FAR 04: Trade Accounts Receivable

J. Cayetano
Learning Objectives:
1. Know the initial and subsequent measurement of trade accounts receivable.

2. Identify transactions affecting the accounts receivable.

3. Identify the necessary adjustment to the accounts receivable.

 
4. Determine the bad debt expense and allowance for doubtful accounts using the
following techniques in estimating bad debts:
(a)Percentage of ending accounts receivable
(b)Percentage of sales
(c)Aging of accounts receivable

5. Know the correct presentation of accounts receivable in the year-end financial

statement
Trade Accounts Receivable – refers to claims from sales of merchandise or
service in the ordinary course of business. This are receivable from
customers.
 
Trade receivable are expected to be realized in cash within the normal
operating cycle or one year whichever is longer, are classified as current
asset.
 
Since trade receivable is commonly collectible within one year, it is
commonly recorded at face amount at initial recognition.
Sequence of Computation:
1. Accounts Receivable – Ending Balance
2. Allowance for Bad Debt – Ending Balance
3. Bad Debt Expense
4. Net Realizable Value (NRV) of Accounts Receivable

5. Receivable Financial Statement Presentation

Trade Accounts Receivable – refers to claims from sales of merchandise or service in the ordinary
course of business. This are receivable from customers.
 
Trade receivable are expected to be realized in cash within the normal operating cycle or one year
whichever is longer, are classified as current asset.
 
Since trade receivable is commonly collectible within one year, it is commonly recorded at face
amount at initial recognition.

Ways in computing the ending balance of trade accounts receivable (AR):

1. Unadjusted ending to adjusted ending
2. Beginning AR to ending AR
 Unadjusted to adjusted Beginning to ending

Accounts Receivable

Beginning XX
A/R Ending – Unadjusted P XX
Credit Sales XX XX Collection
Reversal of NSF check XX
Customer’s credit bal. Recovery XX XX Collect. WO
XX

Goods in transit XX Write off

X(X)
XX Return
A/R Ending – Adjusted P XX
XX Discount

Ending XX
 Unadjusted to adjusted Beginning to ending

A/R Ending – Unadjusted P XX

Reversal of NSF check XX
Customer’s credit bal. XX
 Customers’ credit balance
Customer AA
 Customer’s account represents accounts
Sales P 10 P3 Collection
payable for each customer – normal balance
is debit.
Ending P 7
 If customer’s account turned out to have a
Customer BB
credit balance – this resulted from
overpayment from customer by the company. Sales P9 P 14 Collection

 Overpayment by the company to customer P 5 Ending

should be presented as receivable (advances
from customer). Trade - AR

Customer AA P7 P5 Customer BB
 Receivable from one customer should not be
offset to payable from other customer
Ending P2
 Unadjusted to adjusted Beginning to ending

A/R Ending – Unadjusted P XX

Reversal of NSF check XX
Customer’s credit bal. XX

Goods in transit X(X)

 Goods In Transit
AR should be Already recorded Not yet recorded
recorded or not?
With transfer title
(should be recorded)
 FOB shipping point
 FOB seller
No Adjustment Add
 FOB CIF/FAS
Without transfer title
(should not be recorded)
 FOB destination
 FOB buyer Minus No Adjustment
 FOB ex-ship
 Unadjusted to adjusted Beginning to ending

A/R Ending – Unadjusted P XX

Reversal of NSF check XX
Customer’s credit bal. XX

Goods in transit X(X)

A/R Ending – Adjusted P XX

A/R Ending – Unadjusted P 1,300,000
Reversal of NSF check 5,000
Goods in transit 50,000
A/R Ending – Adjusted P 1,355,000
Allowance for bad debt ( 8,000)
NRV of accounts receivable P 1,347,000
 Journal Entries Beginning to ending

Credit sales
Dr. A/R XX Accounts Receivable
Cr. Sales XX
Beginning XX
Collection of AR
XX Collection
Dr. Cash XX Credit Sales XX
Cr. A/R XX XX Collection of
Recovery XX recovery
Write off
XX Write off
Dr. Allowance for BD XX
Cr. A/R XX

Recovery
Dr. A/R XX
Cr. Allowance for BD XX
Dr. Cash XX
Cr. A/R XX
 Journal Entries Beginning to ending

Discount taken
Dr. Sales discount XX Accounts Receivable
Cr. A/R XX
Beginning XX
Expected discount
XX Collection
Dr. Sales discount XX Credit Sales XX
Cr. Allowance for sales disc. XX XX Collection of
Recovery XX recovery
Return
XX Write off
Dr. Sales return XX
Cr. A/R XX XX Return
XX Discount
Expected return
Dr. Sales return XX Ending XX
Cr. Allowance for sales ret’n. XX
 Accounts Receivable

Beginning P 480,000
2,560,000 Collection
Credit Sales 2,400,000
-- Collection of
Recovery 4,800 recovery
17,600 Write off
-- Return
??? Discount
 Accounts Receivable

Beginning P 480,000
2,560,000 Collection
Credit Sales 2,400,000
-- Collection of
Recovery 4,800 recovery
17,600 Write off
-- Return
36,800 Discount

Ending P 270,400
Gross sales 1,440,000 800,000
Net of disc. 98% 99%
Cash received 1,411,200 792,000
Discount 28,800 8,000
1. Write off – receivable that was definitely uncollectible (deemed worthless).

2. Allowance of receivable – portion of ending receivable that is expected not to be realized

because the customer is:
A. Expected to default (allowance for bad debt)
B. Expected to return the goods (allowance for sales return)
C. Expected to take the discount (allowance for sales discount)
D. Expected to offset the freight paid in behalf of the company (allowance for freight)

3. Bad debt expense – portion of sales on account but expected not to be realized because of
the customer’s default.

4. Recovery of write off – receivable that was believed to be definitely uncollectible but was
subsequently recovered by the company.

5. NRV of receivable – portion of receivable that is expected to be realized.

Sequence of Computation:
1. Accounts Receivable – Ending Balance
2. Allowance for Bad Debt – Ending Balance
3. Bad Debt Expense
4. Net Realizable Value (NRV) of Accounts Receivable

5. Receivable Financial Statement Presentation

 Which to compute first?
1ST 2ND
Percentage of Allowance for Bad Debt
A/R Bad Debt Expense

1ST 2ND
Estimating Bad Percentage of Bad Debt Allowance for
Debt Sales Expense Bad Debt

1ST 2ND
Aging of Allowance for Bad Debt
AR Bad Debt Expense
 A/R Ending – Adjusted P XX
1ST Percentage of Uncollectible X%

Accounts Receivable

Beginning XX A/R Ending – Unadjusted P XX

Sales XX XX Collection Reversal of NSF check XX

Recovery XX XX Collect. WO Customer’s credit bal. XX

XX Write off Goods in transit X(X)

XX Return A/R Ending – Adjusted P XX

XX Discount

Ending XX
 A/R Ending – Adjusted P XX
1ST Percentage of Uncollectible X%
Allowance for Bad Debt, End P XX

Allowance for Bad Debt, Beginning

= Percentage of Uncollectible
Accounts Receivable, Beginning

Write off - Recovery

= Percentage of Uncollectible
Sales
 Method 1 – Percentage of A/R

A/R Ending – Adjusted P XX

1ST Percentage of Uncollectible X%

Allowance for Bad Debt, End P XX

Allowance for Bad Debt

XX Beginning
2 ND

Write off XX XX Recovery

XX Bad Debt Expense Squeeze

XX Ending
 Method 2 – Percentage of Sales

Net Credit Sales P XX

1ST Percentage of Uncollectible X%

Bad Debt Expense P XX

Allowance for Bad Debt

XX Beginning
2 ND

Write off XX XX Recovery

XX Bad Debt Expense

XX Ending
 Method 3 – Aging of A/R
1ST
Group 1 Group 2 Group 3 Group 4 Total
Ending A/R XX XX XX XX XX
Percentage of Uncollectible X% X% X% X% X%
Allowance for Bad Debt, End XX XX XX XX XX

Allowance for Bad Debt

2ND
XX Beginning

Write off XX XX Recovery

XX Bad Debt Expense Squeeze

XX Ending
 Accounts Receivable

Beginning P 480,000
2,560,000 Collection
Credit Sales 2,400,000
-- Collection of
Recovery 4,800 recovery
Allowance for bad debt
17,600 Write off
19,200 Beginning
Write off 17,600 4,800 Recovery -- Return

7,120 BD expense 36,800 Discount

13,520 Ending Ending P 270,400

% uncoll. 5%
Allowance - end 13,520
 (400K+600K+700K) – (30K+70K+120K)
= 4%
9M + 13M + 15M

Allowance for bad debt Credit sales P 20,000,000

800,000 Beginning % uncoll. 4%
Write off 650,000 150,000 Recovery Bad debt expense P 800,000
800,000 BD expense

1,100,000 Ending
 Allowance for bad debt
XX Beginning
Write off XX XX Recovery
XX BD expense

XX Ending

Group 1 Group 2 Group 3 Group 4 Total

Ending A/R XX XX XX XX XX
Percentage of Uncollectible X% X% X% X% X%
Allowance for Bad Debt, End XX XX XX XX XX
 Group 1 Group 2 Group 3 Group 4 Total
Ending A/R 5,000,000 1,500,000 1,000,000 500,000 8,000,000
Percentage of Uncollectible 10% 20% 50% 100%
Allowance for Bad Debt, End 500,000 300,000 500,000 500,000 1,800,000
 Allowance for bad debt
1,000,000 Beginning
Write off 400,000 100,000 Recovery
1,100,000 BD expense

1,800,000 Ending

Group 1 Group 2 Group 3 Group 4 Total

Ending A/R 5,000,000 1,500,000 1,000,000 500,000 8,000,000
Percentage of Uncollectible 10% 20% 50% 100%
Allowance for Bad Debt, End 500,000 300,000 500,000 500,000 1,800,000
 Combination of 2 Methods of
Estimating Bad Debts
Allowance for Bad Debt
Bad Debt Expense

T-Account Sales * %
Interim Percentage of
FS Sales

Methods in
Estimating BD

Year-End Aging of
FS AR
AR * % Squeeze
 Allowance for bad debt
250,000 Beginning
Write off 150,000 80,000 Recovery
720,000 Correct BDE

900,000 Ending

Recorded BD expense P 600,000

Correct BD expense 720,000
Adjustment to BD expense P 120,000
Sequence of Computation:
1. Accounts Receivable – Ending Balance
2. Allowance for Bad Debt – Ending Balance
3. Bad Debt Expense
4. Net Realizable Value (NRV) of Accounts Receivable

5. Receivable Financial Statement Presentation

 NRV, Amortized Cost, Carrying Amount,
Book Value
Accounts Receivable – Ending P XX
Allowance for Bad Debt (XX)
Allowance for Sales Return (XX)
Allowance for Sales Discount (XX)
Net Realizable Value of A/R P XX

A/R – Ending [with chance of availing the discount] P XX

Discount Rate (XX)
Portion of A/R expected to take the discount (XX)
Allowance for sales discount P XX
0– 15 days accounts receivable P 10,000,000
Discount rate 2%
Allowance for doubtful account P 200,000
 Accounts receivable P 20,000,000
Allowance for bad debt (1,600,000)
Allowance for sales discount ( 200,000)
NRV of accounts receivable P 18,200,000

Group 1 Group 2 Group 3 Group 4 Total

Ending A/R 10,000,000 7,000,000 2,000,000 1,000,000 8,000,000
Percentage of Uncollectible 0% 10% 20% 50% X%
Allowance for Bad Debt, End 0 700,000 400,000 500,000 1,600,000
Allowance method Direct write off method
Bad debt loss is recognize when Bad debt loss is recognize when
account is doubtful account proved worthless or
uncollectible
Conforms with matching principle Violates matching principle
GAAP requires the use of allowance Direct write off method is not
method permitted under PFRS
Allowance method Direct write off method

Journal entry – account is considered doubtful

Dr. Bad debt expense XX No entry
Cr. Allowance for bad debt XX
NRV of receivable (decrease) NRV of receivable (no change)
Net income (decrease) Net income (no change)

Journal entry – account is proven worthless

Dr. Allowance for bad debt XX Dr. Bad debt expense XX
Cr. Accounts receivable XX Cr. Accounts receivable XX
NRV of receivable (no change) NRV of receivable (decrease)
Net income (no change) Net income (decrease)
Journal entry – account is recovered and collected
Dr. Accounts receivable XX Dr. Accounts receivable XX
Cr. Allowance for bad debt XX Cr. Bad debt expense XX

Dr. Cash XX Dr. Cash XX

Cr. Accounts receivable XX Cr. Accounts receivable XX

NRV of receivable (decrease) NRV of receivable (no change)

Net income (no change) Net income (increase)
Presentation Balance Sheet
As of Year Ended December 31, 2020
The trade receivables and nontrade Asset
receivables which are currently
collectible shall be presented on the Cash & Cash Equivalents XX
face of the statement of financial Trade & Other Receivable XX
position as one line item called trade
and other receivables. Inventories XX
Other Current Assets XX
Investments XX
PPE XX
Intangible Asset XX
Other Non Current Asset XX
 Current
Trade
Assets

Silent
Accounts Receivable
Notes Receivable Collectible Current
Within 12 mos. Assets

Non Trade

Collectible Non Current

Beyond 12 mos. Assets
 Collectible Current
within 12 mo. Assets

Subscription
receivable
Silent

Collectible Shareholders’
beyond 12 mo. Equity
 Collectible Current
within 12 mo. Assets
 Employees
 Officers
 Customers
 Suppliers
Advances
Silent
to

 Shareholders
 Associates
 Affiliates
 Subsidiaries
Collectible Non current
beyond 12 mo. Assets
Receivable Presentation
Current Asset Non Current Asset
 Accrued income  Security deposit of a lease contract
o Rent receivable  Special deposit on contract bids
o Interest receivable
o Commission receivable
o Dividend receivable
 Post dated check, NSF check, stale check
 Debit balance of supplier’s account
 Loans receivable
 Claims from common courier
 Claims from insurance
 Accounts receivable unassigned, assigned
and pledged
 Allowance for bad debt, discount and return
Trade A/R P 7,800,000
Accounts receivable - officer 500,000
Debit balances – creditors 300,000
Postdated checks from customer 400,000
Allowance for bad debt (200,000)
Current net receivable P 8,800,000

ANSWER: B
The End