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Nature of receivables – Receivables are financial assets arising from a contractual right to
receive cash or another financial asset from another company.

Classes of Receivables
A. For Manufacturers or retailers:
Trade receivables – are claims arising from sale of merchandise or service in the
ordinary course of business operations; such as:

(a) Accounts receivable – are open accounts or those not supported by

promissory notes. Other names for accounts receivable are customers’
accounts, trade debtors, and trade accounts receivable.

(b) Notes receivable – are those supported by formal promises to pay in the
form of notes.

Non-trade receivables – are claims arising from sources other than from sale of
goods or services in he normal course of business; such as the following:

(a) Advances to officers and employees

(b) Advances to subsidiaries/affiliates
(c) Dividends and interest receivable
(d) Deposits as a guarantee of performance or payment
(e) Deposits to cover potential losses or damage
(f) Claims for: insurance, tax refunds, lawsuits, merchandise damaged or lost in
transit, returnable items, etc.

B. For banks and other financial institutions

Loans – are claims arising primarily for providing loans to heterogenous customers
and the repayment periods are frequently longer or over several years.

Presentation of receivables
Receivables are disaggregated into amounts receivable from trade customers,
receivables from related parties, prepayments and other amounts. (PAS 1 paragraph

Trade receivables and nontrade receivables which are currently collectible shall be
presented on the face of the statement of financial position as one line item called
trade and other receivables.

However, the details of the total trade and other receivables shall be disclosed in the
notes to financial statements.
Customers’ credit balance – are balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.
These credit balances are classified as current liabilities and are not offset against the
debit balances in other customers’ accounts, except when the amount is deemed

Illustration 1. Apollo Company’s accounts receivable controlling account reports a

balance of P500,000. You examined the subsidiary ledgers and discovered the
following details in Apollo’s customers’ accounts:

Sales P 800,000 Collections 400,000
Debit balance 400,000

Sales 600,000 Collections 450,000
Debit balance 150,000

Sales 500,000 Collections 450,000
Returns 100,000
Credit balance 50,000

How much should be presented as accounts receivable on the financial statements?

Initial Measurement of receivables

PFRS 9, paragraph 5.1.1, provides that a financial asset shall be recognized initially
at fair value plus transaction costs that are directly attributable to the acquisition.

The fair value of a financial asset is usually the transaction price, meaning, the fair
value of the consideration given.

For short term receivables, the fair value is equal to the face value or original invoice

For long term receivables that are interest-bearing, the fair value is equal to the face

For long term receivables that are not interest bearing, the fair value is equal to the
present value of all future cash flows discounted using the prevailing market rate if
interest for similar receivables (effective interest rate).
Accounts Receivable – are open accounts arising from sale of merchandise or services in
the ordinary course of business.

Again, accounts receivable shall me initially measured at face value or original invoice
amount. However, subsequently the accounts receivable shall be measured at net
realizable value, meaning the amount of cash expected to be collected or the estimated
recoverable amount.

The initial amount shall be reduced by adjustments which in the ordinary course of business
will reduce the amount recoverable from the customer.

Accordingly, in estimating the net realizable value of trade accounts receivable, the following
deductions are made:

a. Allowance for freight charge

b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

Problem 1. On December 31, 2018, the “Receivables” account of Boreas Company showed a
debit balance of P2,000,000. The allowance for doubtful accounts has a credit balance of
P50,000. Subsidiary details revealed the following:

Trade accounts receivable P 775,000

Trade notes receivable 100,000
Installments receivable, normally due in one (1) year to two (2) years 300,000
Customers’ accounts reporting credit balances arising from sales returns (30,000)
Advance payments for purchase of merchandise 150,000
Customers’ accounts reporting credit balances arising from advance (20,000)
Cash advance to subsidiary 400,000
Claim from insurance entity 15,000
Subscriptions receivable due in 60 days 300,000
Accrued interest receivable 10,000

1. How much should be presented as “trade and other receivables” under current
2. How should the other items excluded from the answer in no. 1 be classified and
Problem 2. The following T-account summarizes the transactions affecting the accounts
receivable of Circe Company for the current year:

Accounts Receivable
Jan. 1 balance 600,000 Collection from customers 5,300,000
Credit sales 6,000,000 Write-off 35,000
Shareholders’ subscriptions 200,000 Merchandise returns 40,000
Deposit on contract 120,000 Collection on carrier claims 40,000
Claim against common 100,000 Allowances to customer for 25,000
carrier for damages shipping damages
IOUs from employees 10,000 Collection on subscriptions 50,000
Cash advance to affiliates 100,000
Cash advance to supplier 500,000

1. Compute the correct amount of accounts receivable.
2. Prepare one compound entry to adjust the accounts receivable.
3. Compute the amount to be presented as “trade and other receivables” under current
4. Indicate the classification and presentation of the other items.

Accounting for freight charge:

Terms related to freight charge:

a. FOB Destination
b. FOB Shipping Point
c. Freight Collect
d. Freight Prepaid

Sometimes goods are 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 him. On the part of the seller, the freight charge is recorded by debiting
Freight Out and crediting Allowance for freight charge.

Problem 3. Dionysus Company sold merchandise on account for P500,000. The terms are
2/10. n/30. The related freight charge amounted to P10,000. The account was collected
within the discount period.

Prepare the journal entries to record the above transactions under the following freight
1. FOB destination and freight collect
2. FOB destination and freight prepaid
3. FOB shipping point and freight collect
4. FOB shipping point and freight prepaid
Allowance for sales returns – the measurement of accounts receivable shall also recognize
the probability that some customers will return goods that are unsatisfactory or will make
other claims requiring reduction in the amount due as in the case of shipment shortages and

Accounting for sales discount – entities usually offer cash discounts to credit customers. A
cash discount is a reduction from an invoice price by reason of prompt payment. A cash
discount is known as sales discount on the part of the seller and a purchase discount on the
part of the buyer.

Methods of recording credit sales

1. Gross method – the accounts receivable and sales are recorded at gross amount of the
invoice. This is the common and widely used method because it is simple to apply.

2. Net method – the accounts receivable and sales are recorded at net amount of the
invoice, meaning the invoice price minus the cash discount.

Problem 4. Estes Company engaged in the following transactions during the month of

Nov. 1 Sold merchandise to A Company for P50,000, 2/10, n/30

3 Sold merchandise to B Company for P200,000, 2/10, n/30.
12 Received payment from B Company for the November 3 sale.
30 Received payment from A Company for the November 1 sale.

a. Prepare the journal entries using the gross method
b. Prepare the journal entries using the net method

Allowance for sales discount – if customers are granted cash discounts from prompt
payment, then, conceptually estimates of cash discounts on open accounts at the end of
the period based on past experience shall be made.

For example, of the accounts receivable of P1,000,000 at the end of the period, it is
reliably estimated that discounts to be taken will amount to P50,000.

The adjustment to record the expected sales discount is:

Sales discount 50,000

Allowance for sales discount 50,000

The adjustment may be reversed at the beginning of the next period in order that
discounts can the be charged normally to sales discount account.

When an account becomes uncollectible, the entity has sustained a bad debt loss. This loss is
simply one of the costs of doing business on credit.

Two methods are followed in accounting for this bad debt loss, namely:

1. Allowance method
2. Direct write-off method

The allowance method requires recognition of a bad bet loss if the accounts are doubtful
of collection. The journal entry to recognize the doubtful accounts is:

Doubtful accounts expense xx

Allowance for doubtful accounts xx

If the doubtful accounts are subsequently found to be worthless or uncollectible, the

accounts are written off as follows:

Allowance for doubtful accounts xx

Accounts receivable xx

Generally accepted accounting principles require the use of the allowance method
because it conforms with the matching principle.

Recoveries of accounts written off

If a collection is made on account previously written off as uncollectible, the customary

procedure is first to recharge the customer’s account with the amount collected and
possibly with the entire amount previously charged off.

Accounts receivable xx
Allowance for doubtful accounts xx

The collection is then recorded normally as follows:

Cash xx
Accounts receivable xx


The direct write-off method requires recognition of a bad debt loss only when the
accounts proved to be worthless or uncollectible. The entry to recognize the worthless or
uncollectible account is as follows:
Doubtful accounts xx
Accounts receivable xx

This approach is often used by small businesses because it is simple to apply. As a matter
of fact, the BIR recognizes this method for tax purposes.

Illustration 1: Allowance method vs. Direct write-off method

Give the journal entries for each transaction under the two methods
1. Accounts receivable worth P10,000 is found to be doubtful of collection.
Allowance method Direct method

2. The P10,000 doubtful account is deemed worthless and needs to be written off
Allowance method Direct method

3. The P10,000 account previously written off is subsequently recovered.

Allowance method Direct method


Doubtful accounts are recognized only when the loss is probable and the amount can be
estimated reliably. There are three methods, namely:

1. Aging the accounts receivable or “statement of financial position approach”

2. Percent of accounts receivable or also SFP approach
3. Percent of sales or “income statement approach”

Aging of accounts receivable

The aging of accounts receivable involves an analysis where the accounts are classified into
not due or past due.
a. Not due e. 91 to 120 days past due
b. 1 to 30 days past due f. 121 to 180 days past due
c. 31 to 60 days past due g. 180 to 365 days past due
d. 61 to 90 days past due h. More than 1 year past due

The allowance is then determined by multiplying the total of each classification by the rate
or percent of loss experienced by the company for each category.

Illustration 2: Aging based on days past due

Papasa Ako Company sells to wholesalers on terms 2/15, net 30. An analysis of the
company’s trade receivable balances at December 31, 2018 revealed the following:

Age in days Receivable balances

0-15 100,000
16-30 60,000
31-60 50,000
61-90 40,000
91-120 30,000
121-150 20,000
Total accounts receivables 300,000

Papasa Ako uses the aging of receivables method. The estimated percentages of collectability
based on past experience are shown below:

Accounts which are overdue for less than 31 days 97%

Accounts which are overdue 31 – 60 days 90%
Accounts which are overdue 61 – 90 days 85%
Accounts which are overdue 91 – 120 days 65%
Accounts which are overdue for over 120 days 40%

The allowance for doubtful accounts has a balance of P8,000 as of January 1, 2018. No write-
offs or recoveries were made during the year.

1. Compute for the (a) balance of allowance for doubtful accounts on December 31, 2018
and (b) the doubtful accounts expense for the year.
2. When is an account past due?

Percent of accounts receivable

A certain rate is multiplied by the open accounts at the end of the period in order to get the
required allowance balance. The rate is usually determined from past experience of the
Illustration 3
The balance of Magiging CPA Ako Company’s accounts receivable is P2,000,000 and the
credit balance in the allowance for doubtful accounts is P10,000. It is estimated that 3% of
the accounts receivable are doubtful for collection.

Required: Give the journal entry to record the allowance

Percent of Sales

The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts
expense. The rate may be applied on credit sales or total sales.

Theoretically, the rate to be used is computed by dividing the bad debt losses in prior years
by the charge sales of prior years. The rate thus obtained is multiplied by the current year’s
charge sales to arrive at doubtful accounts expense

Practically, however, there is no substantial difference if in the computation of the rate, the
basis is total sales of the prior periods. In such a case, the rate thus obtained is multiplied by
the current year’s total sales to get the doubtful accounts expense.

Illustration 4
The following accounts are gathered from the ledger of Lance Company

Accounts receivable 1,000,000

Sales 5,050,000
Sales returns 50,000
Allowance for doubtful accounts 20,000

Required: Give the journal entry to record the doubtful accounts for the period.

Correction in allowance for doubtful accounts

The percent of sales method has the disadvantage of the allowance for doubtful accounts
being inadequate or excessive. Aging the accounts is then necessary to test the
reasonableness of the allowance.

Accordingly, an inadequate allowance is adjusted as follows:

Doubtful accounts xx
Allowance for doubtful accounts xx

An excessive allowance is recorded as follows:

Allowance for doubtful accounts xx

Doubtful accounts xx
When the allowance is excessive, there is a corollary problem when the discrepancy is more
than the debit balance in the doubtful accounts expense account.

For example, if the amount of correction due to excessive allowance is P30,000 and the
doubtful accounts expense account has a debit balance of P20,000, following the above
procedure will result to a credit balance in the doubtful accounts expense account of
P10,000. Such balance is obviously abnormal.

It is believed that in such a case, the P10,000 difference shall not be treated as a prior period
error but included in the determination of the income for the current period.

Journal entry

Allowance for doubtful accounts 30,000

Doubtful accounts expense 20,000
Other income 10,000

Debit balance in allowance account

The allowance for doubtful accounts normally has a credit balance.

However, in certain instances, it may have a debit balance because it may be the policy of the
entity to adjust the allowance at the end of the period and record accounts written off during
the year.

Illustration 5
Guinevere Company reported the following data at year-end

Sales 8,000,000
Accounts receivable 2,000,000
Allowance for doubtful accounts – January 1 100,000
Accounts written off 130,000
Recovery of accounts written off 20,000

Required: Prepare the adjusting entry for doubtful accounts under each of the following
a. Percentage of sales – the estimate is 3%
b. Percentage of accounts receivable – the estimate is 8%
c. Aging – the estimate was computed to be P200,000.