CHAPTER 5: ACCOUNTS RECEIVABLES o Current assets – if material

o Offset against the creditors with

credit balance – if not material
RECEIVABLES - Special deposits on contract bids
o Current assets – currently
- Are financial assets that represent a
uncollectible
contractual right to receive cash or another
o Non-current assets – if silent
financial asset from another entity
- Accrued income – current assets
o Trade and non-trade receivables
- Claims receivables – current assets
o Loans receivables: result from the
loans granted by banks and other
financial institutions to customers
PRESENTATION OF RECEIVABLES

- Trade receivables and non-trade receivables

TRADE AND NON-TRADE RECEIVABLES which are currently collectible shall be
presented on the face of the statements of
- Trade Receivables – claims arising from the
financial position as one line item under
sale of merchandise or services in the
trade and other receivables
ordinary course of the business
- The detail of the total trade and other
o Accounts receivables – open
receivables shall be disclosed in the notes
accounts not supported by
to the financial statements
promissory notes
o Notes receivable – supported by
formal promises to pay
CUSTOMER’S CREDIT BALANCE
- Non-trade receivables – claims arising from
sources other than the sale of merchandise - Customers’ credit balance are credit
or services balances in accounts receivable resulting
from overpayments, returns and allowances,
and advance payments from customers
CLASSIFICATION OF RECEIVABLES o Current assets – if material
o Offset against the creditors with
- Trade receivables which are expected to be
credit balance – if not material
realized in cash within one year or the
normal operating cycle whichever is long is
current
INITIAL MEASUREMENT
- Non-trade receivables which are expected
to be realized in cash within one year the - Financial asset shall be recognized initially
length of the operating cycle at fair value plus transaction costs that are
notwithstanding is current directly attributable to the acquisition
- Non-trade receivables collectible beyond o Fair value is equal to transaction
one year is non-current price (fair value of the consideration
given)
- Short-term receivables – fair value is equal
NON-TRADE RECEIVABLES to the face amount or original invoice
amount
- Advances to or receivables from
- Long-term receivables
shareholders, directors, officers, or
o Interest-bearing – fair values is
employees
equal to face value
o Current assets – if collectible in one
o Non-interest-bearing – fair value is
year
equal to the present values of all
o Non-current assets – if not
future cash flows discounted using
collectible in one year
the prevailing market rate of interest
- Advances to affiliates – long-term
for similar receivables
investments
- Advances to supplier – current assets
- Subscription receivables
SUBSEQUENT MEASUREMENT
o Current assets – if collectible within
one year - Accounts receivable shall be measured
o Deduction from share capital – if not initially at face values or original invoice
collectible within one year amount
- Creditor’s debit balances
- Subsequent measurement – accounts Transaction Gross Net
receivables shall be measure at amortized Sales and Recorded at Recorded at
cost accounts gross net amount
o Amortized cost – net realizable receivable
value Collected Cash at net Cash recorded
 Net realizable value – within the and sales at net
period discount is
amount of cash expected to
debited
be collected or the estimated
Collection Cash recorded Cash at gross
recoverable amount
outside the at gross and sales
period discount
forfeited is
credited
NET REALIZABLE VALUE
BAD DEBTS
- Assets shall not be carried at above their
recoverable amount. Adjustments to trade - Refer to the amount of credit sales that may
accounts receivables: become uncollectible
o Allowance for freight charge o Allowance method – requires the
o Allowance for sales return recognition of bad debts loss if the
o Allowance for discount accounts are doubtful of collection
o Allowance for doubtful accounts o Direct write off method – requires
the recognition of bad debts loss
only when the account is proved to
FREIGHT CHARGES be worthless or uncollectible

- FOB Destination – ownership of goods

purchased is vested buyer upon receipt;
RECOVERIES OF ACCOUNTS WRITTEN OFF
freight is paid by seller
- FOB Destination – ownership of goods - When collected – recharge the customer’s
purchased is vested in the buyer upon account with the amount collected and
shipment; freight is paid by the buyer possibly with the entire amount previously
- Freight collect – freight charge is actually charged off if it is expected to be received in
paid by the buyer full
- Freight prepaid – freight charge is already
paid by the seller
ALLOWANCE FOR BAD DEBTS

SALES RETURNS AND DISCOUNTS Transaction Allowance Direct write off

Recognition of Dr. DA No entry
- Sales returns – customers will return goods allowance Expense
that are unsatisfactory or will make claims Cr. Allowance
requiring reduction in the amount due as in Worthless or Dr. Allowance Dr. BD
the case of shipment shortages and defects uncollectible Cr. Accounts Expense
- Sales discounts – cash discount is a Receivable Cr. Accounts
reduction from an invoice price by reason of Receivable
prompt payment Collected Dr. Accounts Dr. Accounts
worthless Receivable Receivable
o Seller – sales discount
accounts Cr. Allowance Cr. BD
o Buyer – purchase discount
Expense
Dr. Cash
Cr. Accounts Dr. Cash
METHOD OF RECORDING CREDIT SALES Receivable Cr. Accounts
Receivable
- Gross method – the accounts receivable
and sales are both recorded at gross
amount of the invoice AGING OF ACCOUNTS RECEIVABLE
- Net method – the accounts receivable and
- It involves an analysis where the accounts
sales are recorded at net amount of the
are classified as not due or past due and the
invoice (price minus cash discount)
allowance is determined by multiplying the
total of each classification by the rate
experienced by each category
 o Advantage – considered as more DISHONORED NOTES
accurate and scientific computation
- Are promissory notes that matures and is
of the allowance for doubtful
not paid
accounts
- This includes a reclassification from notes
o Disadvantages – it violates the
receivable to accounts receivable with
matching process
interests and charges

PERCENT OF ACCOUNTS RECEIVABLE

INITIAL MEASUREMENT
- A certain rate is multiplied to the open
- Notes receivable are measured initially at
accounts at the end of the period to get the
present value
required allowance
- Present value is the sum of all future cash
o Advantage – it is simple to apply and
flows discounted using the effective interest
it properly presents accounts
rate
receivable at estimated net
o Short-term notes receivable – face
realizable value
amount
o Disadvantage – it violates the
o Long-term notes receivable
principle of matching costs against
 Interest-bearing – face
revenue and the loss experience rate
amount (PV upon issuance)
may be difficult to obtain and may
 Noninterest-bearing –
not be reliable
present value

PERCENT OF SALES

- The amount of sales for the year is

multiplied by a certain rate to determine the
doubtful accounts expense
o Advantage – there is proper
SUBSEQUENT MEASUREMENT
matching costs against revenue
o Disadvantage – accounts receivable - Interest-bearing long-term notes receivable
may not be shown at estimates – amortized cost using effective interest
realizable value because the method
allowance may be excessive or - Noninterest-bearing long-term notes
inadequate receivable
o Present value plus amortization of
discount
CORRECTION OF DOUBTFUL ACCOUNTS o Face value minus unamortized
unearned interest income
- The percentage of sales has the
disadvantage of determining the adequacy
of the allowance account
LOAN RECEIVABLE
- Ageing of the accounts is necessary to test
the reasonableness of the allowance - A financial asset arising from a loan granted
- The difference is reported in the income by a bank or other financial institution to a
statement as an adjustment to the doubtful borrower or client
accounts expense

INITIAL MEASUREMENT
CHAPTER 6: NOTES RECEIVABLES
- Initial recognition – fair value plus
- Claims supported by formal promises to pay transaction costs
usually in the form of notes o Fair value – transaction price or the
- Negotiable promissory note is an amount of the loan granted
unconditional promise in writing made by o Transaction costs – directly
one person to another, signed by the maker, attributable to the loan receivable
engaging to pay on demand or at a fixed including direct origination cost
determinable future time a sum certain in  Direct origination cost –
money to order or to bearer added
  Origination fees received – - Financial flexibility or capability of an entity
deducted to raise money out of its receivables
 Indirect origination cost – - Common forms of receivable financing:
outright expense o Pledging
o Assignment
o Factoring
SUBSEQUENT MEASUREMENT o Discounting

- Subsequent measurement – amortized cost

using the effective interest method
PLEDGING
o If initial measurement is lower than
principal amount – difference is - Pledging of accounts receivable – when
added to carrying amount loans are obtained from the bank or any
o If initial measurement is higher than lending institution, the accounts receivable
principal amount – difference is may be pledged as collateral security for the
deducted from carrying amount payment of the loan
- The borrowing entity continues to collect
the pledged account receivable but may be
ORIGINATION FEES required to turn over the collections to the
bank in satisfaction of the loan
- Fees charged by the bank against the
- Loan recording:
borrower for the creating of the loan
o Dr. Cash
o Evaluating the borrower’s financial
o Cr. Discount on loan payable
condition, evaluating guarantees,
o Cr. Loan Payable
collateral and other security,
- Subsequent payment:
negotiating the terms of the loan,
o Dr. Loan payable
preparing and processing
o Cr. Cash
documents and closing the loan
transaction

FINANCIAL STATEMENT PRESENTATION

ACCOUNTING FOR ORIGINATION FEES - Disclosure is made in the notes to the
financial statements
- Origination fees received from the borrower
- The carrying amount of the note payable is
– unearned interest income and amortized
shown net of discount on note payable
over the term of the loan
- The discount on note payable is amortized
- Origination fees not chargeable against the
using the straight-line method
borrower – direct origination cost are
deferred and amortized over the term of the
loan
o Preferably, offset directly against
any unearned origination fees ASSIGNMENT
received
- Assignment – the borrower (assignor or
- If the origination fees received exceed the
owner of the receivable) transfers its rights
direct origination costs – unearned interest
in some of its accounts receivable to a
income and the amortization increased
lender (assignee) in consideration of a loan
interest income
- It is evidence by a financing agreement and
- If the direct origination costs exceed the
a promissory note
origination fees received – charged to direct
origination costs and the amortization
decreases interest income
FEATURES OF ASSIGNMENT

- Notification basis – customers are notified

PRESENTATION to make the payments direct to the
assignee (lender)
- The loan receivable is measured and
- Non-notification basis – customers are not
presented at amortized cost
informed that their accounts have been
o Face value of the loan net unearned
assigned
- The assignee (lender) analyzes the
assignor’s (borrowers) accounts receivable
CHAPTER 7: RECEIVABLE FINANCING
before the assignment
- The assignee charges interest, service, or maturity date at discounted amounted at a
finance charge or commission for the loan bank or other financial institution
o Maturity date – the date on which
the note should be collected or paid
FINANCIAL STATEMENT PRESENTATION

- The details of the assigned receivables is

TYPES OF DISCOUNTING
presented in the notes to the financial
statements as part of the trade and other - To discount a note, the payee must endorse
receivables it. The payee is the endorser and the bank is
- The disclosure shall include its equity in the the endorsee
assigned accounts receivable (values of the o Endorsement with recourse (if silent)
assigned receivable less the carrying – endorser (payee) shall pay the
amount of the note payable) endorsee if the maker dishonors the
note (contingent liability of the
endorser)
FACTORING o Endorsement without recourse –
endorser voids future liability even if
- Factoring – the borrower entity sells the
the maker refuses to pay the
accounts receivable without recourse and
endorsee at maturity date
notification basis to a factor; transfers
ownership of the receivable
- Gain or loss is recognized for the difference
DISCOUNTING OF NOTES RECEIVABLE
between the proceeds and the net carrying
amount of the receivables - Maturity value (carrying amount) of the note
is equal to the principal value plus interest
- Discount is equal to maturity value time
TYPES OF FACTORING discount rate and discount time
o Discount time is the remaining time
- Casual factoring – an entity is forced to
of the note
factor some or all of its receivables at a
- Net proceeds is maturity value less discount
substantial discount to obtain the much
- Gain or loss on discounting is the difference
needed cash
between the net proceeds and the carrying
- Factoring as a continuing agreement – a
amount
finance entity purchases all the account
receivable of an entity

WITH RECOURSE – CONDITIONAL SALE

FEATURES OF CASUAL FACTORING - Conditional sale – the note receivable is

recognized as a contingent liability
- Selling entity secures credit approval from
- The note receivable discounted is deducted
the factor
from the total notes receivable with
- The factor assumes credit and collection
disclosure
function
o Paid by maker on maturity –
- Factor charges a commission or factoring
contingent liability is extinguished
fee for credit approval, billing, collecting,
and credited to note receivable
and assuming uncollectible factored
o Dishonored by maker – the
accounts
receivable is paid and contingent
- Factor’s holdback (current asset) –
liability is extinguished
predetermined amount as protection
against customer returns, allowances, and
other adjustments

DISCOUNTING OF NOTES RECEIVABLE

WITH RECOURSE – SECURED BORROWING
- Parties to a note receivable:
- Secured borrowing – note receivable is not
o Maker – liable to pay the note
derecognized but an accounting liability
o Payee – entitled to receive payment
(liability for note receivable discounted) is
on maturity
recorded equal to its face value
- Discounting – the process of obtaining cash
from the note receivable prior to the
- The gain or loss is treated as either interest
income or interest expense
o Paid by maker on maturity – liability
is extinguished and credited to note
receivable
o Dishonored by maker – the
receivable is paid and liability is
extinguished
- Journal entry:
o Cash (Net proceeds)
o Gain or loss (Net proceeds less
carrying amount)
 Notes Receivable (Principal
amount)
 Interest income
- Notes:
o If net proceeds > carrying amount =
Gain on discounting
o If net proceeds < carrying amount =
Loss on discounting
o Without recourse – Note receivable
discounted