ACCOUNTING
FOR
ACCOUNTS
RECEIVABLES
OBJECTIVES:
• To know the classification and presentation of
receivables
• To know the initial and subsequent measurement
of accounts receivable
• To identify the adjustments necessary in
determining the net realizable value of accounts
receivable
• To understand the gross method and net method
of recording credit sales.
• To know the accounting for doubtful accounts,
worthless accounts written off and recoveries of
accounts written off.
Accounts Receivable
- A receivable is an amount due from another party.
- Represent financial assets arising from a
contractual right to receive cash or another
financial asset from another entity.
A company must also maintain a separate account for
each customer that tracks how much that customer
purchases, has already paid, and still owes.
• Trade Receivables – result from the normal
operating activities of the business, that is, the sale of the
company’s goods or services to customers.
SUBCLASSIFICATIONS:
üAccounts Receivable- nonwritten promises by
customers to pay for goods or services but evidenced by
signed invoices and acknowledged delivery receipts.
üNotes Receivable- unconditional written agreement to
receive a certain sum of money on a specific date.
• Non-trade Receivables – arise from
transactions other than from sale of goods and services in
the normal course of business.
EXAMPLES
üAdvances to officers and employees
üAdvances to subsidiaries
üDeposits to cover potential damages or losses
üDeposits as a guarantee of performance or payment
üDividends and interest receivable
CLASSIFICATION OF
ACCOUNTS RECEIVABLES
ü Current (short-term) – within a year or
during the current operating cycle
whichever is longer
ü Non-current (long-term)- all other
receivables
CUSTOMER’S CREDIT BALANCES
ü Are credit balances in accounts
receivable resulting form overpayments,
returns and allowances, and advance
payments from customers.
ü Classified as current liabilities
CUSTOMER A CUSTOMER B
Credit Sales 100,000 20,000 Return
Credit Sales 80,000 20,000 Return
Credit Sales 120,000 80,000 Payment
Credit Sales 250,000 60,000 Payment
20,000 Return
45,000 Return
120,000 Payment
TOTALS 220,000 240,000 TOTALS 330,000 125,000
Credit DEBIT
20,000 Balance Balance 205,000
• When the entity becomes a party to the contractual
provision of the instrument and has a legal right to receive
cash.
• When the criteria for REVENUE RECOGNITION are
fulfilled.
*The REVENUE RECOGNITION PRINCIPLE states that, under
the accrual basis of accounting, you should only record
revenue when an entity has substantially completed a
revenue generation process; thus, you record revenue when
it has been earned.
INITIAL MEASUREMENT
FAIR VALUE plus TRANSACTION COSTS that are
directly attributable to the acquisition.
FAIR VALUE of a financial asset = TRANSACTION PRICE
SHORT-TERM RECEIVABLES = face value or original invoice
amount (not discounted)
SUBSEQUENT MEASUREMENT
AMORTIZED COST – the net realizable value of
accounts receivable (the amount of cash expected to be
collected or estimated recoverable amount)
• Allowance for freight charge
• Allowance for sales return
• Allowance for sales discount
• Allowance for doubtful accounts
• FOB (Free-on-Board)-used to identify
when legal title passes and to identify
which party involved in the sale is
ultimately responsible for the payment of
the associated freight charges.
• FOB Shipping
• FOB Destination
A. Who has the responsibility?
B. Who should pay the transport?
C. Who insures goods during transit?
FREIGHT TERMS
FREIGHT COLLECT – freight charge on the goods shipped
is not yet paid. (Buyer)
FREIGHT PREPAID – freight charge on the goods shipped
is already paid by the seller. (Seller)
Who Shoulders the
transportation Who pays the
Freight Terms costs? Shipper?
FOB Destination, Freight
Prepaid Seller Seller
FOB Shipping Point,
Freight Collect Buyer Buyer
FOB Destination, Freight
Collect Seller Buyer
FOB Shipping Point, Freight
Prepaid Buyer Seller
ACCOUNTING FOR FREIGHT
California Business Solutions (CBS) sells computers to
its customers and part of the agreement is that CBS
(the seller) pays the shipping costs of P1,000. CBS sold
10 computers worth P56,000.
Recording the sale:
Accounts Receivable 56,000
Freight Out 1,000
Sales 56,000
Cash 1,000
Upon collection:
Cash 56,000
Accounts Receivable 56,000
ACCOUNTING FOR FREIGHT
California Business Solutions (CBS) sells computers to
its customers. CBS sold 10 computers worth P56,000
FOB Destination (seller). The shipping costs of P1,500
were paid by the buyer.
Recording the sale:
Accounts Receivable 56,000
Freight Out 1,500
Sales 56,000
Allowance for freight charge 1,500
Upon collection:
Cash 54,500
Allowance for freight charge 1,500
Accounts Receivable 56,000
ACCOUNTING FOR FREIGHT
California Business Solutions (CBS) sells computers to
its customers. CBS sold 10 computers worth P56,000
FOB Shipping Point (buyer). The shipping costs of
P1,500 were PAID by the seller.
Recording the sale:
Accounts Receivable 57,500
Sales 56,000
Cash 1,500
Upon collection:
Cash 57,500
Accounts Receivable 57,500
Question:
American Computer Hub sells computers to its
customers. Each unit costs P10,000 and is charged
with P200 freight each unit shipped. ABC Co.
purchased 10 units of computer.
How much cash was received by ACH under the
following situation?
1. The sale is FOB Shipping Point, Freight Collect
a. P80,000
b. P100,000
c. P120,000
Question:
American Computer Hub sells computers to its
customers. Each unit costs P10,000 and is charged
with P200 freight each unit shipped. ABC Co.
purchased 10 units of computer.
How much cash was received by ACH under the
following situation?
The sale is FOB Destination, Freight Collect
a. P80,000
b. P98,000
c. P100,000
d. P120,000
Question:
American Computer Hub sells computers to its
customers. Each unit costs P10,000 and is charged
with P200 freight each unit shipped. ABC Co.
purchased 10 units of computer.
How much cash was received by ACH under the
following situation?
1. The sale is FOB Destination, Freight Prepaid
a. P80,000
b. P98,000
c. P100,000
d. P120,000
Question:
American Computer Hub sells computers to its
customers. Each unit costs P10,000 and is charged
with P200 freight each unit shipped. ABC Co.
purchased 10 units of computer.
How much cash was received by ACH under the
following situation?
1. The sale is FOB Shipping Point, Freight Prepaid
a. P80,000
b. P98,000
c. P100,000
d. P102,000
Review:
Affectionate Company sold merchandise on account
for P500,000. The terms are 3/10, 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 transactions
under the following:
a. FOB Destination and freight collect
b. FOB Destination and freight prepaid
c. FOB Shipping Point and freight collect
d. FOB Shipping Point and freight prepaid
Review:
• It is offered at the time of sale or at the
time of payment
• TRADE DISCOUNT – to attract bulk orders
• CASH DISCOUNT – to attract prompt
payment
• Gross amount-sales discounts only if the
customers pays within the discounting
period.
• Net amount (invoice price-cash discount)-
record sales discount only if the customer
fails to pay within the discount period.
• Gross Method – A/R and SALES are
recorded at gross amount of the invoice.
• Net Method - A/R and SALES are recorded at
NET amount of the invoice (invoice less cash
discount)
2/10, n30 = 2% discount, 10 days, 30 days
1. To record GROSS METHOD NET METHOD
credit sales
of P5,000, Accounts Receivable 5,000 Accounts Receivable 4,900
2/10 Sales 5,000 Sales 4,900
(5,000 x 98%)
2. To record
collection Cash 2,940 Cash 2,940
within the Sales Discount (3k*2%) 60 Accounts Receivable 2,940
Accounts Rec. 3,000 (3,000 X 98%)
10-day
period
(discount
period)
3. To record
collection Cash 1,500 Cash 1,500
after the 10- Accounts Receivable 1,500 Accounts Receivable 1470
day period Sales discount forfeited 30
Balance of AR = 500 Balance of AR = 490
4. To record
forfeited cash None Accounts Receivable 10
discount of Sales discount forfeited 10
(500 x 2%)
past due
accounts Balance of AR = 500
Example:
On February 15, 2020, ABC Company sold 50 air
conditioning units. The sale price for each unit is
P50,000.
The following sales are subject to 20% trade discount
and are subject to terms 2/10, n30. Freight for the
sale is P12,000 under FOB Destination, Freight
Collect.
1. Under the gross method, what will be the journal entries
upon sale, upon collection within and beyond the discount
period.
2. Under the net method, what will be the journal entries upon
sale, upon collection within and beyond the discount period.
GROSS METHOD NET METHOD
Upon Sale Upon Sale
ACCOUNTS REC. (50 UNITS X P50K X ACCOUNTS REC. ( 50 UNITS X
80%) 2,000,000 P50K X 80% X .98)) 1,960,000
SALES 2,000,000 SALES 1,960,000
Freight Out 12,000 Freight Out 12,000
Allowance for Freight Charges 12,000 Allowance for Freight Charges 12,000
Upon Collection within the discount period Upon Collection within the discount period
CASH (2,000,000 – 12K – 40K ) 1,948,000 CASH (2,000,000 – 12K – 40K ) 1,948,000
ALLOW. FOR FREIGHT
SALES DISCOUNT (2,000,000 X 2%) 40,000 CHARGES 12,000
ALLOW. FOR FREIGHT CHARGES 12,000 Accounts Receivable 1,960,000
Accounts Receivable 2,000,000
Upon Collection beyond the discount period Upon Collection beyond the discount period
CASH 1,988,000 CASH 1,988,000
ALLOW. FOR FREIGHT
ALLOW. FOR FREIGHT CHARGES 12,000 CHARGES 12,000
Accounts Receivable 2,000,000 Accounts Receivable 1,960,000
Sales Discount
Forfeited 40,000
ALLOWANCE FOR SALES
DISCOUNT
• Estimate of the cash discount given to customers (open
accounts) at the end of the period
EXAMPLE:
Of the accounts receivable at the end of the period, it is
estimated that 5% will be taken as discounts.
JOURNAL ENTRY:
Sales Discount 50,000
Allowance for Sales Discount 50,000
• Sales Return -represent rejected or
unacceptable merchandise sent back to the
entity.
• Sales Allowance -price reductions made to
encourage customers to keep merchandise
which do not meet their specifications or
having minor damage.
Example:
• ABC Co. sells computers to its customers. It sold
50 computers worth P10,000 each to DEF
Company with terms 2/10, n/30. Upon delivery,
DEF company found out that 2 of the computers
delivered are defective thus they ordered it to be
returned to ABC.
• What is the journal entry in ABC Co.?
Sales Return 20,000
Accounts Receivable 20,000
Accounting for Bad Debts
• When an account becomes uncollectible, the
entity has sustained a bad debt loss.
• “cost of doing business on credit”
• Two methods:
• 1. Allowance Method
• 2. Direct Method
• The allowance method of accounting for bad debts
involves estimating uncollectible accounts at the end of
each period.
• Recognition of bad debt loss if the accounts are doubtful
of collection.
• TECHNIQUES OF ESTIMATING UNCOLLECTIBLE
ACCOUNTS
ü Percentage applied on total outstanding receivable
ü Percentage of Sales
ü Aging of Receivables
• Recording Estimated Uncollectible/ doutbful collection
Doubtful accounts expense xxx
Allowance for doubtful accounts xxx
• Write-off / proven to be uncollectible
Allowance for doubtful accounts xxx
Accounts Receivable xxx
• Recovery of an Uncollectible account
Accounts Receivable xxx
Allowance for doubtful accounts xxx
Cash xxx
Accounts Receivable xxx
DIRECT METHOD
• Requires recognition of a bad debt loss only
when the accounts proved to be worthless or
uncollectible.
• If doubtful, no adjustment is necessary.
• Violates the matching principle, thus not
permitted under IFRS
• Recording Estimated Uncollectible/ doutbful collection
NO ENTRY
• Write-off / proven to be uncollectible
Bad Debts Expense xxx
Accounts Receivable xxx
• Recovery of an Uncollectible account
Accounts Receivable xxx
Bad Debts xxx
Cash xxx
Accounts Receivable xxx
Example:
On June 1, ABC company discovered that of its
P1,500,000 accounts receivable, P58,000 is
doubtful of collection. On June 12, the company
proved that the P58,000 is indeed worthless.
However, on June 28, after contacting the
customer for the last time, the same account in
full amount was collected from the customer.
Prepare the necessary journal entries under Direct
and Allowance Method.
