accounts receivable

• Accounts Receivable


  Claims held against customers and others for money, goods, or services
• Receivables


  Claims held against customers and others for money, goods, or services
• Types of Receivables


  • Trade Receivables (accounts receivable and notes receivable)
  • Non-Trade Receivables
• Trade Receivables


  Claims arising from the sale of merchandise or services in the ordinary course of business
• Non-Trade Receivables


  Claims arising from sources other than the sale of merchandise or services in the ordinary course of business
• Accounts Receivable


  Open accounts arising from the sale of merchandise or services in the ordinary course of business and not supported by promissory notes
• Measurement of Accounts Receivable

  • Initially at Face Value
  • Subsequently at Original Invoice Price
  • Net Realizable Value
  • Recoverable Amount
• Trade Discount


  Deductions from the list prices of merchandise offered to promote sale (not recorded)
• Cash Discount

  Deductions from the prices of goods bought
• Credit Invoice

  Document issued by a seller to a buyer to adjust or correct the previously issued invoice
• Sales Returns and Allowances

  Sales returns occur when customers return defective, damaged, or otherwise undesirable products to the seller. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price.
• Freight Terms

  • FOB (Free on Board) Shipping Point - freight charge on the goods shipped is not yet paid, the common carrier shall collect the freight from the buyer
  • FOB Destination - ownership of goods purchased is transferred only upon receipt of the goods by the buyer at the point of destination and therefore the goods in transit are the property of the seller
  • Freight Collect - freight charge on the goods shipped is already paid by the seller
  • Freight Prepaid - freight charge on the goods shipped is already paid by the seller
• Allowance for bad debts


  A valuation account used to estimate the amount of a firm's receivables that may ultimately be uncollectible. It is also known as an allowance for doubtful accounts.
• Trade Receivables


  Receivables arising from the sale of goods or services in the ordinary course of business
• Non-trade Receivables


  Receivables arising from other sources
• Trade receivables that are currently collectible are combined and presented on the statement of financial position in a single line item described "Trade and other receivables"
• Receivables


  Claims held against customers and others for money, goods, or services
• Types of receivables


  • Trade receivables (accounts receivable and notes receivable)
  • Nontrade receivables
• Accounts receivable


  Oral promises of the purchaser to pay for goods and services sold
• Notes receivable


  Written promises to pay a certain sum of money on a specified future date
• Accounts receivable recognition issues

  • Timing
  • Measurement
• Trade discounts


  Reductions from the list price not recognized in the accounting records, customers are billed net of trade discounts
• Cash discounts (sales discounts)


  Inducements for prompt payment
• Gross method


  1. Sales and receivables are recorded at the gross amount

  2. Sales discounts taken by customers are debited to the Sales Discounts account which is reported as a reduction of sales
• Net method


  1. Sales and receivables are recorded at the net amount

  2. Sales discounts not taken by customers are credited to the Sales Discounts Forfeited account, which is reported in the other income line item of the profit or loss statement
• Theoretically, receivables should be measured at their present value but accountants have chosen to ignore the implicit interest element in receivables which are due within one year
• Net realizable value


  The net amount expected to be received in cash
• Direct write-off method


  When a specific account is determined to be uncollectible, Bad Debt Expense is debited and Accounts Receivable is credited
• Direct write-off method


  • Makes no attempt to match revenues and expenses
  • Does not result in receivables being stated at net realizable value in the balance sheet
• Allowance method


  1. At the end of each accounting period an estimate is made of expected losses from uncollectible accounts

  2. This estimate is debited to Bad Debt Expense and credited to the Allowance for Doubtful Accounts
• The allowance method is justified because a company has experienced a loss the moment customers receive goods or services that they will never pay for, even if the specific identity of such customers will not be known for some time
• Percentage-of-sales (income statement approach)

  Bad debt expense is estimated directly by multiplying a percentage times credit sales
• Percentage-of-receivables (balance sheet approach)

  1. First the required ending balance in the Allowance for Doubtful Accounts is estimated by multiplying a percentage (a single composite rate) times the ending outstanding receivables

  2. Then bad debt expense is equal to the difference between the required ending balance and the existing balance in the Allowance account
• Percentage of aging of receivables

  Same procedure as percentage of receivables, the only difference is the percentage use for each term in the aging schedule
• Net accounts receivable is the balance in accounts receivable less the allowance for bad debts
• Net receivables do not change when a specific account is written off since both accounts receivable and the allowance account are reduced by the same amount
• Initial measurement of trade receivables

  • Fair value plus transaction cost
  • Trade receivables that do not have a significant financing component are measured at their transaction price in accordance with PFRS 15 Revenue from Contracts with Customers
• Transaction price


  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 sales taxes)
• As a practical expedient under PFRS 15, an entity may not discount a trade receivable if it is due within 1 year
• Recognition of trade receivables

  Recognized when the entity has a right to consideration that is unconditional; this is normally the case when the control over the promised goods or services is transferred to the customer