ACCOUNTS RECEIVABLE

DEFINITION

• Open accounts arising from the sale of good and services in the ordinary course of
business and not supported by promissory note.

• Other terms: customer accounts, trade debtors

 VALUATION

• INITIAL:
• The amount to be recorded as AR from sales on account is “INVOICe PRICe”

List Price XXX

Less: Trade discount, rebates U___
Invoice Price XX__
• SUBSEQUENT:
• The ending balance of AR shall be presented at Net Realizable Value (expected cash value) or amortized cost.

NRV:
Gross AR XXX
Less:
Allowance for Sales Return X
Allowance for Sales Discount X
Allowance for Freight Charges X
Allowance for Doubtful Accounts X___
NRV XX__
 AMOUNT TO BE RECOGNIZED

Transaction Gross Method Net Method

Sales on account AR (gross) 100 AR (net) 95
Sales (gross) 100 Sales (net) 95
When payment is made Cash (net) 95 Cash (net) 95
within the discount Sales discount 5 Sales discount 5
period Accounts Accounts
Receivable(gross) 100 Receivable(net) 95
When payment is made Cash (gross) 100 Cash (gross) 100
beyond the discount Accounts Accounts
period Receivable(gross) 100 Receivable(gross) 95
Sales Discount
Forfeited 5
 ACCOUNTING FOR SALES RETURNS

• Sales Returns – value of merchandise expected to be returned by customers as a result of shipment

storages and defects.

Relevant entries:
Estimation of future returns
Sales returns xx
Allowance for sales returns xx

Recording of actual returns

Allowance for sales returns xx
Accounts receivable xx
 ACCOUNTING FOR SALES DISCOUNTS

• Sales Discounts – a cash discount is a reduction from invoice price by reason of prompt payment

Relevant entries:
Estimation of future discounts
Sales discounts xx
Allowance for sales discountsxx

Recording of actual discounts

Allowance for sales discounts xx
Accounts receivable xx
 ACCOUNTING FOR FREIGHT CHARGES

• Freight charges
• Goods sold “FOB Destination” but shipped ”freight collect” with the understanding that the buyer will pay for the freight
charge and deduct the same when remittance is made by the buyer.

• Relevant entries:
• Estimation of future freight charges
Transportation expense xx
Allowance for freight charge xx

• Payment of freight charges

Allowance for freight charge xx
Accounts receivable xx
 ACCOUNTING FOR DOUBTFUL
ACCOUNTS OR BAD DEBTS
• Doubtful Accounts
• When an account becomes uncollectible, the entity sustained a bad debt loss.
This loss is simply one of the costs doing business on credit
Allowance Method Direct Write-off
When accounts
. are Bad Debt expense xxx no entry
expected to be Allowance for BD
uncollectible xxx
x
When accounts are Allowance for BD xxx Bad debt expense xxx
written-off Accounts Receivable Accounts receivable xx
xx
When accounts previously AR AR
written off are recovered A4BD Bde

Cash Cash
AR AR
ESTIMATION OF BAD DEBTS
• Aging of Accounts Receivable Method
ü Most accurate of all 3 methods since an analysis is made and each classification of AR
is multiplied by as specific rate of the estimate of uncollectability
ü Provides the amount of required allowance for bad debts
ü Emphasizes asset valuation
 SUMMARY OF MOVEMENTS OF
ACCOUNTSAllowance for bad debts
Accounts Recievable
Xxx Beginning Bal
Beginning Bal xxx
Xxx Bad debts
Credit Sales xxx xxx Collections
Write-off xxx
Recoveries xxx Xxx Sales Return
Xxx Recoveries
Xxx Sales discounts
Xxx write-off
Total Xxx
Total Xxx
xxx
xxx
RECEIVABLE FINANCING
 DEFINITION

• Receivable financing is the acceleration of collection of AR

• It is the financial flexibility or capability of an entity to raise money out of its

receivables.
 COMMON FORMS

Ø Receivable as Loan Collateral

Ø Factoring
Ø Discounting
 RECEIVABLE AS LOAN COLLATERAL

• The use of receivable as a loan collateral can be designated as

• Pledge
• assignment
 RECEIVABLE AS LOAN COLLATERAL

• Pledge / Hyphotecation / General Assignment

• Total or all of the AR is used
• Disclosure is made of the fact that AR have been pledged
• AR is accounted for normally and are not reclassified
• Accounting for loan shall be made within respect to the proceed, recording of
interest and payment of principal.
 ILLUSTRATIVE PROBLEM

• On August 1, 2023, A Co. borrowed P 1,000,000 from a bank and pledged its
receivables as collateral security.
Total Accounts Receivable is P 5,000,000 before pledging.

1. How much is the AR to be reported in the Financial Statements?

2. Show the journal entry
Cash 1000,000
Loan payable 1,000,000
 RECEIVABLE AS LOAN COLLATERAL

• Assignment / Specific Assignment

• Specific AR is used as collateral. Not all AR
• May be done on notification or non-notification basis.
• Reclassification is made on assigned accounts

• Journal entry:
AR – assigned xx
AR xx
RECEIVABLE AS LOAN COLLATERAL -
ASSIGNMENT

Disclosure on the “equity in assigned accounts” of the assignor is made in the notes,
which is calculated as:
AR assigned xx
Less: CA loan xx
Equity in assigned accounts xx
 RECEIVABLE AS LOAN COLLATERAL -
ASSIGNMENT
NON-NOTIFICATION BASIS NOTIFICATION BASIS
Payment made by customer Cash xx
AR – assigned xx
Customer return goods Sales Return xx Sales Return xx
AR – assigned xx AR – assigned xx
Customer availed cash discount Sales Discount xx
AR – assigned xx
Collections are remitted to assignee Loan Payable xx
Interest expense xx
Cash xx
Advice from assignee is received Loan Payable xx
Interest expense xx
Sales Discount xx
AR xx
 ILLUSTRATIVE PROBLEM

On December 1, 2021, an entity assigned on a non-notification basis accounts receivable of P5,000,000 to a bank in
consideration for a loan of 80% of the accounts less a 5% service fee on the accounts assigned. The entity signed a
note for the bank loan.
On December 31, 2021, the entity collected assigned accounts of P2,000,000 less discount of P200,000. The entity
remitted the collections to the bank in partial payment for the loan.
The bank applied first the collection to the interest and the balance to the principal. The agreed interest is 1% per
month on the loan balance.
The entity accepted sales returns of P100,000 on the assigned accounts and wrote off assigned accounts of P300,000.

1. What is the balance of accounts receivable assigned on December 31, 2021?

2. What is the equity of the assignor in assigned accounts on December 31, 2021?
 FACTORING

• Factoring is the sale of AR to finance company which is called the “factor”

• Factor assumes risk of collectability and generally handles the billing and
collection of the receivables

• Can be either a:
• Casual factoring
• Factoring as a continuing agreement (regular factoring)
 FACTORING

• Casual Factoring
• Sale of AR at a discount

• This is similar to any type of sale of an asset in order to generate cash quickly. However, the
sale is always made below the carrying amount or net realizable value of the AR and therefore
a loss is recognized.

Proceeds xx
Less: Carrying Amount of AR
AR xx
AR Allowances (xx) xx
Loss on Factoring xx
 CASUAL FACTORING

• Pro-forma journal:
Cash xxx
Loss on Factoring xxx
Allow for Doubtful Acc xxx
Accounts Rec xxx
 FACTORING

• Factoring as a Continuing Agreement

• Involves the sale of AR to a financing entity on a long term basis and where the buyer (factor) is committed to buy the AR before the
actual goods are sold to the customers on credit
• The collection and credit responsibilities are surrendered to buyer as soon as goods are delivered to the customers.
Proceeds :
Face Value of AR xx
Less: Service Fee xx
Interest Charges xx
Factors holdback xx (xx)
Proceeds on Factoring xx

Note:
Ø Service fee and interest shall be recognized as a loss
Ø Factors holdback shall be recognized as a Receivable (where the factor shall deduct the sales discount, returns taken by the customers before
finally remitting to the seller the remaining balance when all of the AR is collected
 FACTORING AS A CONTINUING
AGREEMENT

• Pro-forma journal:
Cash xxx
Service fees xxx
Interest expense xxx
Factors holdback xxx
Allow for Doubtful Acc xxx
Accounts Rec xxx
 ILLUSTRATIVE PROBLEM

An entity factored P5,000,000 of accounts receivable. Control was surrendered by the entity. The
transaction met the criteria to be accounted for as sale but subject to recourse for nonpayment. The fair
value of the recourse obligation is P250,000.

The finance company assessed a fee of 6% and retained a holdback equal to 10% of the accounts receivable.
In addition, the finance company charged 12% interest computed on a weighted average time to maturity of
the accounts receivable for 60 days.
1. What amount was initially received from the factoring of accounts receivable?
2. What total amount should be recognized initially as loss on factoring?
3. What amount should be reported as loss on factoring assuming the accounts are fully collected by the factor?
 DISCOUNTING OF NOTES RECEIVABLE

• Discounting of NR may be done on a with or without recourse basis

• The amount of proceeds from discounting of notes may be calculated as
follows:
Face Value/Principal xxx
Interest on Maturity xxx
Maturity Value xxx
Less: Discount
(MV x DR x Discount period) (xxx)
Proceeds xx
 DISCOUNTING OF NOTES RECEIVABLE

• Without Recourse
ü Represents absolute sale of NR
ü NR sold will be derecognized
ü Amount received will represent from the proceeds of sale of the notes.
ü A loss on discounting is normally recognized
 DISCOUNTING OF NOTES RECEIVABLE

• With Recourse
ü NR can also be sold but is usually with recourse. This means that the seller is
contingently liable if the maker of the promissory note is unable to pay the maturity
value at maturity date.

ü Discounting of NR can either be accounted for as conditional sale or a secured

borrowing

ü The only difference is a recognition of loss and interest expense and a liability under
secured borrowing
 DISCOUNTING OF NR

Situation Without recourse Conditional sale Secured borrowing

Cash xx Cash xx Cash xx
Recognition Loss on discounting xx Loss on discounting xx Interest expense xx
NR xx NR discounted xx Liability on NR discounted xx
Interest Income xx Interest Income xx Interest Income xx

NR discounted xx Liability on NR discounted xx

Payment is made NR xx NR xx
NR discounted xx Liability on NR discounted xx
Payment is dishonored NR NR xx

AR xx AR xx
Cash xx Cash xx
Cash xx Cash xx
When collection from AR xx AR xx
maker is made interest income xx interest income xx
 ILLUSTRATIVE PROBLEM

• An entity accepted from a customer in settlement of an account a P5,000,000.

180-day 9% note dated August 1, 2021. On September 30, 2021, the entity
discounted the note at 12% with recourse at the bank. The note was paid in
full by the maker on maturity. The discounting is accounted for as a conditional
sale with recognition of a contingent liability.
1. What amount was received from the note receivable discounting?
2. What is the loss on note receivable discounting?
END