Accounts Receivables

Receivables

· Financial asset that represents a contractual right to receive cash of another financial asset from another entity.

· It represents the amount collectible from customers and others, most frequently arising from sale of merchandise,
claims of money lent, or the performance of services.

· Under PFRS 15 paragraph 108, a receivable is an entity’s right to consideration that is unconditional. A right to
consideration is unconditional if only the passage of time is required before payment of that consideration is due.

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 revenues, 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 subscription receivables and disposal of property.

Classification of Receivables

As to source:

1. Trade Receivables – refer to claims arising from sale of merchandise or services in the ordinary course of the
business operations.

a. Accounts Receivable/Customer’s Account/Trade Debtors – these are open accounts not supported by promissory
note arising from sale of merchandise or services in the ordinary course of business.

b. Notes Receivable – is a formal against another that is evidenced by a written promise called promissory note, or a
written order to pay at a late time called time draft.

2. Nontrade Receivables – these are receivables that arise from sources other than from sale of goods or services in
the normal course of business.

Specific examples of non-trade receivable include:

a. Loans to officers and employees

b. Advances to affiliates

c. Accrued interest and dividends

d. Deposits to guarantee performance or payment or to cover possible damages or losses

e. Subscriptions for the entity’s equity securities

f. Deposit with creditors

g. Claims for losses and damages

h. Claims for tax refunds or rebates

i. Claims against common carriers for damaged or lost goods

Trade receivables are generally classified as current assets because they are collectible within the normal operating
cycle.
Normal operating cycle is the period required for cash to be converted into inventories through purchase and
production, inventories into receivables through sale, and receivables back into cash or cash equivalents through
collection.

Non-trade receivables that are expected to be collected within 12 months from the end of the reporting period are
also classified as current assets, regardless of the length of the entity’s normal operating cycle.

Non-trade receivables that are not reasonably expected to be collected within twelve months from the end of the
reporting period are reported as non-current assets.

Subscription receivable with call date beyond twelve months from the end of the reporting period is appropriately
reported as deduction from shareholders’ equity.

Initial Recognition

Based on IFRS 9 Financial Instruments, 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, trade
receivables are recognized simultaneous to the recognition of the related revenues, either from sale of goods or
rendering of services.

Trade receivables that do not have a significant financial component are measured at the transaction price in
accordance with PFRS 15 Revenue from Contracts with Customers.

Transaction price is “the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (e.g.,
some sale taxes).” (PFRS 15)

Accounting for Accounts Receivable and Related Revenues

a. Trade Discounts/Volume Discount/Quantity Discount

Trade discounts are given to encourage prospective customers to buy the goods in large quantities. These discounts
are deducted from the list price to arrive at the invoice price and are never recognized in the accounting record since
the journal entry is based on the amount on the sales invoice.

b. Cash Discount/Settlement Discount

Cash discounts are reductions from invoice price as an inducement for prompt payment of an account within the
discount period (e.g., 2/10, n/30). This is also called sales discount from the point of view of the buyer.

3 Methods of Cash Discounts:

Gross Price Method - sales and receivables are recorded at the gross amount. Sales discounts taken by customers
are debited to the Sales Discounts account which is reported as a reduction of sales. This is considered to be more
practical than the net method.

Net Price Method - Sales and receivables are recorded at the net amount. Sales discounts not taken by customers
are credited to the Sales discounts Forfeited (discounts not taken) account, which is reported in the “other income”
line item of the statement of comprehensive income. This method is considered to the theoretically correct since the
receivable and sales are recorded using the cash price equivalent.

Allowance Method - account receivable and sales are recorded at gross amount and a corresponding allowance for
sales discount is recorded.
Illustrative Problem: Trade Discount

Diesel manufacturing sold to Bulldogs company merchandise on account with a list price of P120,000, less trade
discounts of 15%,10% and 5%. The invoice price of the merchandise computed as follows:

List Price 120,000

Less: 15% x 120,000 18,000

102,000

Less 10% x 102,000 10,200

91,800

Less 5% x 91,800 4,590

Invoice Price 87,210

Alternatively, the invoice price may simply be computed as

120,000 x .85 x .90 x .95 = 87,210

Journal Entry

Accounts Receivable 87,210

Sale 87,210

To record the sale transaction

Illustrative Problem: Cash Discount

Naragsak Company entered into the following during the year:

· Jan. 02 – Sold 10,000 units of merchandise to Rex Company at a selling price of P100 less trade accounts of 10% and
5% with terms of 2.10, 1.20, n.20.

· Jan. 04 – Sold 15,000 units of merchandise to Zeus Company at a selling price of P100 less trade accounts of 10%
with terms 2.10, 1/29, n/30

· Jan. 06 – Rex returned 2,000 units of goods to the company

· Jan. 10 – Rex paid his account availing of the cash discount

· Feb. 02 – Zeus Company paid his account

Required: Prepare all the necessary entries assuming the company used:

1.) Gross Method 2.) Net Method 3.) Allowance Method

Illustrative Problem: Cash Discount – Gross Method

Date Account Title Amounts

Jan. 02 Accounts Receivable 855,000

Sales 855,000

Jan. 04 Accounts Receivable 1,350,000

Sales 1,350,000

Jan. 06 Sales Return 171,000

Accounts Receivable 171,000

Jan. 10 Cash 670,320

Sales Discount 13,680

Accounts Receivable 684,000

(8,000 x 100 x .90 x .95 x .02)

Feb. 02 Cash 1,350,000

Accounts Receivable 1,350,000

Under the gross price method, inasmuch as the sales discount is recorded only when taken, it is possible that sales
may have been recorded in one reporting period, but the cash may have been taken by the customer upon payment
in the subsequent period.

Assuming Naragsak Company uses fiscal year that ends January 11 as its reporting period and receivable from Zeus
paid the accounts on January 14. Below are to record the transactions:

Transaction Date Account Title Amounts

To record the adjustment Jan. 11 Sales Discount 27,000

at the end of the
Allowance for Sales Discount 27,000
reporting period

To record the reversing Jan. 12 Allowance for Sales Discount 27,000

entry
Sales Discount 27,000

To record the payment Jan. 14 Cash 1,350,000

within the discount
Sales Discount 27,000
period
Accounts Receivables 1,323,000
Illustrative Problem: Cash Discount – Net Price Method

Transaction Date Account Title Amounts

To record the sales Jan. 02 Accounts Receivable 837,900
Sales 837,900
To record the sales Jan. 04 Accounts Receivable 1,323,000
Sales 1,323,000
To record sales return Jan. 06 Sales Return 167,580
Accounts Receivable 167,580
(2,000 x 100 x .90 x .95 x .98))
If paid within the Jan. 10 Cash 670,000
discount period Accounts Receivable 670,320
(2,000 x 100 x .90 x .95)
If paid beyond the Feb. 02 Cash 1,350,000
discount period Accounts Receivable 1,323,000
Sales Discount Forfeited 27,000

Illustrative Problem: Cash Discount – Allowance Method

Transaction Date Account Title Amounts

To record the sales Jan. 02 Accounts Receivable 855,000

Allowance for Sales Discount 17,100

Sales 837,900

To record the sales Jan. 04 Accounts Receivable 1,323,000

Allowance for Sales Discount 27,000

Sales 1,323,000

To record sales return Jan. 06 Sales Return 167,580

Allowance for Sales Discount 3,420

Accounts Receivable 171,000

(2,000 x 100 x .90 x .95 x .98))

If paid within the Jan. 10 Cash 670,000

discount period
Allowance for Sales Discount 13,680

Accounts Receivable 670,320

(2,000 x 100 x .90 x .95)

If paid beyond the Feb. 02 Cash 1,350,000

discount period
Allowance for Sales Discount 27,000

Accounts Receivable 1,323,000

Sales Discount Forfeited 27,000

Credit Card

Credit card is plastic card which enables the holder to obtain credit up to predetermined limit form the issuer of the
card for the purchase of goods and services. Services charge or credit card fees, normally ranging from 1% to 5% of
net credit card sales, reduce the value of the accounts receivable. The account Credit Card Service Charge would be
reported as an operating expense in Profit or loss.

Illustrative Problem: Credit Card

On January 1, of the current year, Oxide sold merchandise to customers using BPI Master Card totaling P1,000,000.
On January 6, BPI Master Card remitted in full the amount minus service charge of 5%

To prepare the necessary journal entries:

Date Account Title Amounts

Jan. 1 Accounts Receivable – BPI Master Card 1,000,000
Sales 1,000,000
To record the BPI Master card sales
Jan. 6 Cash (1M x 95%) 950,000
Service Charge (5% x 1M) 50,000
Accounts Receivable – BPI Master Card 1,000,000
To record the remittance of BPI Master card to Oxide