No. 125 Brgy.
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
Accounts Receivable
NATURE OF RECEIVABLES
Receivables are financial assets that represent a contractual right to receive cash or another financial asset from another.
Common Examples of Receivables
1. Accounts receivable – receivables supported by oral or informal promises to pay. These are not supported by formal
promissory notes.
2. Notes receivable – receivables supported by written or formal promises to pay in the form of promissory notes.
3. Loans receivable – receivables arising from loans extended by financial institutions, such as banks, financing companies,
and lending institutions. These are also supported by promissory notes and are generally backed by collateral securities.
4. Advances
5. Accrued income
6. Deposits
7. Claims receivable – receivables from insurance companies for casualties sustained, defendants under suit, government
agencies for refundable taxes and other remittances, common carriers for damaged or lost goods, and suppliers for returned
or damaged goods.
Trade and Non-trade Receivables
For non-financial institutions, receivables are classified into:
(1) Trade receivables – these are claims arising from sale of goods or services in the ordinary course of business.
(2) Nontrade receivables – these are claims arising from sources other than sale of goods or services in the ordinary course
of business.
The normal operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or
cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months.
FINANCIAL STATEMENT PRESENTATION
Trade and non-trade receivables that are currently collectible are combined and presented on the statement of financial position in a
single line item “trade and other receivables”.
ABNORMAL BALANCES IN ACCOUNTS
Customers’ credit balances
Credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance payments from
customers.
These are classified as current liabilities and are not offset against the debit balances in other customers’ accounts.
Adjusting Journal Entry:
Accounts receivable XX
Customer’s credit balances XX
Suppliers’ debit balances
Debit balances in accounts payable resulting from overpayments, advance payments to suppliers.
These are classified as current assets and are not offset against accounts payable.
Adjusting Journal Entry:
Advances to suppliers XX
Accounts payable XX
INITIAL MEASUREMENT OF RECEIVABLES
Receivables are initially recognized at fair value plus transaction costs under IFRS 9 Financial instruments.
SUBSEQUENT MEASUREMENT
Accounts receivables are subsequently measured at net realizable value (NRV). This is computed as accounts receivable
less allowance for doubtful accounts.
ACCOUNTING FOR DOUBTFUL ACCOUNTS
There are two methods of accounting for bad debts:
1. Allowance method – an allowance is recognized for bad debts when the collectability of accounts becomes doubtful.
This method conforms with the accrual basis, matching, and conservatism. When it becomes certain that accounts are
uncollectible or worthless, the accounts are written off.
When accounts previously written off are subsequently recovered, the write-off is reversed and reestablished and the
collection is recorded.
1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
2. Direct write off method – this method does not conform to the concepts of accrual basis of accounting, matching, and
conservatism because bad debts are recognized only when collectability becomes certain.
METHODS OF ESTIMATING DOUBTFUL ACCOUNTS
1. Percentage of credit sales
2. Percentage of receivables
3. Aging of receivables
FINANCIAL ACCOUNTING AND REPORTING (FAR) PROBLEMS
Problem 1:
Emma Company is engaged in the sale of various home and office furnishing. It caters accounts to both receivable cash and credit
customers. The following affecting the accounts receivable of Emma Company took place during the year 2023:
Sales (cash and credit) P1,182,100
Cash received from cash customers 410,350
Cash received from credit customers (P562,600 was received from customers who took advantage of
the discount feature of the Company’s credit terms 3/10, n/30 641,600
Accounts written off as worthless 9,910
Credit memoranda issued to credit customers for sales returns and allowances 52,550
Cash refunds given to cash customers for sales returns and allowances 33,944
Recoveries on accounts written off as uncollectible in prior periods (not included in cash collections
stated above) 13,230
An aging of the receivables indicates that P34,600 of the accounts receivable balance is deemed uncollectible.
The following balances were taken from the December 31, 2022, statement of financial position:
Accounts receivable P191,684
Allowance for uncollectible accounts 19,480
1. What are the balances of (1) Accounts Receivable and (2) Allowance for Uncollectible Accounts that would be
shown in the December 31, 2023, statement of financial position?
A. (1) P241,974 and (2) P34,600
B. (1) P241,974 and (2) P22,800
C. (1) P241,974 and (2) P19,480
D. (1) P241,974 and (2) P11,800
A/R, 1/1/2023 191,684
Credit sales (1,182,100 - 410,350) 771,750
Accounts settled
Those who took adv. of the 3/10 disc. (562,600/0.97) (580,000)
Those who did not took adv. of the 3/10 disc. (641,600 - 562,600) (79,000)
Accounts written off (9,910)
CM issued for SRA (52,550)
Restatement of accounts previously written off 13,230
Recoveries of accounts previously written off (13,230)
A/R, 12/31/2023 241,974
2. What is the amount of uncollectible accounts expense reported in profit or loss for the year ended December
31, 2023?
A. P34,600
B. P22,800
C. P19,480
D. P11,800
AUA, 12/31/2023 34,600
Written off accounts 9,910
Recoveries (13,230)
AUA, 1/1/2023 (19,480)
Uncollectible accounts expense 11,800
2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
Problem 2:
Evelyn Company's terms of sale is 3/10, 1/20, n/60 and it provides for uncollectible accounts based on aging of its receivables at year-
end. The balance of selected accounts taken from the December 31, 2022, statement of financial position of Evelyn Company are as
follows:
Accounts receivable P674,000
Allowance for bad debts 24,000
The following transactions affecting accounts receivable occurred during the year ended December 31, 2023:
Sales on account 3,000,000
Cash received from customers 3,200,000
Cash received includes the following:
Customers paying within the 10-day discount period 1,746,000
Customers paying within the 20-day discount period 990,000
Recovery of accounts written off 6,000
Customers paying beyond the discount period ?
Accounts receivable written off as worthless 22,000
Credit memoranda for sales returns 12,000
An aging of the accounts receivable and estimate of uncollectible accounts on December 31, 2023 revealed the following:
Age Amount Uncollectibility %
Less than 30 days P150,000 2%
31 – 90 days 120,000 8%
91 – 120 days 86,000 15%
More than 120 days Remainder 30%
1. What are the balances of accounts receivable and the related allowance account on December 31, 2023?
A. P376,000 and P25,300
B. P376,000 and P33,300
C. P382,000 and P25,300
D. P382,000 and P33,300
2. How much is the bad debts expense for the year 2023?
A. P41,300
B. P33,300
C. P31,300
D. P25,300
FINANCIAL ACCOUNTING AND REPORTING (FAR) THEORIES
1. Trade receivables are classified as current assets if they are reasonably expected to be collected
A. Within one year.
B. Within the normal operating cycle.
C. Within one year or within the operating cycle, whichever is shorter.
D. Within one year or within the operating cycle, whichever is longer.
2. Non-trade receivables are classified as current assets only if they are reasonably expected to be realized in cash
A. Within one year or within the operating cycle, whichever is shorter.
B. Within one year or within the operating cycle, whichever is longer.
C. Within one year, the length of the operating cycle notwithstanding.
D. Within the normal operating cycle.
3. Under IFRS 9 Financial Instruments, Receivables are initially recognized at
A. Fair value
B. Fair value plus transaction costs
C. Transaction price
D. Cost
4. Credit balances in accounts receivable are classified as
A. Current liabilities
B. Part of accounts payable
C. Long-term liabilities
D. Deduction from accounts receivable
3|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
5. Accounts receivable are subsequently measured at their net realizable value. Which of the following methods of estimating
uncollectible accounts is in conformance with the IFRSs?
A. Allowance method
B. Direct writeoff method
C. Both A and B
D. None of these
6. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
A. Allowance method is used for tax purposes.
B. Estimates are used.
C. Determining worthless accounts under direct write-off method is difficult to do.
D. Improved matching of bad debt expense with revenue.
7. When an accounts receivable aging schedule is prepared, the resulting amount from the computation
A. when added to the total accounts written off during the year is the desired credit balance of the allowance for doubtful
accounts at year-end.
B. is the amount of doubtful accounts expense for the year.
C. is the amount that should be added to the beginning allowance for doubtful accounts to get the doubtful accounts expense
for the year.
D. is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year-end.
8. The entry debiting accounts receivable and crediting allowance for doubtful accounts would be made when
A. A customer pays an account balance.
B. A customer defaults on an account.
C. A previously defaulted customer pays the outstanding balance.
D. Estimated uncollectible receivables are too low.
9. When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would decrease when
A. Specific account receivable is collected.
B. Account previously written off is collected.
C. Account previously written off becomes collectible
D. Specific uncollectible account is written off.
END OF HANDOUT
4|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
