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THE TOTAL VALUE OF TRADE RECEIVABLES FOR A BUSINESS AT ANY ONE TIME
REPRESENTS THE AMOUNT OF SALES WHICH HAVE NOT YET BEEN PAID FOR
BY CUSTOMERS.
Trade receivables arise when a RECORDING THE CREDIT SALE In a computerised accounting
business makes sales or provides Let’s imagine that Ingrid makes a credit system, all these accounting entries
a service on credit. For example, if sale of $6,450 to Manfredi. The sale and the production of the invoice would
Ben sells goods on credit to Candar, was made on 17 March 2010 and the take place simultaneously.
Candar will take delivery of the goods goods have been delivered to Manfredi Manfredi’s account will look
and receive an invoice from Ben. This along with an invoice for $6,450. The something like Table 1 below in the
will state how much must be paid invoice states that the amount owing Receivables Ledger.
for the goods and the deadline for should be paid within 30 days from the Manfredi’s account shows a debit
payment, eg within 30 days. Ben now date of the invoice. balance. This is an asset because it
has a trade receivable – the amount The invoice will be processed ‘is a resource controlled by the entity
payable to him by Candar. through Ingrid’s accounting system. as a result of past events and from
The total value of trade receivables The original entry will be in Ingrid’s which future economic benefits are
for a business at any one time Sales Day Book which lists all credit expected to flow to the entity’ (IASB
represents the amount of sales sales chronologically. Total credit sales Framework for the Preparation and
which have not yet been paid for by (including the $6,450) will be posted Presentation of Financial Statements,
customers. The trade receivables figure from the Sales Day Book to the debit of paragraph 40).
will depend on the following: trade receivables account and the credit Here the ‘entity’ is Ingrid’s
1 The value of credit sales. The greater of sales account – both accounts being business, the ‘past event’ is the sale,
the value of credit sales then, other in the General Ledger. The $6,450 will and the ‘future economic benefits’
things being equal, the greater the also be posted to the debit of a personal are represented by the cash received
total of trade receivables. account opened for Manfredi and kept in from Manfredi when he settles
2 The period of credit given. The the Receivables Ledger. the invoice.
longer the period of credit given to
customers then, other things being
equal, the greater the total of trade
receivables.
3 The efficiency with which the
business administers its trade
receivables. The more inefficient the
business is in billing its customers
and collecting overdue accounts then, TABLE 1: MANFREDI’S ACCOUNT IN THE RECEIVABLES LEDGER
other things being equal, the greater
the total of trade receivables. Manfredi
2010 $ 2010 $
17 Mar Sales 6,450
STUDENT ACCOUNTANT ISSUE 07/2010
02
Studying Paper F3?
Performance objectives 10 and 11 are relevant to this exam
RECEIVABLES
RELEVANT TO ACCA QUALIFICATION PAPER F3 AND CAT PAPERS 1, 3
AND 6
The debit balance is also a current (a) The entity has transferred to the What happens now?
asset because it meets the criteria in buyer the significant risks and If all goes well, Manfredi will keep to
paragraph 66 of IAS 1, Presentation rewards of ownership of the goods. the terms of the agreement and Ingrid
of Financial Statements. This states (b) The entity retains neither continuing will receive payment within 30 days.
that an entity should classify an managerial involvement to the If Manfredi pays on 16 April 2010,
asset as current when any one of the degree usually associated with Ingrid will debit this in her Cash Book
following applies: ownership, nor effective control over (in the Bank column) and credit the
(a) The entity expects to realise the the goods sold. trade receivables account (in the
asset, or intends to sell or consume (c) The amount of revenue can be General Ledger). The payment will
it, in its normal operating cycle. measured reliably. also be credited to Manfredi’s account
(b) The entity holds the asset primarily (d) It is probable that the economic in the Receivables Ledger, as shown in
for the purpose of trading. benefits associated with the Table 2 below.
(c) The entity expects to realise the transaction will flow to the entity. This now completes the transaction
asset within 12 months after the (e) The costs incurred, or to cycle. The asset trade receivables reduces
reporting period. be incurred, in respect by the amount of the payment, and cash
(d) The asset is cash or a cash of the transaction can be at bank increases by the same amount.
equivalent (as defined in IAS 7) measured reliably.
unless the asset is restricted from ENCOURAGING PROMPT PAYMENT
being exchanged or used to settle a All these criteria are met here: Sometimes the invoice will state that
liability for at least 12 months after ¤ Manfredi now possesses and controls a cash discount can be taken if full
the reporting period. the goods (criterion (a)) and Ingrid payment is received by a certain date.
doesn’t (criterion (b)) This is to encourage prompt payment
In this example, the asset meets ¤ Manfredi has agreed the price (as per by the customer. For example, let’s
criterion (c) because the amount the invoice), meeting criterion (c) suppose that the invoice issued to
is payable within 30 days, and also ¤ Manfredi is likely to pay the invoice Manfredi stated that a 2% discount
criterion (a) because Ingrid’s normal (Ingrid wouldn’t have sold to can be deducted if the invoice is paid
operating cycle is buying and selling on Manfredi otherwise, and can sue for within 15 days – half the normal period
credit, collecting cash from customers, payment if necessary) (criterion (d)) of credit. Let’s suppose that Manfredi
and paying suppliers. ¤ Ingrid’s costs of buying and takes this offer up and pays on 30
The effect on the accounting equation selling the goods are measurable March. The payment will be recorded in
is that inventory will decrease by the (criterion (e)). Manfredi’s account as shown in Table 3
cost of the goods sold and receivables on page 3.
will increase by the selling price of the
goods sold. So total assets increase by
the profit made on the sale. This also
increases capital/equity. There is no
change in liabilities. TABLE 2: MANFREDI’S ACCOUNT IN THE RECEIVABLES LEDGER (POST-PAYMENT)
The profit on this transaction is
therefore taken when the goods are sold Manfredi
even though no money has exchanged
hands yet. This is because this 2010 $ 2010 $
transaction meets all of the recognition 17 Mar Sales 6,450 16 Apr Bank 6,450
rules in paragraph 14 of IAS 18:
03 TECHNICAL
$
TABLE 5: INGRID SELLS HER GOODS AT A UNIFORM GROSS MARGIN OF 30% Irrecoverable debts 196,201
$ Add end of year allowance for
Sales 6,450 70% of 6,450 receivables 16,254
Receivables expense for 2010 212,455
Cost of sales (4,515)
And the amount included in current
Gross profit 1,935 30% of 6,450 assets in the statement of financial
position as at the end of 2010 will be:
Irrecoverable debts (6,450)
Profit/(loss) (4,515) $
Trade receivables 541,800
Less Allowance for receivables 16,254
525,546
Ingrid will have to make additional Suppose that Ingrid’s experience This will all be recorded in the ledger
sales of $15,050 just to break even is that on average 3% of trade accounts as shown in Table 6 on
(30% of $15,050 = $4,515). receivables proves to be uncollectible. page 5.
This means that if Ingrid’s trade
MAKING AN ALLOWANCE receivables as at 31 December 2010 OUT WITH THE OLD AND IN WITH
FOR RECEIVABLES totalled $541,800 then she can expect THE NEW
Let us now assume that the financial to write off about $16,254 of this We’re not quite finished yet. If 2010
year end for Ingrid is 31 December in 2011. It would be appropriate to was not Ingrid’s first year of operation
2010. The irrecoverable debt arising charge this amount as an expense she would have made an allowance for
from the sale to Manfredi has been in the year in which the related sales trade receivables at the end of 2009.
recognised in the same year in which took place (the matching principle) So, if Ingrid’s trade receivables totalled
the sale was made. Ingrid may feel even though Ingrid will not find $400,932 as at 31 December 2009,
that it would be prudent to make an out which specific receivables are she would have made an allowance
additional charge for irrecoverable uncollectible until 2011. for receivables of $12,028 (3% of
debts based on the total of trade Suppose now that the total trade $400,932). It is important that this
receivables as at the end of the year. receivables written off as irrecoverable allowance is reversed for 2010 so that
Past experience may suggest that during 2010 was $196,201 (this the irrecoverable debts of $12,028
a fairly fixed percentage of trade will include Manfredi’s debt). The anticipated and charged in 2009
receivables proves to be uncollectible total amount charged in the income are not charged again in the income
each year. statement for 2010 will now be: statement for 2010.