Chapter 4

ACCOUNTS RECEIVABLE
(PFRS 9- Financial Instruments & PRFS 15 Revenue from Contracts with Customers)

Receivables
⁠~ assets that represent contractual rights to receive cash or other asset from another entity.
Examples:

・Accounts Receivable
⁠~receivables supported by oral or informal promised to pay.
・Notes Receivable
⁠~unlike accounts receivable, this receivable is supported by written or formal
promised to pay in the form of promissory note or in some cases, postdated
checks.
・Loans Receivable
⁠~receivable arising from loans extended by financial institutions
⁠~also supported with a promissory note and generally backed by collateral
securities or postdated checks.
・Advances
⁠~ receivables arising from advances to officers and employees, to suppliers
and to affiliates.
・Accrued Income
⁠~ receivables arising from income earned but not yet collected.
・Deposits
⁠~ receivables from reimbursable deposits.
・Claims Receivable
⁠~ receivables from insurance companies.

Classification of Receivables

・Trade Receivables
⁠ receivables arising from the sale of goods or services in the ordinary course of
~
a business.
⁠~ classified as current asset when it is expected to be realized in cash within
the normal operating cycle or one years, whichever is longer.

Normal Operating Cycle – an entity’s time between the acquisition of assets

for processing and their realization in cash or cash equivalents.

Examples:
 ・ Accounts Receivable
・ Notes Receivable

・Non-trade Receivables
⁠~ receivables arising from sources other than the sale of goods or services in
the ordinary course of a business.
⁠~ classified as current asset when it us expected to be realized in cash within
one year.

Examples:
・ Loans to officers and employees
・ Advances to affiliates
・ Accrued interest and dividends
・ Deposits to guarantee performance or to cover possible damages or losses
・ Subscription for the entity’s securities
・ Deposit with creditors, claims for losses and damages
・ Claims for tax refunds or rebates
・ Claims against common carriers for damaged or lost goods
・ Claims against creditors for returned, damaged or lost goods

In presenting the trade and non-trade receivables on the statement of financial position will be in a
single line item as “Trade and other receivables”. The breakdown is disclosed in the notes.

Abnormal balances in accounts

Credit balance in accounts receivable (customers account) resulting from overpayments, advance
payments, or errors should be presented as part of current liabilities and not offset against
receivables. In such cases, adjustment is needed.

Debit balance in accounts payable (suppliers account) resulting also from overpayments, advance
payments, or errors should be presented as part of current assets and not offset against payables. In
such cases, adjustment also much needed.

Initial and Subsequent Measurement of Receivables:

Initially, receivables are recognize at fair value plus transaction costs. However, trade receivables
do not have a significant financing component are measured at their transaction price (accordance
with PFRS 15).

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.
Subsequently, accounts receivable are measured at recoverable historical cost or net realizable
value.

Recoverable historical cost or net realizable value represents the amount of cash expected to be
recovered from the contractual cash flows of the receivable. In estimating the net realizable value of
trade accounts receivable the deductions of allowance for freight charge, allowance for sales returns,
allowance for sales discounts, and allowance for doubtful accounts shall be made.

Recognition of Trade Receivables

Trade Receivables are recognize when the entity has right to the consideration that is unconditional. This is
normally the case when the control over the promised goods or services is transferred to the customer.
However, in some cases, receivables are recognize before the control over a promised is transferred to the
customer when the unconditional right results from a contractual provisions.

Terms of Sale Contract

FOB Shipping Point – ownership of the goods transferred to the buyer upon shipment. Thus, sales
and accounts receivable are recognized in shipment date.

FOB Destination – ownership is transferred only when the buyer receives the goods. Sales and
accounts receivable also recognized upon receipt of goods.

Freight Collect – freight is not yet paid upon shipment. The carrier will collect the shipping costs from
the buyer upon delivery, but this does not mean that the buyer is the one who will shoulder for the
payment of freight.

Freight Prepaid – freight is already paid in advance before shipment happen but also doesn’t mean
tgat the seller is the one who will pay for the freight.
TRANSFER OF CONTROL OVER THE GOODS SOLD
Freight Charge
Ownership
Charge to: Freight Prepaid Freight Collect
FOB Shipping Buyer upon Seller
Buyer Buyer
Point shipment (reimbursable)
Buyer upon receipt Buyer
FOB Destination of goods
Seller Seller
(reimbursable)

📚 Rule: The ones who owns the goods being shipped should pay for the shipping costs.

a.) Under FOB shipping point, freight prepaid – the buyer owns the goods being shipped but
the seller paid the freight in advance. ( Buyer should reimbursed seller for the advance
payment of freight)
b.) Under FOB destination, freight collect – the seller owns the goods being shipped but the
carrier will be collecting freight from the buyer. (Seller should reimbursed buyer or deduct the
freight from the goods bought by the buyer).
c.) FOB shipping point, freight collect – buyer owns the goods and the carrier will collect the
payment for freight to the buyer.
d.) FOB destination, freight prepaid – buyer owns the goods and paid the freight in advance.
Discounts:
Trade Discounts
⁠~ given to encourage orders in large quantities.
⁠~ already deducted from the list price when determining the invoice price.

Cash Discounts
⁠~ give to encourage prompt payment. It is known as sales discounts on the part of the seller and
purchase discount in the part of buyer.
⁠~ deduction from the invoice price made when the net amount collectible within the discount period.

Accounting treatment:
・In accordance with PFRS 15
⁠~ entity recognizes revenue and receivable equal to the estimated amount when it
satisfies its obligation in the contract.
・In accordance with traditional GAAP
⁠~ cash discount are accounted for using either gross method or net method.

Methods of Recording Credit Sales (Traditional GAAP)

⁠⁠ GROSS METHOD – discounts only deducted when they are taken by the buyer.

⁠ NET METHOD – discounts already deducted from the price and if not taken by the buyer, it is
credited to the Sales discounts forfeited ( other income).

Illustration:
An entity sells inventory with a list price of P10,000 on account under credit terms of 20%, 10%, 2/10,
n/30.

Gross Method Net Method

Sale on account
Accounts Receivable 7,200 Accounts Receivable 7,056
Sales 7,200 Sales 7,056

(10,000 × .80×.90) (10,000 × .80×.90×.98)

Assume collection is made within the

discount period
Cash 7,056 Cash 7,056
Sales Discounts (7,056 × 2%) 144 Accounts Receivable 7,056
Accounts Receivable
7,200
 Assume collection is made beyond the
discount period
Cash 7,200 Cash 7,200
Accounts Receivable 7,200 Sales discounts forfeited 144
Accounts Receivable. 7,056

Accounting for Bad Debts

Bad debts or doubtful accounts exist when doing business on credit. It is a risk assumed by an
entity where some customers will not pay their accounts.
Two methods in accounting for bad debts:

・Allowance Method – allowance is recognized when there is doubtful or questionable upon

collection of the account.

・Direct Write-off Method – only when the account are deemed worthless.

Example:
Accounts Receivable of 10,000 is found to be doubtful of collection.
ALLOWANCE METHOD DIRECT METHOD
Bad Debt Expense 10,000
No entry
Allowance for Bad Debts 10,000
The 10,000 doubtful of collection is deemed worthless.
ALLOWANCE METHOD DIRECT METHOD
Allowance for Bad Debt 10,000 Bad Debt Expense 10,000
Accounts Receivable 10,000 Accounts Receivable 10,000

The 10,000 account previously written off is subsequently recovered.

ALLOWANCE METHOD DIRECT METHOD
Accounts Receivable 10,000
No entry
Allowance for Bad Debts 10,000
Cash 10,000 Cash 10,000
Accounts Receivable 10,000 Gain on recovery 10,000

Methods of Estimating Doubtful Accounts

・Percentage of Net Credit Sales

-under this method, bad debt expense is computed by applying a percentage on the net credit
sales during the period.
Example:
ABC Co. has the following information on December 31,20x2 before any year-end
adjustments.
Allowance for Doubtful Accounts, Jan 1 8,000
Write-offs 5,000
 Recoveries 1,000
Sales (including cash sales of P100,000) 600,000
Sales Returns and Discounts (including: 1,000 sales returns on cash 6,000
sales 150,000
Accounts Receivable 2%
Percentage of credit sales

Formula: Bad debt expense= Net Credit Sales × Percentage

Total Sales 600,000 Dec 31, 20x1
Cash Sales (100,000)
Bad Debt Expense 9,900
Gross credit sales 500,000
Sales returns and disc. (6k-1k) (5,000) Allowance for doubtful accounts
Net credit sales 495,000 9,900
Multiply by: % on net credit sales 2%
Bad debt Expense 9,900
Allowance for doubtful accounts
8,000 Jan 1
Net Realizable Value of AR Write off 5,000 1,000. Recovery
Accounts Receivable, Dec 31-gross 9,900 Bad debt
150,000 Dec. 31(squeeze) 13,900

Allowance for doubtful accounts, Dec 31 (13,900)

Accounts Receivable, Dec. 31-net 136,100

・Percentage of Receivable

-under this method, the required balance of allowance for doubtful accounts is computed by
applying a percentage on the ending balance of the receivables.

Example:
ABC Co. has the following information on December 31,20x1 before any year-end
adjustments.
Accounts Receivable 80,000
Net Credit Sales 270,000
Collections from customers ( excluding recoveries) 140,000
Allowance for doubtful accounts, Jan. 1 10,000
Write-offs 5,000
Recoveries 1,000
Percentage of Receivable 5%

Requirements:

・ Bad debt expense

Formula:
Required balance of allowance= Percentage × Accounts Receivable, end

・ Net realizable value of accounts receivable

 Accounts Receivable, Jan 1. – Allowance for Doubtful Account, Dec. 31= Accounts
Receivable, Dec 31.

a.

b.

Example 2: Computation of percentage

ABC Co. has been recognizing bad debt expenses based on the direct write-off method. In 20x4,
ABC Co. decided to change to the allowance method and that doubtful accounts shall be
estimated using the percentage of receivables method. The percentage is to be computed based
on all available historical data up to a maximum of four years. Information for four years Is shown
below:
Year Write-offs Recoveries Net Credit Sales
20x1 7,000 1,000 100,000
20x2 10,000 3,000 160,000
20x3 15,000 5,000 200,000
20x4 28,000 2,000 240,000
60,000 11,000 700,000

The balances of accounts receivable on January 1,20x4 and December 31,20x4 are 100,000
and 200,000, respectively.
Formula: Percentage= (Write-offs – Recoveries) ÷ (Net Credit Sales)

・Aging of Receivables
 ⁠~ a variation of the percentage of receivables method. Under this method, the required balance
of allowance for doubtful accounts is computed by applying various estimated percentages
to the breakdown of the ending receivable according to ages. It is determined based on either
on the number days the receivable are outstanding or past due.

Example: Aging based on days outstanding

ABC Co. has the following information:

During the year, ABC Co. wrote off 7,000 receivable and recovered 4,000 that had been written
off inin prior years. The allowance for doubtful accounts has a beginning balance of 2,000.

Solution:

Example: Aging based on days past due

 ABC Co. sells to wholesalers on terms of 2/15, n/30. An analysis of ABC Co.’s accounts
receivable on December 31, 20x1 follows:

ABC Co. uses the aging of receivables method. The estimated percentages of collectability are
as follows:

The allowance for doubtful accounts has a balance of 8,000 as of January 1,20x1. No write-offs
or recoveries were made during the year.

Solution:

📖 Summary:
 Ending balance of
Amount Computed by
Method Bad debts is computed allowance
applying percentage
computed
Percentage of net credit ~ Bad debt expense ~ % of net credit sales ~ by preparing T-
sales (favors income accounts
statement)
Percentage of receivables ~ Required balance of ~ squeeze from T- ~ by applying the %
(favors balance sheet allowance accounts
Aging Method ( favors ~ Required balance of ~ squeeze from T- ~ by applying the %
balance sheet) allowance accounts