Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

ACCOUNTING 230 TUTORIALS (2014)

Chapter 3: Receivables
Receivables claims against third parties that are expected to be settled by the
receipt of cash.
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 revenue, 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 subscriptions receivables and disposal of
property.
Classification of Receivables
1. As to Source or Origin
a. Trade Receivables receivables arising from sale of goods or services in the
normal course of business.
b. Non-trade Receivables receivables that arise from sources other than from
sale of goods or services in the normal course of business.
i. loans to officers and employees
ii. advances to affiliates
iii. accrued interest and dividends
iv. deposits to guarantee performance or payment or to cover possible
damages or losses
v. subscriptions for the entitys securities
vi. deposit with creditors, claims for losses and damages
vii. claims for tax refunds or rebates
viii.
claims against common carriers for damaged or lost
goods
2. As to Classification on a Statement of Financial Position
In a properly classified statement of financial position, receivables are
classified either as current assets or non-current assets. Receivables that are
expected to be realized within 12 months from the end of the reporting period and
receivables that are expected to be realized within the entitys normal operating
cycle are classified as current assets.
Receivables

Did they arise from sale of

goods and services in the
normal course of business?
Yes

No

Are they collectible

within 12 months from
the end of the reporting
period?
Yes

Report as
current asset

No

Report as noncurrent asset

Accounting for Accounts Receivable

Accounts Receivable trade receivables on open accounts and are not evidenced
by promissory notes or time drafts.
Initial Recognition
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, accounts receivable are recognized simultaneous to the
recognition of the related revenues, either from sale of goods or rendering of
services.
Trade discounts also known as volume or quantity discounts; means of
converting a catalog list price to the prices actually charged to the buyer. Trade
discounts are not recognized for financial accounting purposes.
Illustration
XYZ Manufacturing Company sells merchandise on account with a list price of P
200,000, less trade discounts of 20%, 10%, and 5%. The invoice price of the
merchandise is computed as follows:
List Price
Less 20% x 200,000
Less 10% x 160,000
Less 5% x 144,000
Invoice Price

P
200,000
40,000
P
160,000
16,000
P
144,000
7,200
P
136,800

Cash Discounts sales discounts from the sellers point of view; are reductions
from the sales price as an inducement for prompt payment of an account. Cash
discounts are recognized for financial accounting purposes.
Methods of recording credit sales:
1. Gross Method The accounts receivable and sales are recorded at gross
amount of the invoice. This is the common and widely used method because it
is simple to apply.
Illustration
a) Sale of merchandise for P 136,800, terms 2/10, n/30.
Accounts Receivable
136,800
Sales
136,800
b) Assume collection is made within the discount period.
Cash
134,064
Sales Discount
2,736
Accounts Receivable
136,800
c) Assume collection is made beyond the discount period.
Cash
136,800
Accounts Receivable
136,800
*Sales Discounts are reported as deduction from Sales in the profit or loss section of the
statement of comprehensive income.

2.

Net Price Method The accounts receivable and sales are recorded at net
amount of the invoice, meaning the invoice price minus the cash discount.

Illustration
a) Sale of merchandise for P 136,800, terms 2/10, n/30.
Accounts Receivable
134,064
Sales
134,064
b) Assume collection is made within the discount period.
Cash
134,064
Accounts Receivable
134,064
c) Assume collection is made beyond the discount period.
Cash

136,800
Sales Discounts Forfeited
Accounts Receivable

2,736
134,064

*Sales Discounts Forfeited account is reported as other operating income in profit or loss
section on the statement of comprehensive income.

3.

Allowance Method The accounts receivable is recorded at the gross sales

price and the available cash discount is recorded as a credit in the valuation
account, Allowance for Sales Discounts. Sales account is recorded at net
amount.
Illustration
a) Sale of merchandise for P 200,000, terms 2/10, n/30.
Accounts Receivable
200,000
Allowance for Sales Discounts
4,000
Sales
196,000
b) Assume collection is made within the discount period.
Cash
196,000
Allowance for Sales Discounts
4,000
Accounts Receivable
200,000
c) Assume collection is made beyond the discount period.
Cash
200,000
Accounts Receivable
200,000
Allowance for Sales Discounts
Sales Discounts Forfeited

4,000
4,000

*The Allowance for Sales Discounts account is a valuation account that reduces accounts
receivable to its amortized cost.

Accounting for Notes Receivable

Note Receivable formal claim against another that is evidenced by a written
promise, called
promissory note, or a written order to pay at a later
time, called time draft.
A promissory note is an unconditional written agreement to pay a certain sum of
money on a specific or determinable date to order of the payee or to bearer.
Interest-bearing note It is a note or draft that provides for the payment of
interest for the period
between the issuance date and the due date.
On the date of receipt of the note, the present value of an interest-bearing
note which bears a realistic interest rate is equal to its face value. Subse
quent
to the date of the note or the draft, the present value of an interest-bearing note is
equal to its face value plus accrued interest.

Non-interest bearing note It is a note which makes no provision for interest.

However, a noninterest bearing note does not necessarily mean that there is no
interest accruing on the receivable. The promissory note is simply written in a
form where the face value already
includes an imputed interest for the term of
the note.
a. If exchanged solely for cash and no other rights or privileges are exchanged,
the present value or amortized cost of the note on the date it is received is
equal to the cash proceeds exchanged.
b. If exchanged for property, goods, or services, the present value of the note
on the date it is
received is the fair market value of the property, goods or
services, or the fair market
value of the note, whichever is more clearly
determinable.
Measurement subsequent to initial recognition
Loans and receivables are measured in the statement of financial position at
amortized cost using the effective interest method. The amortized cost of
receivables is its principal amount plus accrued interest and any unamortized
premium and minus the unamortized discount using the effective interest method,
and minus any reduction (directly or through the use of an allowance account) for
impairment or uncollectibility.
Methods of accounting for uncollectible accounts:
1. Direct Write Off Method recognizes impairment loss or bad debts
expense by crediting directly the receivables account.
Journal Entries:
a. To recognize impairment on accounts receivable
Bad Debts Expense
xx
Account Receivable
xx
b. To record recovery of accounts
Accounts Receivable
xx
Bad Debts Recovery
xx
c. To record collection of accounts previously written of
Cash
xx
Accounts Receivable
xx
2. Allowance Method requires the use of valuation account for the
receivables. This method recognizes the impairment of receivables by a
charge to Bad Debts Expense or Impairment Loss and a credit to the
allowance account.
Journal Entries:
a. To recognize impairment on accounts receivable
Bad Debts Expense
xx
Allowance for Bad Debts
xx
b. To write of a specific account considered to be uncollectible
Allowance for Bad Debts
xx
Accounts Receivable
xx
c. To record recovery of a specific account
Accounts Receivable
xx
Allowance for Bad Debts
xx
d. To record collection of accounts previously written of
Cash
xx
Accounts Receivable
xx
Receivable Financing
Receivable Financing financial flexibility or capability of an entity to raise
money out of its
receivables.

Transfer of
Receivables

Yes

I.

Substantial transfer
of risks and
rewards?

Derecognize the
asset and record
gain or loss

No

Retain the asset in the

books and record the
transaction as a
secured borrowing

Secured
Borrowing
A. Pledging refers to the use of receivables as collateral for a loan;
general assignment of accounts receivable
B. Assignment more formal borrowing arrangement in which specific
receivables are identified and used as security for a loan; specific
assignment of accounts receivable
C. Discounting of notes receivable with recourse endorsing a promissory
note to a bank or a financing company, the latter advancing the
maturity value of the note less a charge called discount. The endorsing
company still has a continuing involvement on the discounted note.

The following terms and computations are necessary relating to discounting

of notes
receivable:
1. Principal amount stated on the face of the note; face value
2. Interest amount of interest for the entire term of the note (Principal x
interest rate x term)
3. Maturity date date when the note is due and payable
4. Maturity value total amount due on the note at maturity date (Principal
+ Interest)
5. Discount rate rate of interest used by bank in computing discount
6. Discount period period of time remaining on the term of the note; the
period from the date of discounting to maturity date
7. Discount amount of interest earned by the bank (Maturity value x Bank
discount rate x discount period)
8. Proceeds discounted value of the note received by the endorser of the
note from the bank (Proceeds = Maturity value Discount)
II.

Sale of Receivables
A. Discounting of notes receivable without recourse endorsing a
promissory note to a bank or a financing company but in this case, the
endorser is relieved of the responsibility for the note that is dishonored
on maturity.
B. Factoring an outright sale of receivables. As in any sale of assets, a
gain or loss is recognized for the difference between the proceeds
received and the net carrying amount of the receivables factored.

If the factor retains a portion of the purchase price to cover probable

sales
discounts, returns, and allowances, such amount is
charged to a Receivable from
Factor account. This is also known as
factor holdback.
Disclosure Requirements
An entity shall disclose the following in its financial statements:
a.
information that enables users of its financial statements
to evaluate the significance of receivables for its financial position and
performance, including significant terms and conditions that may affect the
amount, timing, and certainty of future cash flows;

b.
the accounting policy and method adopted including the
criteria for recognition and the basis of measurement applied;
c.
Information about its exposure to credit risk including the
amount that best represents its maximum credit risk exposure at the end of
the reporting period, without taking account of the fair value of any
collateral, in the event of other parties failing to perform their obligations
and including significant concentrations of credit risks; and
d.
Information about its exposure to interest rate risk
including contractual repricing or maturity date whichever dates are earlier
and including effective interest rates, when applicable.
References:
Robles & Empleo (2012). Intermediate Accounting Volume 1.
Valix, C., Peralta & Valix, C.A. (2012). Financial Accounting Volume One.