Receivables

• Receivables


  Any legitimate claim from others for money, goods or services
• Trade receivables


  Arise from sale of goods or services in the normal course of business
• Non-trade receivables


  Arise from sources other than from sale of goods or services in the normal course of business
• Examples of non-trade receivables

  • Loans to officers and employees
  • Advances to affiliates
  • Accrued interest and dividends
  • Deposits to guarantee performance or payment or to cover possible damages or losses
  • Subscriptions for the entity's equity securities
  • Claims for losses and damages
  • Claims for tax refunds or rebates
  • Claims against common carriers for damaged or lost goods
• Current assets

  • Trade receivables are generally classified as current assets because they are collectible within the entity's normal operating cycle
  • Non-trade receivables that are expected to be collected within 12 months from the end of the reporting period are also classified as current assets
• Non-current assets


  Non-trade receivables that are not reasonably expected to be collected within 12 months from the end of the reporting period are reported as non-current assets
• Subscription receivable with call date beyond 12 months from the end of the reporting period is appropriately reported as deduction from shareholders' equity
• Recognition of trade receivables

  Recognized simultaneously to the recognition of the related revenues, either from sale of goods or rendering of services
• Initial measurement of trade receivables


  Recognized at the transaction price, which is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services
• Accounts receivable


  Unsecured right to receive cash in the future
• Notes receivable


  Secured right to receive cash evidenced by a formal promise to pay called a promissory note
• Trade discounts


  Also known as volume or quantity discounts, used to make price differentials among different classes of customers, varying quantities, or changes in prices
• Trade discounts


  • Commonly quoted in percentage, or series of percentages
• Computation of invoice price with trade discounts


  1. List price

  2. Less: 10% of list price

  3. Less: 10% of remaining amount

  4. Less: 5% of remaining amount
• Gross price method


  Accounts receivable and sales are initially recorded at the gross sales price with no accounting recognition of the available cash discount until it is actually taken
• Net price method


  Accounts receivable and the sales are recorded at the sales price less the available cash discount (net price)
• Allowance method


  Accounts receivable is recorded at the gross sales price, the sales revenue is recorded at the net amount and the cash discount is recorded in an allowance account
• When goods are shipped FOB shipping point


  Title to the goods is transferred from the seller to the buyer at the point of shipment; hence, the freight is for the account of the buyer
• Sales discount account


  A contra-sales account reported as deduction from Sales
• It is possible that sales may have been recorded in one period, but the cash discount may be taken by the customer in the succeeding period. An adjusting entry must be made to recognize anticipated sales discounts. The same entry is reversed at the beginning of the next period.
• Sales discounts forfeited


  Reported as other operating income or finance income
• Credit card discount expense or credit card service charge


  Normally ranges from 1% to 5% of net credit card sales, reported as an operating expense in profit or loss
• Upon collection of receivables on or before July 26

  1. Cash

  2. Allowance for Sales Discounts

  3. Accounts Receivable
• ACCOUNTING FOR ACCOUNTS RECEIVABLE & RELATED REVENUES
• Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo
• The collection beyond July 26, the discount period, is recorded as


  1. Cash

  2. Allowance for Sales Discounts

  3. Sales Discounts Forfeited

  4. Accounts Receivable
• excerpt from another video lecture
• Credit Card Discount Expense or Credit Card Service Charge

  Normally ranges from 1% to 5% of net credit card sales
• The account is reported as


  An operating expense in profit or loss
• Assume that SM Department Store has Citibank Visa drafts/receipts that total P1,200,000 on December 20. The entry to record the Citibank Visa sales would be


  1. Accounts Receivable – Citibank Visa

  2. Sales
• Citibank subsequently remits to SM the corresponding amount of sales reduced by service fees charged. Assuming a 2% service fees by the bank, which is recognized by SM as a selling expense, the entry in the books of SM is

  1. Cash

  2. Credit Card Service Charge

  3. Accounts Receivable – Citibank Visa
• There are some credit card companies that allow the retailer to deposit credit card drafts/receipts directly to a current account. The bank receives the deposit slip and credit card draft/receipts and increases the retailer's current account for the total amount less the bank credit card service charge. Under such arrangement, credit card sales of SM Department Store is recorded as

  1. Cash

  2. Credit Card Service Charge

  3. Sales
• The transaction is, in effect, a cash sale and the retail companies do not establish a receivable from the card issuing bank. The credit card sales are the responsibility of the bank that issued the credit card and the customer pays directly to them. Uncollectibles from these transactions are considered as losses for the card issuing bank.
• Accounting for NOTES RECEIVABLE
• Discussed by: Ariel E. Serrano, CPA, MBA (in progress)
• Trade notes generally arise from sale involving relatively high peso amounts where the buyer wants to extend payment period beyond the usual credit period.
• A note is initially recognized at the transaction price based on the circumstance that gives rise to the receipt of the note, which is any of the following


  • The amount of cash given up in exchange for the note
  • The fair value of the non-cash consideration given up in exchange for the note, or if such fair value cannot be practically determined, the fair value of the note received, which is the discounted cash flow of future collections, based on an implicit interest rate
• Interest-bearing note


  A note or draft that provides for the payment of interest for the period between the issuance date and the due date
• On the date of the receipt of the note, the present value of an interest-bearing note, which bears a realistic interest rate, is equal to its face value.
• Subsequent to the date of the note or the draft, the present value of an interest-bearing note is equal to its face value plus accrued interest.