Accounts Receivable

• Accounts receivable


  Financial assets that represent contractual right to receive cash or another financial asset from another entity
• Trade receivable


  Claims arising from sale of merchandise or services in the ordinary course of business
• Accounts receivable


  Open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes
• Notes receivable


  Supported by formal promises to pay in the form of notes
• Nontrade receivable


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


  • Trade receivables expected to be realized in cash within the normal operating cycle or one year, whichever is longer, are classified as current assets
  • Nontrade receivables expected to be realized in cash within one year, the length of the operating cycle notwithstanding are classified as current assets
  • Nontrade receivables collectible beyond one year are classified as noncurrent assets
• 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
• The details of the total trade and other receivables shall be disclosed in the notes to financial statements
• Examples of Nontrade Receivables


  • Advances to or receivables from shareholders, directors, officers or employees
  • Advances to affiliates
  • Advances to supplier for the acquisition of merchandise
  • Subscriptions receivable
  • Creditors' accounts with debit balances
  • Special deposits on contract bids
  • Accrued income
  • Claims receivable
• Customers' credit balances


  Credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance payments from customers
• Customers' credit balances are classified as current liabilities and are not offset against the debit balances in other customers' accounts, except when the same is not material in which case only the net accounts receivable may be presented
• Initial measurement of receivables

  • Financial assets 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 is equal to the face value or original invoice amount
  • Cash flows relating to short-term receivable are not discounted because the effect of discounting is usually immaterial
  • For long-term receivables that are interest-bearing, the fair value is equal to the face value
  • For long-term receivables that are noninterest-bearing, the fair value is equal to the present value of all future cash flows discounted using the prevailing market rate of interest for similar receivables
• Accounts receivable


  • Shall be measured initially at face value or original invoice amount
  • 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 net realizable value is actually the amortized cost of accounts receivable
• Deductions made in estimating the net realizable value of trade accounts receivable

  • Allowance for freight charge
  • Allowance for sales return
  • Allowance for sales discount
  • Allowance for doubtful accounts
• FOB destination


  Ownership of the goods purchased is vested in the buyer upon shipment thereof. The seller shall be responsible for the freight charge up to the point destination.
• FOB shipping point


  Ownership of the goods purchased is vested in the buyer upon shipment thereof. The buyer is responsible for the transportation charge from the point of shipment to the point of destination.
• Freight collect


  Freight charge on the goods shipped is not yet paid. The common carrier shall collect the same from the buyer.
• Freight prepaid


  Freight charge on the goods shipped is already paid by the seller.
• Accounting for Freight charge

  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 the 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.
• Allowance for Sales returns


  The measurement of accounts receivable shall 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 defects.
• Methods of recording credit sales

  • Gross Method: Accounts receivable and sales are recorded at gross amount of the invoice
  • Net Method: Accounts receivable and sales are recorded at net amount of the invoice, meaning the invoice price minus the cash discount
• Allowance for Sales discount


  If customers are granted cash discounts for prompt payment, then, conceptually estimates of cash discounts on open accounts at the end of period based on past experience shall be made
• Accounting for Bad debts

  1. Allowance Method: Accounts considered doubtful of collection are recorded in Doubtful accounts and Allowance for doubtful accounts. Uncollectible accounts are written off from Allowance for doubtful accounts and Accounts receivable.

  2. Direct writeoff method: No entry necessary for doubtful accounts. Uncollectible accounts are written off directly to Bad debts expense.
• Doubtful accounts in the income statement


  • If the granting of credits and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution cost.
  • If the of credit and collection of accounts are under the charge of an officer other than sales manger, doubtful accounts shall be considered as administrative expense.
• Accounts receivable


  Amounts owed to a company by its customers for goods or services provided on credit
• Accounts receivable recovery

  Previously written off accounts are unexpectedly recovered or collected
• Doubtful accounts in the income statement

  • Distribution cost - if the granting of credits and collection of accounts are under the charge of the sales manager
  • Administrative expense - if the granting of credits and collection of accounts are under the charge of an officer other than sales manager
• Subsidiary details of receivables

  • Trade accounts receivable
  • Trade notes receivable
  • Installment receivable, normally due 1 year to 2 years
  • Customers' accounts reporting credit balances arising from sales returns
  • Advance payment for purchase of merchandise
  • Customers' accounts reporting credit balances arising from advance payments
  • Cash advance to subsidiary
  • Claim from insurance entity
  • Subscriptions receivable due in 60 days
  • Accrued interest receivable
• Reclassify the receivables account

  1. Accounts receivable

  2. Notes receivable

  3. Installments receivable

  4. Advance to suppliers

  5. Advance to subsidiary

  6. Claim receivable

  7. Subscriptions receivable

  8. Accrued interest receivable

  9. Customers' credit balance

  10. Advances from customers
• Trade and other receivables

  • Accounts receivable
  • Allowance for doubtful accounts
  • Notes receivable
  • Installment receivable
  • Advances to suppliers
  • Claim receivable
  • Subscriptions receivable
  • Accrued interest receivable
• Advances to subsidiary


  Normally for long term investments, treated as non-current asset
• Customers' credit balance and advances from customers

  Treated as current liabilities, should not be offset from other receivables
• Trade and other receivables

  • Accounts receivable
  • Claims receivable
  • Advances to employees
  • Advances to suppliers
• Subscription receivable


  Non-current asset if not stated collectible within one year, not included in trade and other receivables
• Deposit in contract

  Normally non-current asset because such deposits remain outstanding for a certain long period of time
• Cash advances to affiliates

  Long term investment
• Net realizable value of accounts receivable

  Accounts receivable less allowance for doubtful accounts