 line item= “trade & other receivables”.

Customer credit balances- (Current liabilities)


20/03/22

 Credit balance in accounts receivables


 Result from:
o Overpayment
o Returns & allowances
o Advance payments from customers
 Classified as Current liabilities

Measurement of accounts receivable:

1. Initial measurement:
o Face amount/ original invoice amount
2. Subsequent measurement:
o Amortized cost/net realizable value
o NVR of accounts receivable-
o Amount of cash expected to be collected
o Estimated recoverable account

Net realizable value-

o Initial amount recognized for accounts receivable


o Is reduced by adjustment w/in ordinary course of business
o Initial amount- uncollectible or bad debts= Net realizable value.

Deductions to get net realizable value-

1. Allowance for freight charge- (Is it taken for account in COGS or is it a contra asset
account?)

Terms related to freight-

1. FOB destination-
o Ownership of goods is transferred to the buyer
o When it arrives at the destination.
2. FOB shipping point-
o Ownership of goods is with the seller.
o When the goods are still on transit.
3. Freight collect-
o Goods shipped are not paid yet.
o Carrier will receive payment from the buyer.
4. Freight prepaid-
o Freight charge on goods shipped is already paid
o By the seller.
2. Allowance for sales return- (Contra asset account)
o Margin of error
o Expecting goods to be returned due to shortage or defect.
20/03/22

3. Allowance for sales discount


Cash discounts-
o Reduction from an invoice price for paying in full
o Is offered to credit customers
o Sales discount= seller, purchase discount= buyer
o Expressed in = 3/10.n/30

Methods in recording credit sales:

1. Gross method-(Would these effects appear on the financial statement later on as a


deduction instead of on the credit side of the ledger?)
(Sales discount has a separate ledger in the books of the entity?)
o Accounts receivable sales are recorded in gross amount of invoice.
o Ledger is recorded without cash discount deductions to the amount first.
2. Net method- (There is no separate ledger for the sales discount)
Accounts receivable is recorded at net amount of invoice
Invoice price-cash discount

4. Allowance for doubtful accounts


o (How would businesses increase income through selling of credit rather than
cash?)
o Bad debts-
o Risk of customer not paying
o Account becomes uncollectible
o Bad debt loss

Two methods for accounting for bad debts:

1. Allowance method-
o Recognition of bad debt loss
o Doubtful of collection of account
2. Direct write-off people-
Recognition of bad debts only
When accounts are proved to be worthless or uncollectible.

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