Chapter 4 - Accounts Receivable

Receivables

are assets that represent contractual rights to receive cash or other asset from another entity

Accounts Receivable

receivable supported by oral or informal promises to pay

Notes Receivable

receivables supported by written or formal promises to pay in the form of promissory notes

Loans Receivable

receivables arising from loans extended by financial institutions

Advances

receivables arising from advances to officers and employees, advances to suppliers, advances to affiliates

Accrued Income

receivables arising from income earned but not yet collected

Deposits

receivables from reimbursable deposits paid to cover potential damages or losses

Claims Receivable

receivables from insurance companies for casualties sustained, defendants under suit

Trade Receivable

receivables arising from the sale of goods or services in the ordinary course of the business

Non-Trade Receivable

receivables arising from other sources

Receivables are initially measured at

fair value plus transaction costs

trade receivables that do not have a significant financing component are measured at

transaction price

trade receivable is recognized when

when the entity has right to consideration that is unconditional

FOB shipping point

ownership of the goods is transferred upon shipment

FOB destination

ownership is transferred only when the buyer receives the goods

Trade discounts

are given to encourage orders in large quantities or to avoid frequent changes in catalogs. it is deducted from the list price when determining the invoice price.

Cash discounts

given to encourage prompt payment

Gross method

trade discount taken, cash discounts are not assumed to be taken

Net method

trade discount taken, cash discounts are assumed to be taken

accounts receivables are subsequently measured at

recoverable historical cost(NRV)

in estimating the recoverable historical cost of trade accounts receivable, an entity considers:

sales discounts and doubtful accounts

allowance method

an allowance is recognized for bad debts expense when the collectability of accounts becomes doubtful. this method conforms to the accrual basis of accounting, matching , and conservatism

direct write-off method

bad debts expense is directly written off only when the accounts are deemed worthless

percentage of net credit sales

bad debt expense is computed by applying a percentage on the net credit sales during the period, this method favors the income statement

percentage of receivables

the required balance of ADA is computed by applying a percentage on the ending balance of the receivables, favors the statement of financial position

aging of receivables

ADA is computed by applying various estimated percentages to the breakdown of the ending receivable according to ages, favors the statement of financial position

percentage formula used in the methods

past bad debt expenses net of past recoveries divided by past credit sales

risk of accounting loss

refers to the risk that the carrying amount of a recognized asset will not be recovered

off-balance-sheet risk

refers to a potential loss that may exceed the amount recognized as an asset