L2 TRADE AND NONTRADE RECEIVABLES

Trade receivables

refer to claims arising from sale of merchandise or services in the ordinary course of business. They include accounts receivable and notes receivable. 

Accounts receivable

are open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes. Other names are customers' accounts, trade debtors, and trade accounts receivable.

Notes receivable

are those supported by formal promises to pay in the form of notes. 

current assets

Trade receivables which are expected to be realized in cash within the normal operating cycle or one year, whichever is longer, are classified as

Nontrade receivables

which are expected to be realized in cash within one year, the length of the operating cycle notwithstanding, are classified as current assets. If collectible beyond one year, nontrade receivables are classified as noncurrent assets. 

Trade receivables, These classifications are in accordance with IFRS 18, paragraph 99, which states that an entity shall classify an asset as current when the entity expects to realize the asset within the entity's normal operating cycle, or when the entity expects to realize the asset within twelve months after the reporting period. 

Trade receivables and nontrade receivables

PRESENTATION 

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." However, the details of the total trade and other receivables shall be disclosed in the notes to financial statements. 

1. Accounts receivable and allowance for doubtful accounts 

2. Notes receivable 

3. Accrued interest on note receivable 

4. Advances to officers and employees 

5. Dividends receivable

Examples of items included in trade and other receivables: 

NONTRADE RECEIVABLES 

Advances to or receivables from shareholders, directors, officers or employees - if collectible in one year, classified as current assets. 

Advances to affiliates - classified as noncurrent investments. 

Advances to supplier - classified as current assets. 

Subscriptions receivable - shown preferably as a deduction from subscribed share capital unless collectible currently. 

Creditors' accounts with debit balances as a result of overpayment or returns and allowances - classified as current assets. 

Special deposits on contract bids - normally classified as noncurrent assets because such deposits are likely to remain outstanding for a considerable long period of time. 

Dividend receivable, accrued rent receivable, accrued royalties receivable, and accrued interest receivable - usually classified as current assets. 

Claims receivable such as claims against common carriers for losses or damages, claim for rebates and tax refunds - normally classified as current assets. 

Customers' credit balances

are credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance payments from customers. They 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. 

face amount or original invoice amount

INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLE 

PFRS 9, paragraph 5.1.1, provides that accounts receivable shall be recognized initially at . Cash flows relating to short-term accounts receivable are not discounted because the effect of discounting is usually immaterial. With respect to accounts receivable, transaction costs are not normally incurred because the accounts simply arise from the act of selling goods in the ordinary course of business. 

amortized cost

SUBSEQUENT MEASUREMENT 

PFRS 9, paragraph 5.2.1, provides that after initial recognition, accounts receivable shall be measured at . Actually, the amortized cost is the net realizable value of accounts receivable. The net realizable value of accounts receivable is the amount of cash expected to be collected or the estimated recoverable amount. 

NET REALIZABLE VALUE 

The initial amount recognized for accounts receivable shall be reduced by adjustments which in the ordinary course of business reduce the amount recoverable from the customer. This is based on the basic principle that assets shall not be carried at above their recoverable amount.

1. Allowance for freight charge 

2. Allowance for sales return 

3. Allowance for sales discount 

4. Allowance for doubtful accounts

In estimating the net realizable value of trade accounts receivable, the following deductions are made: 

Gross Method

- Accounts receivable and sales are recorded at the gross invoice amount. If payment is made within the discount period, Sales Discount is debited. If payment is made beyond the discount period, no discount is recognized. 

Net Method

- Accounts receivable and sales are recorded at the net amount (gross invoice amount less the discount). If payment is made within the discount period, no discount is recognized. If payment is made beyond the discount period, Sales Discount Forfeited is credited. 

allowance method

follows the matching principle by recognizing doubtful accounts expense in the same period as the related sales revenue. An allowance for doubtful accounts is established as a contra-asset account to accounts receivable. 

direct writeoff method

: recognizes bad debt expense only when an account is determined to be uncollectible. It does not follow the matching principle and is generally not acceptable under PFRS.