IA 1 ( Ch 4 - Accounts Receivable )

Refer to claims arising from sale of merchandise or services in the ordinary course of business

Trade receivables

Trade receivables include __________ and __________

Accounts receivable and notes receivable

These are open accounts arising from the sale of goods and services in the ordinary course of business and NOT supported by promissory notes

Accounts receivable

Other names of accounts receivable

Customer’s accounts, trade debtors, and trade accounts receivable

Those supported by formal promises to pay in the form of notes

Notes receivable

Represent claims arising from sources OTHER THAN the sale of merchandise or services in the ordinary course of business

Nontrade receivables

When is TRADE receivables classified as current assets?

Expected to be realized in cash within normal operating cycle or 1 year, whichever is longer

When is NONTRADE receivables classified as current assets?

Expected to be realized in cash within 1 year, the length of the operating cycle notwithstanding

Note: beyond 1 year - noncurrent assets

Standard in classifications of trade and nontrade receivables

PAS 1, paragraph 66

Presentation of trade and nontrade receivables on the face of the statement of financial position

One line item called TRADE AND OTHER RECEIVABLES

Note: details shall be disclosed in the notes to financial statements

Credit balances in accounts receivables resulting from overpayments, returns and allowances, and advance payments from customers

Customers' credit balances

Customers' credit balances are classified as current __________ (assets, liabilities) and are not offset against the debit balances in other customers' accounts, except when the same is not material

Initial measurement of AR

Face amount or original invoice amount + transaction costs that are directly attributable to the acquisition

T/F

Cash flows relating to short-term AR are NOT DISCOUNTED because the effect of discounting is usually immaterial

True

Subsequent measurement of AR

Amortized cost - net realizable value (NRV) of AR

Amount of cash expected to be collected or the estimated recoverable amount

Net realizable value of AR

T/F

Initial amount of AR shall be reduced by the amount recoverable from the customers

True

Note: Deduction to AR

Deductions to AR

Allowance for:

freight charge

sales return

sales discount

doubtful accounts

Accounting for freight charge

Buyer owns upon receipt of goods

FOB destination - seller (DS)

Who shall be responsible for the freight charge up to the POINT OF DESTINATION?

Seller

Buyer owns upon shipment of goods

FOB shipping point - buyer (SB)

Who shall be responsible for the freight charge from the POINT OF SHIPMENT to the point of destination?

Buyer

Freight charge on the goods shipped is NOT YET PAID

Freight collect

Under freight collect, the freight charge is actually paid by the __________

Buyer

Freight charge on the goods shipped is ALREADY PAID BY THE SELLER

Freight prepaid

Under freight prepaid, the freight charge is actually paid by the __________

Seller

Reduction from an invoice price by reason of prompt payment

Cash discount

Methods of recording credit sales

AR and sales are recorded at GROSS AMOUNT of the invoice

Gross method

Note: Common and widely use method of recording credit sales because it is simple to apply

AR and sales are recorded at NET AMOUNT of the invoice or at the invoice price minus the cash discount WHETHER TAKEN OR NOT TAKEN

Net method

Account title to be used when the collection is made beyond the discount period in NET METHOD

Sales discount forfeited

Note: It is classified as OTHER INCOME

One of the costs of doing business on credit

Bad debt loss

2 methods in accounting for bad debt loss

Allowance method

Direct writeoff method

Requires recognitiom of bad debt loss if the account are DOUBTFUL OF COLLECTION

Allowance method

Note: It conforms with the matching principle

Effect of the recovery of accounts written off in AR and allowance for doubtful accounts

AR - zero (offsetting)

Allowance for doubtful accounts - increased

Requires recognition of a bad debt loss only when the accounts PROVED to be WORTHLESS OR UNCOLLECTIBLE

Direct writeoff method

Note: it violates the matching principle and it is not permitted under IFRS

Method that is often used by small businesses bacause it is simple to apply

Direct writeoff approach

Doubtful accounts in the income statement

Distribution cost / selling expense

Administrative expense

Granting of credit and collection of accounts are under the charge of the SALES MANAGER, doubtful accounts shall be considered as __________

Distribution cost / selling expense

Granting of credit and collection of accounts are under the charge of an OFFICER OTHER THAN SALES MANAGER, doubtful accounts shall be considered as __________

Administrative expense

Note: In the absence of any contrary, D/A shall be classified as administrative expense