FAR- Receivables PDF

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Summary

FINANCIAL ACCOUNTING AND REPORTINGRECEIVABLESA receivable is the right to receive cash, another asset (goods) or servicesReceivables may be current or noncurrent and trade or nontrade The rules on current and noncurrent classification are discussed in detail under PAS 1 and are also based on the re...

Description

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FINANCIAL ACCOUNTING AND REPORTING RECEIVABLES A receivable is the right to receive cash, another asset (goods) or services Receivables may be current or noncurrent and trade or nontrade  The rules on current and noncurrent classification are discussed in detail under PAS 1 and are also based on the receivable as either trade or nontrade  Trade receivables arise from the sale of goods or services to customers and in the form of accounts receivable or notes receivable while nontrade receivables are receivables from all other types of transactions like advances to officers and employees and advances to other entities. Accounts receivable arise from credit sales. The amount to be recorded as accounts receivable from sales on account shall be the “Invoice Price” which is the amount after deducting trade discounts from the List Selling Price. Take note that trade discounts are not accounted for and are ignored for recording purposes. Example: An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point terms with a list selling price of P2,000,000 with trade discounts of 20% and 10%. The Invoice price is computed as follows: List selling price Less: 20% trade discount Net Less: 10% trade discount Invoice price

2,000,000 400,000 1,600,000 160,000 1,440,000

As mentioned the entry will not include the total trade discount of P560,000 (400,000 + 160,000) but instead only the P1,440,000 amount will be recorded as follows: Accounts Receivable Sales

1,440,000 1,440,000

The following transactions also affect accounts receivable in computing for the ending balance: ACCOUNTS RECEIVABLE + Credit Sales (-) Sales returns and allowances + Recovery of accounts written off (-) Sales discounts (-) Collections including recovery (-) Write off (-) Factored accounts The write off for accounts receivable under the allowance method is recorded by: Allowance for doubtful accounts Accounts Receivable

xx xx

So therefore the recovery or the collection on an accounts receivable that already has been written off cannot be recorded by simply debiting cash and crediting accounts receivable. The entry for the write off must be reversed and before recording the collection with the following two entries: Accounts Receivable Allowance for doubtful accounts

xx

Allowance for doubtful accounts Accounts Receivable

xx

xx

xx

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PAGE 2 Combining the two entries will be more efficient by: Cash

xx Allowance for doubtful accounts

xx

The ending balance of accounts receivable shall be presented as part of current assets under the heading of “trade and other receivables” at the Net Realizable Value (expected cash value) or “amortized cost” The net realizable shall be computed after deducting an allowance for the following:  Sales returns – Value of merchandise expected to be returned by customers as a result in error of deliveries and defects  Sales discounts – Value of price savings to customers expected to pay within the discount period and take advantage of the cash discount.  Freight charges – Amount of freight charges collected by the shipper from the buyer even though the shipment was under FOB destination terms. This amount shall not be remitted by the buyer hence deducted from the receivable.  Doubtful accounts – Allowance for expected uncollectability that is an inherent risk from selling on credit. Allowance Method vs. Direct Write-off Method

Application Accounts considered doubtful

Allowance

Direct Write-off

Generally Accepted Expense and Increase

Non-GAAP

the Allowance

Write-off

Debit Allowance and Credit AR

Recovery

Debit AR and credit Allowance

Not accounted for Debit expense and Credit AR Debit AR and credit expense

The computation for the doubtful accounts expense which is an adjusting entry and the allowance for doubtful accounts will be as follows: Beginning balance Write off Recovery Balance before adjustment Doubtful accounts expense Ending balance

X (X) X X X X

There are 3 methods in estimating doubtful accounts: 1) The percentage of net credit sales method which will provide the amount of doubtful accounts expense for the year and therefore is a method that emphasizes proper matching of doubtful accounts against sales. This amount will then be added to the balance before adjustment, the total of the two will then be the amount of allowance at yearend or after adjustment. 2) The percentage of accounts receivable method will provide the amount of required allowance for doubtful accounts and just like its counterpart the “Aging Method”, the amount of doubtful accounts expense will be worked back as an adjustment to the amount of required allowance. 3) The Aging of accounts receivable method that is arguably the most accurate of all three methods since an analysis is made and each classification of accounts receivable is multiplied by a specific rate of the estimate of uncollectability. Naturally older accounts receivable are more likely to be uncollectible compared to newer or more recent sales. RECEIVABLE FINANCING

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