REPORTING AND

ANALYZING
RECEIVABLES
Part 1 Accounts Receivable
Part 2 Notes Receivable
Part 3 Other Receivables

Accounting for Receivables

Types of Receivables

Accounts
receivable
Notes receivable
Other receivables

Accounts Receivable

Recognizing
accounts
receivable
Valuing accounts
receivable
Disposing of
accounts
receivable

Notes Receivable

Determining
maturity date
Computing
interest
Recognizing notes
receivable
Disposing of
notes receivable

Statement Presentation
Analysis

Presentation
Analysis

Receivables Defined
Amounts due from individuals and companies- expected

to be collected in cash;
Assets that represent contractual rights to receive cash

or other asset from another entity.

Frequently classified as:
Accounts receivable
Notes receivable
Other receivables
3

Learning Objectives (Accounts

Receivable)
Identify the proper presentation of receivables as
either current or noncurrent assets;
2. Know the timing of recognition and measurement of
trade receivables;
3. Differentiate gross method from net method of
recording sales;
4. Know the accounting for doubtful accounts, worthless
accounts written off and recoveries of accounts
written off.
1.

Accounts Receivable...
Amounts owed by customers on account.
Result from the sale of goods/services in the

ordinary course of business.

Classified as current assets when they are
expected to be realized in cash within the normal
operating cycle or one year, whichever is longer.
Supported by informal or oral promises to pay.
Often called trade receivables.
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Valuing Accounts Receivable

A/R that do not have a significant financing component are

measured initially at their transaction price in accordance

with PFRS 15. After initial recognition, accounts receivable
shall be measured at amortized cost (net realizable value).
Generally, trade receivable may not be discounted if it is due
within 1 year.
Under FOB Shipping point, ownership is transferred to the
buyer upon shipment. Therefore, sales and accounts
receivable are recognized on shipment date.

Valuing Accounts Receivable (cont.)

Under FOB Destination, ownership

is transferred only upon

receipt of goods by the buyer. Therefore, sales and accounts
receivable are recognized only when the buyer receives
delivery of the goods.

The allowance method of recognizing bad debts on

accounts receivable is used for financing reporting purposes.

Valuing Accounts Receivable (cont.)

Doubtful accounts may be estimated using:

Percentage of credit sales

b. Percentage of receivables
c. Aging of receivables
The amount computed under the percentage of credit sales
method is the doubtful accounts expense for the period.
The amount computed under the percentage of receivables
and aging methods is the required balance of the
allowance account.
a.

Accounts Receivable...
Are recorded when service is provided or
at point of sale of merchandise on
account.
Accounts Receivable 1,000
Sales
1,000
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Cash (Net) Realizable Value

Is the net amount expected to be collected in

cash.
Excludes amounts the company estimates it will

not collect.

Keeps Receivables from Being Overstated

on the Balance Sheet.
10

Accounting for Cash Discounts (GAAP)

Gross Method

Net Method

Accounts receivable

Accounts receivable and Sales are

and
Sales are initially recorded at
gross amount of the invoice.

Cash discounts are recorded

only when they are taken by

the buyer.

initially recorded at amounts net

of cash discounts.

Cash discounts NOT taken by the

buyer are credited to the Sales

Discounts Forfeited account and
included as part of Other Income.

Cash discounts taken by the buyer

ARE NOT ACCOUNTED FOR.

Illustrative Problem
An entity sells inventory with a list price of P10,000 on
account under credit terms of 20%, 10%, 2/10, n/30.

Journalize the entry using both the gross and net method for
the following:
1.

Sale on account

2.

Collection is made within the discount period

3.

Collection is made beyond the discount period

2 Methods of Accounting for

Uncollectible Accounts
The Direct Write-off Method
The Allowance Method

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Direct Write-off Method

Bad debt losses are not estimated.
No allowance account is used.
Accounts are written off when determined

uncollectible as

follows:
Bad Debts Expense
Accounts Receivable- Santos

200
200

Bad debt expense will show only actual losses.

Accounts receivable will be reported at gross amount.
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Allowance Method
Uncollectible accounts receivable are estimated and

matched against sales in the same accounting period in

which the sales occurred.
Uncollectible accounts receivable may be estimated

using:
Percentage of sales
Aging of accounts receivable

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Uncollectible Accounts Expense...

Is an expense to record estimated
uncollectible receivables.

Keeps Expenses from Being Understated

on the Income Statement.

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Recording Estimated Uncollectibles

Hampton Furniture has credit sales of P1,200,000, of
which P200,000 remains uncollected. The credit
manager estimates P12,000 will prove uncollectible.

Uncollectible Accounts Expense

12,000
Allowance for Uncollectible Accounts

12,000

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Recording Estimated Uncollectibles

Uncollectible Accounts Expense
12,000
Allowance for Uncollectible Accounts
Accounts Receivable
Jan 1 Bal 200,000

12,000

Allowance for Uncollectible Accounts

Jan 1 Bal 12,000

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Cash (Net) Realizable Value...

Is the net amount expected to be collected in cash.
Excludes amounts the company estimates it will

not

collect.

Keeps Receivables from Being Overstated

on the Balance Sheet.
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HAMPTON FURNITURE
Balance Sheet (partial)
Current assets
Cash

$ 14,800

Accounts receivable

$200,000

Less: Allowance for uncollectible accounts

Cash (net) Realizable Value

12,000

188,000

Write-off of an Uncollectible Account

The vice president of finance authorizes a write-off of
P500 owed by R.A.Ware.

Allowance for Uncollectible Accounts

Accounts Receivable-Ware

500
500

21

Write-off of an Uncollectible Account

Allowance for Uncollectible Accounts
Accounts Receivable-Ware

Accounts Receivable
Jan 1 Bal 200,000
Mar 1 Bal 199,500

Mar 1 500

500
500
Allowance for
Uncollectible Accounts

Mar 1 500

Jan 1 Bal 12,000

Mar 1 Bal 11,500

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Aging of Accounts Receivable

The analysis of customer balances by the
length of time they have been unpaid. The
longer a debt is outstanding the less likely it
is to be paid.

23

Aging of Accounts Receivable

Uncollectible Accounts is computed as the difference

between the required balance of the allowance for

uncollectible accounts and the unadjusted carrying amount
similar to the percentage of receivables.

Illustrative Problem
(Based on Days Outstanding)
MCL Co. has the following information:
Days outstanding
0 60

Receivable balances

% Uncollectible

P120,000

1%

61 120

90,000

2%

Over 120

100,000

6%

Total Accounts Receivable

P 310,000

During the year, MCL wrote-off P7,000 receivables and recovered P4,000 that had
been written-off in prior years. The allowance for doubtful accounts has a beginning
balance of P2,000.
Required: Compute the doubtful accounts expense and net realizable value of
accounts receivable.

Days
Outstanding

Receivable
balances

0 -60

P 120,000

1%

P 1,200

90,000

2%

1,800

100,000

6%

6,000

61 - 120
Over 120
Totals

%
Uncollectible

P 310,000

P 9,000

Allowance for Doubtful Accounts

Write-offs 7,000

Required
allowance

2,000 beg. bal.

4,000 recoveries
10,000 DAE (squeeze)

End. Bal. 9,000

Net realizable value = 310,000 9,000

Illustrative Problem
(Based on Days Past Due)
MCL Co. sells to wholesalers on terms 2/15, n/30. An analysis of MCL Co.s trade
receivable balances at Dec. 31, 20xx revealed the following:
Age in days
Receivable balances
0 - 15
P100,000
16 30
60,000
31 60
50,000
61 90
40,000
91 120
30,000
121 150
20,000
MCL Co. uses the aging of receivables method. The estimated percentages of
collectability based on past experience are shown below:
Accounts which are overdue for <31 days
97%
Accounts which are overdue 31 60 days
90%
Accounts which are overdue 61 90 days
85%

Illustrative Problem
(Based on Days Past Due cont.)
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 Jan.
1, 20xx. No write-offs or recoveries were made during the year.
Required: Compute: (a) balance of allowance for doubtful accounts
(b) doubtful accounts expense

Days Past Due

Receivable Balance

% Uncollectible

Current

160,000

1 30 days

50,000

3%

1,500

31 60

40,000

10%

4,000

61 - 90

30,000

15%

4,500

91 - 120

20,000

35%

7,000

Total
Doubtful Accounts Expense = 17,000 8,000

Required Allowance

17,000

Abnormal Balances in Accounts

If abnormal balance occurs, adjustment is needed to eliminate it prior to the preparation

of financial statements.

Credit balance in customers accounts should be presented as part of current liabilities

and should NOT be offset against receivables.

Example:

ABC Co. has an outstanding receivable of P10,000 from Customer X.

Subsequently, X remits P16,000 to ABC as payment for an existing receivable and the
excess as advance payment for future delivery of goods.
Entry to record receipt of payment:

Entry to eliminate credit balance in Xs account:

Cash on Hand

Accounts Receivable X

16,000

Accounts Receivable x

16,000

6,000

Advances from Customers

(non-trade payable)

6,000

Disposing of Accounts Receivable

Reasons why companies sell their receivables:
1.

They may be the only reasonable source of cash;

2.

Billing and collection are often time-consuming and costly.

Sale of Receivables

A common sale of receivables is a sale to a factor.

Factor is a finance company or bank that buys receivables

from businesses and then collects the payments directly

from the customers.
Factor charges a commission to the company that is selling

the receivables.

2 Types of Accounts Receivable Factoring

With Recourse

In a with-recourse arrangement, if the

customer does not pay the factor, the
transferor must pay the factor the
amount due on the account.

The rules for transfer of receivables with

recourse vary by jurisdiction; therefore,
transfers with recourse may or may not
qualify for sale treatment.

If the factoring with recourse

arrangement qualifies as a sale, the
recourse liability is treated as reduction
of the proceeds received in the transfer.

Without Recourse

Factor assumes the risk of loss from

noncollection. Thus, once a factoring
arrangement is completed, the entity
has no further involvement with the
receivables, unless the customer
decides to return the merchandise. In
its simplistic form, the receivables are
sold and the difference between the
cash received and the carrying value
of the receivables is recognized as a
gain or loss.

Illustrative Problem
Cabal Furniture factors P6,000,000 of receivables to Singh Factors
that charges 3% of the amount of receivables sold.
Entry to record sale by Cabal Furniture:
Cash
5,820,000
Service Charge Expense
180,000
Accounts Receivable
6,000,000
Note: If the company often sells receivables, it records service
charge expense otherwise, it may just report it as Other Expenses
and Losses.

Illustrative Problem (2)

Thirsty Corp., on July 1, year 1, enters into an agreement with Rich Company (the
factor) to sell a group of its receivables without recourse. A total face value of
$200,000 of accounts receivable are involved. The factor charges 20% interest
computed on the weighted-average time to maturity of the receivables of thirtysix days plus a 3% fee.
The entries required by the transferor are as follows:
Cash
Interest expense (or prepaid) (200,000 .20 36/365)
Factoring fee (200,000 .03)
Accounts receivable

190,055
3,945
6,000
200,000

The interest expense and factors fee can be combined into a $9,945 loss on the
sale of receivables.

Pledging of Accounts Receivable

is short-term

borrowing from financial institutions where the

loan is secured by accounts receivable. The lender may physically
take the accounts receivable but typically has recourse to the
borrower; also called discounting of accounts receivable.

Account receivable financing can be allowed

preferably
against charge or hypothecation of receivables whereby
the lenders is vested with the right to collect or recover
the Receivables either in the normal course of business or in
the event of default by the borrower.

Credit Card
A common type of credit
card is a national credit
card such as:

Visa

Master Card

American Express.

37

Credit Card
Three parties are involved when national credit
cards are used in making retail sales:
the credit card issuer
the retailer

the customer

38

Bank Credit Card

Sales resulting from the use of VISA and MasterCard

are considered cash sales by the retailer.

Upon receipt of credit card sales slips from a retailer,

the bank immediately adds the amount to the seller's

bank balance.

39

Advantages of Credit Cards to the Retailer

Advantages of Credit Cards to the

Retailer

41

Advantages of Credit Cards to the

Retailer

42

Advantages of Credit Cards to the

Retailer

43

Impairment of Accounts Receivable

Accounts Receivable considered uncollectible

are deemed to be impaired.

Impairment assessment:
1.

Individually significant accounts receivable should be considered for

impairment separately and if impaired, the impairment loss is
recognized.

2.

Accounts receivable not individually significant should be collectively

assessed for impairment.

3.

Accounts receivable not considered impaired should be included with

other accounts receivable with similar credit-risk characteristics and
collectively assessed for impairment.

Notes Receivable...
Represents claims for which formal instruments of
credit are issued as evidence of debt.
2015

45

Learning Objectives (Notes Receivable)

1.
2.
3.
4.

5.

State the initial and subsequent measurement of note

receivables;
Account for noninterest bearing and interest bearing
note receivable;
Learn how to compute for present value factors and
how to properly apply them;
Be able to prepare amortization table;
Compute for the effective interest rate.

Notes Receivable...

A claim supported by a formal promise to pay a

certain sum of money at a specific future date.

Result from sale of goods

and services on account

that extends payment period of the said account.

Often called trade receivable.

Give holder

a stronger legal claim to assets than

accounts receivable.

Are negotiable instruments and may be transferred

to another party by endorsement.

47

Notes Receivable...

Credit instrument normally requires:

payment of interest
extends for time periods of 60-90 days or longer.
48

Notes Receivable...
Are often accepted

from customers who need

to extend payment of an account receivable.

Are often required

from high-risk

customers.

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Types of Notes Receivable

Interest Bearing

Noninterest Bearing

Notes that have stated

Notes that do not have a stated

interest rate on the face of

the note.

interest rate because they include

interest element as part of the face
amount.
Face amount pertained here

represents an unspecified principal

and an unspecified interest. Present
value computation is needed to
separate the interest element from
the principal element.

Initial Measurement of Notes Receivable

Initially at present

value which is the sum of all future cash flows

discounted using the prevailing market rate of interest for similar
notes.
Prevailing market rate is the same effective interest rate.
Short-term notes receivable shall be measured at face value.
Long-term receivables that bears a reasonable interest rate are
recorded at face value present value upon issuance.
Long-term receivable that bears no interest; at present value
which is the discounted value of the future cash flows using the
effective interest rate.

Subsequent Measurement
Subsequent to initial recognition, long-term notes receivable
shall be measured at amortized cost using the effective
interest method.

Amortized Cost
The amount at which the note receivable is measured initially:
minus principal repayment
Plus or minus cumulative amortization of any difference between
the initial carrying amount and the principal maturity amount.
Minus reduction for impairment or uncollectibility.

Notes Receivable
The life of a note may be expressed in months or days.
When the life of a note is expressed in terms of months,

the due date is found by counting the months from the

date of issue.
When the due date is stated in terms of days, count the

exact number of days to determine the maturity date.

In counting, the date the note is issued is omitted but
the due date is included.
Dishonored notes should be removed from the notes
receivable account and transferred to accounts
receivable.
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Notes Receivable Valuation

are recorded at face value.
are reported at cash (net)

realizable value.
are honored when paid in
full at maturity.
are dishonored when not
paid in full at maturity.

54

Notes Receivable...
Interest revenue is recorded when the note is paid.
If interim financial statements are prepared,

interest on notes receivable is accrued.

Each type of receivables should be identified in

the balance sheet or in the notes to the financial

statements.
Short-term receivables are reported in the
current asset section of the balance sheet below
short-term investments.
The gross amount of receivables and the
allowance for doubtful accounts should be
reported.
55

Illustrative Problem on
Interest Bearing Note
ABC Co. owns a farm land costing P2,000,000 and was sold for P3,000,000. The firm
received a 3-year note for P3,000,000 plus 6% interest compounded annually.
Year 1: Notes receivable
3,000,000
Land
2,000,000
Gain on sale of land
1,000,000

Accrued interest receivable

Interest Income

180,000
180,000

Other Receivables
Nontrade including:
interest receivable
loans to company officers
advances to employees
income taxes refundable

57

Presentation in the financial statements

Trade receivables and non-trade receivables currently
collectible are combined and presented in a single line item
described as Trade and other receivables on the face of
the financial position. The breakdown of this line item is
disclosed in the note.