Receivables

• Receivables

  Asset accounts related to all amounts owed, unsettled transactions, or other monetary obligations owed to an entity by its credit customers or debtors
• Receivables

  Claims against an entity who has been a customer or borrower of the company
• Receivables


  Considered as financial assets because it entails contractual rights that have future benefits such as future cash flows to the entity
• Categories of receivables


  • Trade receivables
  • Non-trade receivables
• Trade receivables


  Amounts owed by customers for goods or services sold by an entity on credit (sale on credit) in the normal course of business
• Trade receivables

  Classified as Current Asset
• Non-trade receivables

  Arise from any number of other sources other than trade, such as amounts due from the sale of assets, insurance claims, advances to employees, amounts due from officers, dividends receivable, non-trade notes receivables, accrued receivables
• Non-trade receivables


  Classified as Current Asset if collectible within 12 months from the end of reporting period, regardless of the normal operating cycle. If not then Non-Current Asset
• Initial measurement of trade receivables

  At their transaction price, which is the price paid to acquire the asset or received to assume the liability (selling/entry price)
• Initial measurement of non-trade receivables

  At its fair value (or if none, the present value)
• Subsequent measurement of financial assets

  At amortized cost, which is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and, for financial assets, adjusted for any loss allowance

  
• Accounts receivable

  Results from credit sales in the normal course of business (called trade receivables), expected to be collected within one year
• Accounts receivable

  Considered as open accounts
• Valuation of accounts receivable

  Affected by trade and sales discounts, and sales returns and allowances

  
• Methods of recording credit sales

  • Gross method
  • Net method
  • Allowance method

  
• Gross method

  Accounts receivable and sales are recorded at gross invoice price (which is equal to list/catalog price of the product minus any trade discount)
• Net method

  Accounts receivable and sales are recorded at net amount (which is computed by the gross amount of receivable less any applicable cash discount)
• Allowance method

  Accounts receivable is recorded at gross, Sales at net amount and an allowance is set-up for the sales discount
• Allowance for Sales Discount


  A valuation account that reduces Accounts Receivable
• Sales Discount Forfeited

  Classified as other income in the Profit and Loss section of the Statement of Comprehensive Income

  
• Accounting for credit card transactions

  Sale is recorded at gross amount, but when collected the cash account will be net with the bank service charge
• Credit card bank issuers absorb the uncollectible accounts and costs of extending credit and maintaining records</b>
• Business/Seller agrees to pay the percentage fee (typically based on sale) charged by the bank
• Methods of accounting for uncollectible accounts


  • Allowance method
  • Direct write-off method
• Allowance method


  Requires recognition of loss (immediately) if the accounts receivable is doubtful of collection
• Allowance for doubtful accounts, allowance for bad debts or allowance for uncollectible accounts


  A contra Accounts Receivable account (with a credit normal balance) used in the allowance method
• Allowance method


  Produces a better matching of income and expenses
• Allowance method entries


  1. Uncollectible Accounts Expense/Loss

  2. Allowance for Uncollectible Accounts

  3. Allowance for Uncollectible Accounts

  4. Accounts Receivable

  5. Accounts Receivable

  6. Allowance for Uncollectible Accounts

  7. Cash

  8. Accounts receivable
• Estimates of uncollectible accounts


  • Percentage of outstanding accounts receivable method
  • Aging of Receivables Method
• Percentage of Outstanding Accounts Receivable Method


  The accounts receivable (totality) closing balance is multiplied by the percentage the management estimated uncollectible accounts
• Aging of Receivables Method


  Accounts receivable are grouped into categories based on length of time they have been outstanding, and the sum of all the amounts by group represents the total estimated uncollectible accounts
• Direct write-off method


  Usually used for tax purposes, there is no estimation since it will be based on actual write-off, thus it doesn't use Allowance for Uncollectible Accounts
• If the uncollectible amount is material, the write-off method is not appropriate because it will report the net amount of Accounts Receivable higher than its net realizable value, create over and under statements of net income due to lapse of time, and creates an opportunity to manipulate asset amounts and net income
• Accounts Receivable and Allowance for Doubtful Accounts movement


  • Beginning Balance
  • Cash Collections
  • Sales on Account
  • Sales Discounts
  • Recovery of previous Write-offs
  • Sales Returns
  • Sales Allowances
  • Write-offs
  • Ending Balance
  • Write-off
  • Beginning balance
  • Doubtful Accounts Expense
  • Recovery of previous Write-offs
  • Ending Balance
• Future Value


  Typically measure cash flows at the end of the project's life, is the cash you will receive at a given future date
• Present Value


  Measure cash flows at the start of a project's life (time zero), is just like cash in hand today
• Basic patterns of cash flow


  • Single Amount/Lump-sum
  • Annuity
  • Mixed Streams/Uneven Cash Flow
• Types of Present Value (PV) factors


  • P1- Present Value of Single Payment
  • Present Value of an Ordinary Annuity
  • Present Value of Annuity Due

  
• Present Value of Single Payment (P1)


  Used for lump-sum or mixed streams cash flows (one period/one amount)
• Computing Present Value of Single Payment

  Locate the intersection of the interest rate and number of years in the PV table to find the PV factor, then multiply the future amount by the PV factor