Professional Documents
Culture Documents
No
Report as
current asset
No
P
200,000
40,000
P
160,000
16,000
P
144,000
7,200
P
136,800
Cash Discounts sales discounts from the sellers point of view; are reductions
from the sales price as an inducement for prompt payment of an account. Cash
discounts are recognized for financial accounting purposes.
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.
Illustration
a) Sale of merchandise for P 136,800, terms 2/10, n/30.
Accounts Receivable
136,800
Sales
136,800
b) Assume collection is made within the discount period.
Cash
134,064
Sales Discount
2,736
Accounts Receivable
136,800
c) Assume collection is made beyond the discount period.
Cash
136,800
Accounts Receivable
136,800
*Sales Discounts are reported as deduction from Sales in the profit or loss section of the
statement of comprehensive income.
2.
Net Price Method The accounts receivable and sales are recorded at net
amount of the invoice, meaning the invoice price minus the cash discount.
Illustration
a) Sale of merchandise for P 136,800, terms 2/10, n/30.
Accounts Receivable
134,064
Sales
134,064
b) Assume collection is made within the discount period.
Cash
134,064
Accounts Receivable
134,064
c) Assume collection is made beyond the discount period.
Cash
136,800
Sales Discounts Forfeited
Accounts Receivable
2,736
134,064
*Sales Discounts Forfeited account is reported as other operating income in profit or loss
section on the statement of comprehensive income.
3.
4,000
4,000
*The Allowance for Sales Discounts account is a valuation account that reduces accounts
receivable to its amortized cost.
Transfer of
Receivables
Yes
I.
Substantial transfer
of risks and
rewards?
Derecognize the
asset and record
gain or loss
No
Secured
Borrowing
A. Pledging refers to the use of receivables as collateral for a loan;
general assignment of accounts receivable
B. Assignment more formal borrowing arrangement in which specific
receivables are identified and used as security for a loan; specific
assignment of accounts receivable
C. Discounting of notes receivable with recourse endorsing a promissory
note to a bank or a financing company, the latter advancing the
maturity value of the note less a charge called discount. The endorsing
company still has a continuing involvement on the discounted note.
Sale of Receivables
A. Discounting of notes receivable without recourse endorsing a
promissory note to a bank or a financing company but in this case, the
endorser is relieved of the responsibility for the note that is dishonored
on maturity.
B. Factoring an outright sale of receivables. As in any sale of assets, a
gain or loss is recognized for the difference between the proceeds
received and the net carrying amount of the receivables factored.
b.
the accounting policy and method adopted including the
criteria for recognition and the basis of measurement applied;
c.
Information about its exposure to credit risk including the
amount that best represents its maximum credit risk exposure at the end of
the reporting period, without taking account of the fair value of any
collateral, in the event of other parties failing to perform their obligations
and including significant concentrations of credit risks; and
d.
Information about its exposure to interest rate risk
including contractual repricing or maturity date whichever dates are earlier
and including effective interest rates, when applicable.
References:
Robles & Empleo (2012). Intermediate Accounting Volume 1.
Valix, C., Peralta & Valix, C.A. (2012). Financial Accounting Volume One.