Handout 6 [Receivables Accounting] ACC 124 [Conceptual Framework & Int.
Acc 1]
N.M. CUA, CPA – Instructor 1st Term / 2nd Semester 2024-2025
INTRODUCTION TO RECEIVABLES
In a general sense, a receivable is the right of an entity to obtain cash from another entity. When an entity has a receivable, it is
said to be a creditor of its counterparty, Receivables can arise from different types of transactions such as providing services
on account, selling goods on account, lending funds to other entities, accrual of other income, and other claims against other
entities, suppliers, and shareholders.
CLASSIFICATION OF RECEIVABLES
These are the receivables arising from the primary revenue-generating
activities of an entity. Classifying receivables as “trade” depends to the
Trade Receivables industry in which the entity belongs.
It is expected that only a handful of receivables can be classified as trade.
RECEIVABLES
These are receivables arising from activities other than the primary
revenue-generating activities of an entity.
Non-Trade Receivables
Nontrade receivables cover a much broader scope compared to trade
receivables.
TRADE RECEIVABLE
Depending on the primary activities of an entity, the following can be considered as trade receivables:
TRADE RECEIVABLE DESCRIPTION
Accounts receivable arises from the rendering of service on credit (if the entity is a provider
of service) or from selling of inventories (if the entity is a merchandiser or manufacturer) to
customers.
Accounts Receivable
“On credit”, in this context, means that the customer’s payment is to be received at a later
date.
Installment receivable, a variation of accounts receivable, arises from the selling of
high-value inventories such as vehicles, and house and lot.
Installments Receivable
This type of receivable is still considered as trade receivable, even if they are
collectible beyond one year after the reporting date, provided that the installment basis
granted is the usual credit terms of the entity.
Notes receivable arises from the same transactions as accounts receivable. The difference
is that this is supported by a formal document called a promissory note.
Notes Receivable
However, if a note receivable arises from a transaction other than rendering of service or
selling of goods (e.g., selling of fixed assets, lending of funds of a nonfinancial entity, etc.), it
cannot be classified as part of trade receivables.
Loans receivable (and related accrued interest receivable) arises from lending of funds to
borrowers. These can be classified as trade receivables in the perspective of an entity
wherein its primary activities include the lending of funds to earn interest. Financial
institutions, such as banks and lending companies, can classify loans receivable as part of
Loans Receivable
their trade receivables.
However, if the entity is not a financial institution (e.g., manufacturing entity), its
loans receivable cannot be classified as part of its trade receivables.
NONTRADE RECEIVABLES
In general sense, the following are non-exhaustive examples of nontrade receivables:
1. Advances to employees and officers - these are loans granted to employees and officers that are periodically deducted
from their salaries.
2. Advances to suppliers - these are usually the down payments required by suppliers before shipping out the entity’s order
of inventory. This can also arise from debit balances in suppliers’ account due to overpayments.
3. Loans or advances to affiliates and other related parties.
4. Subscription receivable from subscriber of an entity's own shares.
5. Notes receivable arising from selling land, building, equipment, machinery and other assets not considered as
inventories.
6. Accrued other income such as arising from interest income, dividends income, commission income, rental income etc.
7. Claims of damages against other entities, such as against the courier in case the purchased goods were lost in transit.
FINANCIAL REPORTING OF RECEIVABLES
The reporting of receivables, whether as part of current or noncurrent assets, will depend on their classification as trade or
nontrade:
Classified as part of current assets since these are generally collectible
Trade Receivables within one year or the normal operating cycle of the entity, whichever is
FINANCIAL longer.
REPORTING The portion that is collectible within one year from reporting date is
OF classified as part of current assets.
RECEIVABLES Non-Trade Receivables
The portion that is collectible beyond one year from reporting date is
classified as part of noncurrent assets
Accordingly, trade receivables are ALWAYS classified as current while non-trade receivables can only be classified ONLY
IF they are collectible within one year after the reporting date. Examples of non-trade receivables that are usually classified as
current are the following:
1. Advances to employees, officers, and suppliers
2. Subscription receivable, if collectible within one year after the reporting date, otherwise reported as a deduction from equity.
3. Notes receivable if collectible within one year after the reporting date
4.Accrued other income
5. Claims of damages
It should be noted that advances to affiliates and other related parties are usually reported as part of noncurrent assets since
these amounts, in substance, are not expected to be paid by the affiliates in the foreseeable future.
PRESENTATION
Trade receivables, plus the current portion of nontrade receivables, are presented on the current assets section of the
statement of financial position in a single line item called “Trade and Other Receivables”.
DRILLS
Illustration 1. Fatui Corporation, a manufacturer of a wide range of inventory items, reported the following amounts as of
December 31, 2023:
Subscription receivable due in 60 days 600,000
Accounts receivable – customers 5,000,000
Accounts receivable – affiliates 1,000,000
Advances to employees 400,000
Advances to executives 800,000
Accounts receivables from employees 300,000
Accounts receivables from executives 200,000
Post-dated check received 150,000
Advances to subsidiary 2,000,000
Notes receivable from inventory sold 550,000
Notes receivable from lending funds (due 2026) 1,200,000
Notes receivable from lending funds (due 2024) 2,400,000
Interest receivable 90,000
Advances to suppliers 420,000
Debit balances in suppliers’ accounts 50,000
Accounts receivable – installment basis 900,000
TOTAL
Requirement:
1. What is the total amount of trade receivables?
2. What is the total amount to be considered as non-trade receivables?
3. What is the total amount to be presented in the balance sheet as trade and other receivables?
4. What is the total amount to be presented as non-current receivables?
5. In relation to receivables, which of the following statements is correct?
S1 Trade receivables are classified as current assets only if they are collectible within one year from the reporting date.
S2 Generally, receivables are initially measured at fair value plus transaction costs.
a. I only c. Both I and II
b. II only d. Neither I nor II
6. If the problem is silent as to maturity of the receivables below, which of them is classified as a current transaction receivable?
I. Debit balances in account payables
II. Advances to affiliates
III. Promissory note received in exchange for services rendered to customers
a. I only c. I, II and III
b. II only d. None
INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLES
As financial assets, receivables are initially measured at their fair value on initial recognition. [PFRS 9.5.1.1].
However, for trade receivables with no significant financing component, the initial measurement can be equal to the
transaction price. The transaction price is the total amount that the entity is entitled to receive, which is usually equal to the
selling price of the related goods or services.
TRANSACTIONS AFFECTING ACCOUNTS RECEIVABLES
In the context of an entity normally selling items of its inventory, the following transactions have the following effects in the
accounts receivable (A/R) balance and the corresponding journal entries:
TRANSACTION EFFECTS IN AR PRO-FORMA JOURNAL ENTRY
Accounts Receivable xxx
Sales made on credit Increase
Sales xxx
Collection from customers Cash xxx
Decrease equal to amount of cash received
without sales discount Accounts Receivable xxx
Cash xxx
Collection from customers Decrease equal to the amounts of cash
Sales Discount xxx
with sales discount received plus sales discount
Accounts Receivable xxx
Sales returns or allowance
Sales Returns/Allowance xxx
from unpaid credit sales Decrease
Accounts Receivable xxx
(issuance of credit memo)
Receipt of promissory notes Notes Receivable xxx
Decrease
for overdue AR Accounts Receivable xxx
Write-off of uncollectible Allowance for Bad Debts xxx
Decrease
accounts Accounts Receivable xxx
Please take note of the following:
a. Cash sales do not affect the balance of accounts receivable.
b. Cash refunds paid to customers for sales returns or allowances shall not also affect the accounts receivable balance.
The pro-forma entries above can be summarized under a T-Account as follows:
ACCOUNTS RECEIVABLE
Beginning balance xx xx Cash received from credit sales
Credit sales xx xx Sales discount
Recoveries xx xx Sales return or allowances from unpaid credit sales
xx Receipt of promissory note for overdue AR
xx Recoveries
xx Write-off of AR
Ending balance xx
Illustration 2. At the beginning of 2023, Dawn Winery Company reported accounts receivable balance of P2,500,000. The
following transactions occurred during the year 2023:
a. Cash sales amounted to P800,000 while credit sales amounted to P6,500,000. The company has an established credit
term of 2/10, n/30 for all credit sales.
b. Cash received from credit customers totaled P6,400,000, of which P3,920,000 were received from customers paying
within the discount period (i.e., net of discount).
c. Credit memos issued for sales return totaled P200,000, while cash refund made to customers amounted to P100,000.
d. A promissory note was received for an overdue account amounting to P120,000.
e. Receivable of P60,000 was written-off since the customer is nowhere to be found.
Requirement: What is the balance of the accounts receivable as of December 31, 2023?
GROSS METHOD VS. NET METHOD
If you have noticed as we answered the 2nd illustration, the amount to be received from customers within the discount
period is lower compared to the amount to be received beyond the discount period. This difference is called the “sales
discount” and is substantially a financing mechanism that, theoretically, shall be recognized as a financing income, separate
from sales revenue.
The net method of accounting accommodates this theoretical separate recognition of financing income. The comparison
between the gross method (the usual approach) and the net method is as follows:
TRANSACTION GROSS MEHOD NET METHOD
Accounts receivable xxx Accounts receivable xxx
Sales xxx Sales xxx
Initial recording of
credit sales Sales and AR are recorded in amounts that Sales and AR are recorded in amounts that are
are GROSS of sales discount, hence the NET of sales discount, hence the name of the
name of the method method
Cash xxx
Receipt of payment Accounts receivable xxx Accounts receivable xxx
within discount Sales discount xxx
period Sales xxx Cash received is equal to the amount of
recorded AR, which is already net of discount.
Cash xxx
Accounts receivable xxx
Receipt of payment Sales discount loss xxx
Cash xxx
beyond discount
Accounts receivable xxx
period Sales discount loss account is usually reported
as other income (excluded from gross profit
amount)
Even though the net method is theoretically the more correct choice, it is usually difficult to implement in practice due to the
level of monitoring needed. Nonetheless, the total amount of sales discount is usually immaterial, which yields an insignificant
difference in the amounts reported under the gross and net methods. Gross method is usually followed in practice since it is
much easier to implement.
The differences in the amounts to be reported under both methods are summarized as follows:
Amounts Payment WITHIN Discount Period Payment BEYOND Discount Period
Net sales amount Gross method = net method Gross method > net method
Gross profit Gross method = net method Gross method > net method
Other income N/A Gross method < net method
Net income Gross method = net method Gross method = net method
Illustration 3. On June 1, 2023, Ningguang Company sold inventory on account for P50,000, with terms of 1/15, n/30. The related
cost of the goods amounted to P20,000. The sale transaction and the corresponding receipt of customer payments are recorded as
follows:
SUBSEQUENT MEASUREMENT OF ACCOUNTS RECEIVABLE
At the end of each reporting period, accounts receivable shall be measured at its net realizable value. It is based on the
general notion that assets shall not be carried at amounts more than the amount of cash that can be obtained from them. The
net realizable value of accounts receivable can be computed as follows:
Gross accounts receivable xx
Less: Expected sales returns xx
Expected sales discounts xx
Expected freight out xx
Expected bad debts xx
Net carrying amounts of accounts receivable xx
These expected amounts are maintained in allowance accounts, which are contra-asset accounts (i.e., with normal credit
balances) against accounts receivables.
CONTRA-ASSET ACCOUNT DESCRIPTION
Some of the sales returns in the succeeding period may come from the accounts
receivable balance as of the reporting date. In this case, the amount of expected sales
returns shall be estimated using the entity's best and reasonable inputs primarily from
past experience but adjusted with expectations in the future. Proforma journal entry to
record the recognition of expected sales returns is as follows:
Expected Sales Return
Sales xxx
Allowance for Sales Returns xxx
The above sales return amount is included in the reductions from gross sales to arrive at
the amount of net sales for the current period.
Similar to sales returns, some of the sales discounts early in the succeeding period may
arise from the credit sales made near the end of the current reporting period. The amount
of expected sales discounts shall take into account only the accounts receivable balance
that are entitled to the sales discount. Pro-forma journal entry to record the recognition of
expected sales discounts is as follows:
Expected Sales Discounts
Sales xxx
Allowance for Sales Returns xxx
The above sales discount amount is included in the reductions from gross sales to
arrive at the amount of net sales for the current period.
To understand how an allowance for freight out arises, it is crucial to know first the
shipping terms and freight terms:
Owner of Goods
Shipping Terms Liable to Pay Freight
In-Transit
FOB Shipping Point Buyer Buyer
FOB Destination Seller Seller
Freight Terms
a. Freight Prepaid – The seller pays the freight amount upon shipment
b. Freight Collect – The buyer pays the freight amount upon receipt
Combining shipping terms and freight terms results in the following analysis
Liable to Pay Who Actually Paid
Expected Freight Out Scenario Shipping/Freight Terms
Freight the Freight
1 FOB SP, Freight Prepaid Buyer Seller
2 FOB SP, Freight Collect Buyer Buyer
3 FOB D, Freight Prepaid Seller Seller
4 FOB D, Freight Collect Seller Buyer
Takeaways from this analysis
a. No further accounting issues will arise in Scenarios 2 and 3 since the liable party is the
one who actually paid for the freight.
b. It is in the Scenario 4, when the shipping and freight terms is FOB destination, freight
collect, that will give rise to the expected amount of freight out. There is a reduction
in the amounts to be received since the buyer will charge its shouldered freight against its
payment to the entity.
The Expected Bad Debts will be tackled in a Separate Handout
CREDIT BALANCES IN CUSTOMER’S ACCOUNTS
In accounting, the general ledger for accounts receivable is supported by subsidiary ledger, which shows the breakdown of
accounts receivable balance on a per customer basis.
No issues will arise when each of the customer accounts has a debit or positive balance. However, adjustments shall be made
when some of the customer accounts result to a credit or negative balance. This credit or negative balance shall not be
deducted from other customer accounts but shall be presented separately as part of current liabilities.
Illustration 4. Venti Co. had a balance of 6,000,000 in its accounts receivable as of December 31, 2023, aged as follows:
Age Balance
More than 90 days 200,000
61-90 days 300,000
21-60 days 500,000
11-20 days 1,000,000
10 days and below 4,000,000
6,000,000
The Company reasonably expects that only 60% of the receivables still entitled to a sales discount will pay within the discount
period. Required: Under each of the independent scenarios, determine the amount of expected sales discount:
1. The Company’s grants 2/10, n/30 credit terms to all of its customers.
2. The Company's grants 1/20, n/30 credit terms to all of its customers.
Illustration 5. On December 27, 2023, CUENCA Company sold goods with selling price of P400,000 under shipping and freight
terms of FOB destination, freight collect and credit terms of 1/15, n/30. It is expected that the buyer will receive the goods on
January 5, 2024. The amount of freight that the buyer will pay on that date is estimated to be P10,000.
Requirement: Prepare the journal entries to record the sale and estimation of freight out.
Illustration 6. Astraea Company reported P4,200,000 balance in its accounts receivable general ledger. Based on the subsidiary
ledger, this can be broken down as follows:
Customer 001045 2,000,000
Customer 001052 1,500,000
Customer 001067 ( 300,000)
Customer 001058 1,000,000
Accounts receivable balance 4,200,000
Requirement: What is the adjusted amount of accounts receivable and the entry to reclassify the credit balance of customer AR?
THEORIES
1. Evaluate the following statements
S1 Generally, receivables are considered as financial assets.
S2 The classification “non-trade receivables” covers more types of receivables compared to the “trade receivables”
classification.
S3 Generally, trade receivables are classified as part of noncurrent assets.
a. Only 1 statement is true c. All statements are true
b. Only 1 statement is false d. All statements are false
2. Evaluate the following statements
S1 The gross method will result to a higher gross sales relative to the net method whether the customer paid within the
discount period or not.
S2 Receivables shall be reported at their net realizable values.
S3 Credit balances in customer’s accounts shall be separately presented as part of current liabilities.
a. Only 1 statement is true c. All statements are true
b. Only 1 statement is false d. All statements are false
3. Accounts receivable is the result of
a. Credit sales only c. Both credit sales and cash sales
b. Cash sales only d. Neither credit sales nor cash sales
4. Generally, receivables are measured initially at their ______________ and subsequently at their _____________.
a. Fair values; net realizable values c. Net realizable values; fair values
b. Face amounts; face amounts d. Face amounts; net realizable values
5. All of the following receivables shall be initially measured at their fair values, except
a. Notes receivable c. Accounts receivable
b. Loans receivable d. Long-term advances to employees
6. If the shipping and freight terms are FOB destination, freight collect
I The seller is required to pay the freight because it is still the owner of the goods while in transit.
II. The buyer will actually pay for the freight, but it can claim reimbursement from the seller.
a. I only c. Both I and II
b. Il only d. Neither I nor II
7. If the shipping and freight terms are FOB shipping point, freight collect
I The buyer is required to pay for the freight since it became the owner of the goods while in transit.
II. The buyer will also actually pay for the freight, but it can claim reimbursement from the seller.
a. I only c. Both I and II
b. Il only d. Neither I nor II
END OF HANDOUT
