Accounts Receivable

-Financial assets that represent a contractual right to Subsequent measurement

receive cash or another financial asset from another
-After initial recognition, accounts receivable shall be
entity.
measured at amortized cost (NRV-net realizable value)
Types of Receivables:
NRV- amount of cash expected to be collected or the
Amounts due from individuals and other companies estimated recoverable amount.
that are expected to be collected in cash.
To arrive with the NRV, following deductions are
Trade Receivables- Accounts receivable and Notes made;
receivable 1. Allowance for freight charge
2. Allowance for Sales Return
Accounts Receivable- Amounts owed by customers that
3. Allowance for Sales discount
result from the sale of goods and services.
4. Allowance for doubtful accounts
Notes receivable- Claims for which formal instruments
of credit are issued as proof of debt. Supported by
Illustration: Assume that Yankumi Co. on July 1, 2017,
formal promise to pay.
sells merchandise on account to Shin Company for
Other Receivables- “Nontrade” (interest, loans to P1,000 terms 2/10, n/30 .
officers, advances to employees, Accrued income).
 Prepare the journal entry to record this
Claims arising from sources other than the sale of
transaction on the books of Yankumi
merchandise or services in the ordinary course of
business. Accounts receivable 1,000
Sales revenue 1,000
Loans Receivable – receivables result primarily from
loans to customers (Banks and Financial institutions)
On July 5, Shin returns merchandise worth P100 to
Classification and Presentation Yankumi.

Trade receivables- if expected to be realized in cash Sales returns and allowances 100
within normal operating cycle or one year , whichever is Accounts receivable 100
longer, are classified as current assets.

Nontrade receivables- if expected to be realized in one On July 11, Yankumi receives payment from Shin
year, are classified as current assets. If beyond one year, Company for the balance due
Nontrade receivables are classified as Non-current
asset. Cash 882
Sales discounts (P900 x .02) 18
**Current portion of Trade and Non-trade receivables
Accounts receivable 900
shall be presented on the face of financial position as
one line item called trade and other receivables.
Accounting for Bad Debts
Details/breakdown should be disclosed in the notes to
financial statement. Uncollectible Accounts Receivable
Initial Measurement  Sales on account raise the possibility of
accounts not being collected.
-Fair value (Fac e amount or original invoice amount)
 Seller records losses that result from extending
credit as Bad Debts Expense.
Methods for Bad Debt Loss:
1. Allowance Method
 Losses are estimated
 Better matching.
 Receivable stated at net realizable value.
 Required by GAAP.
**requires recognition of bad debt loss if the
accounts are doubtful of collection, entry:
Doubtful accounts xx
Allowance for doubtful accounts xx
**if the doubtful accounts are subsequently found
to be worthless or uncollectible, account are
written off, entry:
Allowance for doubtful account xx
Accounts receivable xx
 GAAP require the use of the allowance
method since it conforms to matching
principle.
**The same accounts that are previously written
off are unexpectedly recovered or collected: entry:
Accounts receivable xx
Allowance for doubtful accounts xx
Cash xx
Accounts receivable xx
2. Direct Write-Off
 Theoretically undesirable
 No matching
 Receivable not stated at net realizable value.
 Not acceptable for financial reporting.
** accounts are doubtful of collection, No entry
needed.
**if the accounts are proved to be worthless, entry:
Bad debts xx
Accounts receivable xx
**The same accounts that are previously written off are
unexpectedly recovered or collected: entry:
Accounts receivable xx
Bad debts xx
Cash xx
Accounts receivable xx
** if recovery is subsequent to the year of write off,
recovery may be credited to other income.
ESTIMATION of DOUBTFUL ACCOUNTS
1. Aging of AR
-has the advantage of presenting fairly the accounts
receivable in the statement of financial position at NRV
-violates the matching process
2. Percent of Accounts Receivable
-certain rate is multiplied by open accounts at the end
of the period in order to get the required allowance
balance.
-violates matching principle.
3. Percent of Sales
-The amount of sales for the year is multiplied by a
certain rate to get the doubtful account expense
-proper matching of cost against revenue is achieved
Notes Receivable
Notes receivable
-A promissory note is a written promise to pay a sum of
money on a specified date in the future
The parties to a promissory note are:
1. The maker/borrower/customer - the party that
promises to repay the amount borrowed
2. The payee/bearer - the party that will receive the
payment
Terms used in Note Receivable:
Principal - the amount borrowed/ the face value/ the
stated amount of the note
Maturity date - the date the note is to be repaid/due
Term - the time period/life of the note (in days or
months)
Interest - the amount charged on the borrower for the
use of the money borrowed
Maturity value - the amount of cash to be repaid
including principal and interest on the maturity date
Computing interest
The formula for computing INTEREST is PRT:
Principal(Face Value) x Rate (annual interest rate) x
Time (in Terms of one year)
Measurement
Initially:
 Conceptually, Notes receivable shall be
measured reliably initially at present value
 Short term notes receivable shall be measured
at face value
 Long term notes receivable initial recognition
depends if interest bearing or noninterest
bearing
 Interest bearing-measured at face value
 Non interest bearing- measured at
present value
 Subsequent measurement for long term notes
receivable- measured at amortized cost using
effective interest method.
 The entity actually transfer ownership
of the accounts receivable to the factor
4. Discounting of notes receivable
 Just as accounts receivable can be
factored, notes can be converted into
cash by selling them to a financial
institution at a discount.
 Notes are usually sold (discounted) with
recourse, which means the company
discounting the note agrees to pay the
financial institution if the maker
dishonors the note.
 When notes receivable are sold with
recourse, the company has a contingent
liability that must be disclosed in the
notes accompanying the financial
statements.
 A contingent liability is an obligation to
pay an amount in the future, if and
when an uncertain event occurs.

RECEIVABLE Financing
 Financial flexibility or capability of an entity to
raise money out of its receivables
 Forms:
1. Pledge of accounts receivable
 When loans are obtained from the
bank, accounts receivable may be
pledged as collateral security for the
payment of the loan.
2. Assignment of accounts receivable
 More formal type of pledging AR.
 Specific accounts receivable serve as
collateral security for the loan
 Notification and non- notification basis
3. Factoring of accounts receivable
 Sale of accounts receivable on a
without recourse, notification basis