Lesson Title: Chapter 14 - Financial Assets - Receivables
Lesson Objectives:
At the end of the module, the learners will be able to:
 Explain recognition and measurement of receivables.
 Illustrate accounting for items affecting the NRV of AR – doubtful accounts, sales
discounts, sales returns and freight.
 Illustrate accounting for long-term notes receivable
 Explain amortized cost measurement.
Lecture and annotations:
Nature of Receivable
 A financial asset that represents a contract right to receive cash or other financial
asset from another entity.
 It represents the amount collectible from customers or other parties arising from
sale of goods, rendering of services, or claims for money lent.
 A receivable, as define by PFRS 15 Revenue from Contracts with Customers, is an
entity’s unconditional right to consideration.
 A right to consideration is unconditional if only the passage of time is required
before the payment of that consideration is due.
Lecture and annotations:
Trade
12 months or less
Current
More than 12 months
Current
12 months or less
Current
More than 12 months
Non-current
Claims arising from sale of
goods/services in the
normal course of business.
Classification of receivables
Non-trade
Claims arising from sources
other than sale of
goods/services in the
normal course of business.
Examples of trade receivables:
•
Accounts receivable
 These are open accounts arising from sale of goods and services in the
normal course of business.
 Other names: customers’ accounts, trade debtor
•
Notes receivable from customers
 Those customer accounts supported by formal promises to pay in the form
of promissory notes.
Examples of non-trade receivables:
Examples of non-trade receivables:
Examples of non-trade receivables:
Customers’ credit balances
 These are credit balances in accounts receivable resulting from overpayments,
returns and allowances, and advance collections from customers.
 Classified as current liabilities unless the amount is immaterial in which case an
offset may be made against the accounts receivable account.
 Adjusting journal entry:
Accounts receivable
xx
Customers’ credit balance xx
Recognition Principle
 An entity shall recognize a financial asset in its statement of financial position
when the entity becomes a party to the contractual provision of the instrument.
Measurement Principles
Initial
measurement
At fair value plus
directly
attributable costs
Subsequent
measurement
At amortized cost
using the effective
interest method
Measurement
Financial Statement Presentation
 Trade receivables and non-trade receivables which are currently collectible shall
be presented on the statement of financial position under a single line item
“trade and other receivables”.
 The details of which shall be disclosed in the notes to financial statements.
Accounts Receivable
Nature of Accounts Receivable
 Open accounts arising from sale of goods and services in the normal course of
business.
Measurement Principles
Measurement of
Accounts
Receivable
Initial
measurement
At transaction
price*
Subsequent
measurement
At net realizable
value
*the amount of payment to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts
collected in behalf of third parties (i.e., VAT). This is simply equal to the invoice
price.
Types of Discounts
Trade Discounts
 These are given to customers to encourage them to buy in bulk or large
quantities.
 Known as quantity discounts.
 Usually stated in percentage form.
 These are deducted from the list price to arrive at invoice price.
 These are not recognized for financial accounting purposes.
List price
xx
Less: Trade discounts xx
Invoice price
xx
(amount to be recorded in the books)
Types of Discounts
Cash Discounts
 These are given to credit customers to encourage them to pay their dues early.
 Known as early payments discount.
 These are stated in terms such as:
 2/10 n/30 - 2% discount is given if the account is paid within 10 days from
the invoice date, gross amount is due in 30 days from the invoice date.
 3/15 n/60 - 3% discount is given if the account is paid within 15 days from
the invoice date, gross amount is due in 60 days from the invoice date.
 2/10 1/15 n/30 - 2% discount is given if the account is paid within 10 days
from the invoice date, 1% discount is given if the account is paid within 15
days, gross amount is due in 30 days from the invoice date.
Methods of Accounting for Cash Discounts
 The timing of recognition of the cash discounts is based on one of the
following methods:
a) Gross method
•
Sales and accounts receivable are recorded at gross invoice amount,
meaning the cash discount offered is not yet deducted from the
invoice amount.
•
Cash discounts are recognized only when actually taken by
customers.
•
The most common and widely used method because it is simple to
apply.
Methods of Accounting for Cash Discounts
•
If a credit sale is still unpaid as of the end of the reporting period and
is still within the discount period, an adjusting entry is made to
recognize the sales discount related to that sale.
 No adjusting entry is required when the outstanding amount is
already outside the discount period as of end of the reporting
period.
b) Net method
• Sale and accounts receivable are recorded at an amount net of cash
discount offered.
• Cash discounts not taken by customers are credited to the sales
discounts forfeited account, which is classified as other income in the
statement of comprehensive income.
• If a credit sale is still unpaid as of the end of the reporting period and
is already outside the discount period, an adjusting entry is made to
recognize the forfeited sales discount by debiting accounts receivable
and crediting sales discount forfeited.
 No adjusting entry is required when the outstanding account is
still within the discount period as of the end of the reporting
period.
b) Allowance method
• Accounts receivable is recorded at gross invoice amount while the
sales is recorded at the amount net of cash discount offered, the
difference is credited to allowance for sales discount account.
A/R
accounts receivable
SRA
Sales returns and allowances
SD
Sales discount
SDF
Sales discount forfeited
Allow. for SD Allowance for sales discount
Journal Entries:
If the account of the buyer is still outstanding as of year-end, the year-end adjusting entries
under each method are as follows:
Note:
• Only the gross method uses the sales discount when the cash discount is availed by the
customer.
• Both the net method and the allowance method use the sales discount forfeited account
when the cash discount is not availed by the customer.
• All the three methods result into the same effect on the income statement whether or
not the customer availed the cash discount.
Accounting for Doubtful Accounts
 There are two methods of accounting for doubtful accounts:
1. Direct write-off method (this method is not permitted under GAAP). This
method is used only for income tax purposes.
2. Allowance method
Methods of Estimating Doubtful Accounts under the Allowance Method
 There are three methods of recognizing doubtful accounts under the allowance
method:
1. Percentage of sales
•
Income statement approach
•
Doubtful accounts expense is computed as follows:
Sales*
xx
X : Uncollectability percentage (%)
(xx)
Doubtful accounts expense
xx
*It may be gross sales, net sales, credit sales, or net credit sales.
2. Percentage of accounts receivable
•
Balance sheet approach
•
Procedures:
1) Determine the required ending balance of allowance for doubtful
accounts.
Accounts receivable, end
X: Uncollectability percentage (%)
Allowance for doubtful accounts, end
xx
(xx)
xx
2) Determine the doubtful accounts expense.
Required ending balance of allowance for doubtful accounts*
xx
Less: Allowance for doubtful accounts balance before adj
xx
Doubtful accounts expense
xx
*Computed in Step 1.
3. Aging of accounts receivable
This method is similar to the percentage of accounts receivable method except
that it involves an analysis where the accounts are classified according to their ages.
An example of an aging of accounts receivable is as follows:
After performing the analysis above, determine the doubtful accounts expense.
Required ending balance of allowance for doubtful accounts*
xx
Less: Allowance for doubtful accounts balance before adjustment
xx
Doubtful accounts expense
xx
*Computed from the aging schedule above.
Note:
 The age classifications are based on the company policy as to aging the outstanding
accounts of their customers.
 The credit terms will determine whether an account is past due. Let’s say, for
example, the credit term is 2/10 n/30, and the account is 50 days old, it is
considered to be 20 days past due.
 The longer the account is outstanding, the higher the accountability percentage will
be assigned to that account.
Debit balance in allowance for doubtful accounts
• Allowance for doubtful accounts could have a debit balance during the year due to
excessive write-offs. This can be fixed or adjusted at year-end through provision of
doubtful accounts expense for the year.
• Note: Changes in estimates of doubtful accounts is considered a change in
accounting estimate which is accounted for currently and prospectively.
Financial Statement Presentation
1. Accounts receivable
 Classified as current assets on the statement of financial position.
 Presented at its net realizable value computed as:
Accounts receivable
xx
Less: Allowance for doubtful accounts
xx
Allowance for sales returns
xx
Allowance for sales discounts
xx
Net realizable value
(xx)
XX
2. Doubtful accounts expense
 Presented as part of administrative expenses in the statement of
comprehensive income since the credit granting function is performed by the
credit department.
T-Accounts Components
T-Accounts Components
Notes Receivable
Nature of Notes Receivable
 Those accounts supported by formal promises to pay in the form of
promissory notes.
Measurement Principles
1. Initial measurement
 Receivables are initially measured at fair value plus directly attributable
costs.
 For measurement purposes, notes are classified into:
a) short-term notes receivable
b) Long-term notes receivable
Short-term
Face amount
Notes receivable
Stated rate =
Effective rate
Face amount
Stated rate is not
equal to Effective
rate
Present value
Interest-bearing
Long-term
Noninterestbearing
Present value
Notes:
 Conceptually, notes receivable shall be initially measured at present value.
• The present value is the sum of all future cash flows discounted using the
prevailing market rate of interest (or the effective interest rate) at date of
issuance of the note.
 Cash flows attributable to short-term notes receivable are not discounted
because the difference between its present value and face amount is not
material.
Long-term Notes Receivable
Stated rate =
Effective rate
Interest-bearing
No
discount/premium
on N/R
Present value =
Face amount
Stated rate <
Effective rate
Present value <
Face amount
Discount on N/R
Stated rate >
Effective rate
Present value >
Face amount
Premium on N/R
Present value <
Face amount
Discount on N/R
Stated rate is not =
Effective rate
Long-term notes
receivable
Noninterestbearing
No stated rate
 The fundamental formula to compute for the present value of the note
receivable is:
Future cash inflows (principal and interest)
xx
X: Present value factor (PV factor)
xx
Present value at initial recognition
XX
• Noninterest-bearing note
a) Principal is collectible lump-sum at maturity date
Face amount x PV of 1
b) Principal is collectible in installments
•
Collectible every end of the period
 Periodic collection x PV of an ordinary annuity of 1
•
Collectible every beginning of the period
 Periodic collection x PV of an annuity due of 1
• Interest-bearing note
a) Stated rate = effective rate
 Its present value is simply equal to its face amount.
b) Stated rate ≠ effective rate
Present value of face amount*
xx
Add: Present value of interest collections-
(periodic interest x PV of an annuity of 1)
Present value at initial recognition
xx
XX
*can either be collectible lump-sum or in installments depending on
the
payment terms agreed by the parties.
 If collectible lump-sum, the present value of the face amount is computed
as:
Face amount x PV of 1
• If collectible in installments, the present value of the face amount is computed
as:
Periodic collection on the principal x PV of an annuity of 1 (ordinary
annuity or annuity due)
Note:
 The difference between the face amount and the present value is called the
discount or premium on note receivable.
o Face amount > Present value → Discount on notes receivable
o Face amount < Present value → Premium on notes receivable
 The discount or premium on notes is amortized over the term of the note using
the effective interest method.
o Amortization of discount is an addition to interest income.
Journal entry:
Discount on note receivable
xx
Interest income
xx
o Amortization of premium is a deduction from interest income.
Journal entry:
Interest income
Premium on note receivable
xx
xx
2. Subsequent measurement
 Long-term note receivable is subsequently measured at amortized cost using
effective interest method.
Outstanding face amount
xx
Add/(deduct): Unamortized premium (discount) on N/R xx(xx)
Amortized cost
XX
Dishonored Notes
 A promissory note that is not paid at maturity date is said to be dishonored.
Dishonored notes should be transferred from note receivable to accounts
receivable account.
Journal entry:
Accounts receivable
xx*
Notes receivable
xx
Cash
xx
*Shall include the ff:
 Face amount
 Interest
 Other fees and charges (i.e., penalties paid)
Impairment of Long-Term Receivable
 An entity shall recognized a loss allowance for expected credit losses on
financial assets measured at amortized cost.
o An entity shall measure the loss allowance for a financial instrument at an
amount equal to the lifetime expected credit losses if the credit risk on
the financial instrument has increased significantly since initial
recognition.
 Impairment loss is computed as follows:
Carrying amount of the long-term receivable
xx
Less: PV of expected future cash flows at date of impairment testing* xx
Impairment loss
*Should be discounted using the original effective interest rate.
XX
The carrying amount of the long-term receivable is computed as follows:
1. For a long-term receivable issued at face amount
Outstanding principal amount at date of impairment testing xx
Add: Unpaid interest (only if recognized by the entity)
xx
Carrying amount of the long-term receivable
XX
2. For a long-term receivable issued with premium or discount
Present value at date of impairment testing*
xx
Add: Unpaid interest (only if recognized by the entity)
xx
Carrying amount of the long-term receivable
XX
*Computed as:
Outstanding principal amount as of the date of impairment testing
xx
Add (Deduct): Unamortized premium(discount) on long-term receivable xx (xx)
Present value at date of impairment testing
XX
The present value of expected future cash flows at date of impairment testing is
computed as follows:
Future cash inflows
xx
X: PV factor using the original effective interest rate
xx
PV of expected future cash flows at date of impairment testing
XX
*Journal entries:
1. Date of impairment testing
Impairment loss
xx
Interest receivable
xx
Allowance for impairment
xx
2. Amortization of impairment
Allowance for impairment
Interest income
xx
xx
Three-stage impairment approach (General Approach)
*Net carrying amount is computed in the following manner:
Outstanding face amount
xx
Less: Allowance for impairment
xx
Net carrying amount
XX
Nature of Receivable Financing
 The capability of an entity to generate cash out of its receivables.
 The forms of receivable financing are:
Receivable
Financing
Secured
Borrowing
Pledging of
accounts
receivable
Assignment of
accounts
receivable
Sale of
Receivable
Factoring of
accounts
receivable
Discounting
of notes
receivable
Pledging of Accounts Receivable
 All accounts receivable are pledged as collateral or security for a loan.
 Also known as general assignment of accounts receivable or hypothecation of
accounts receivable because all accounts receivable serve as collateral security for the
loan.
 Accounting treatment: Note disclosure only. Pledged receivables are not derecognized
nor separated from other receivables.
Assignment of Accounts Receivable
 A formal type of pledging of accounts receivable.
 Also known as specific assignment of accounts receivable because specific accounts
receivable serve as a collateral security for the loan or borrowing.
 Accounting treatment: A journal entry is needed to specifically identify the assigned
receivables from other receivables.
 The assignment may be done either on a:
a) Non-notification basis – customers are not informed that their accounts
have
been assigned. Therefore, the customers continue to make
payments to the assignor(i.e., the entity), who in turn remits the
collections to the assignee (i.e., the bank).
b) Notification basis – customers are notified to make their payments to the
assignee (i.e., the bank).
Presentation and Disclosure
 Assigned receivables are presented in the statement of financial position as
regular receivables which is included under the line item “trade and other
receivables”. However, the equity in the assigned accounts shall be disclosed in
the notes.
o Equity in assigned accounts is computed as follows:
Accounts receivable – assigned, end
Less: Related liability balance
Equity in assigned accounts
xx
(xx)
XX
 The assigned receivable and the related loan are presented separately in the
statement of financial position and are not offset.
Factoring of Accounts Receivable
 A sale of accounts receivable to a factor (i.e., financial institution) on a without
recourse basis.
 Since factoring is a sale transaction, gain or loss on factoring shall be
recognized. This is computed in the following manner:
Net selling price*
xx
Less: Carrying amount of A/R
xx
Gain (loss) on factoring
XX
*Net selling price is computed as follows:
Gross accounts receivable
xx
Less: Factoring fee and charges
xx
Net selling price
XX
Note: (A/R is accounts receivable)
 Net selling price > Carrying amount of A/R → Gain on factoring
 Net selling price < Carrying amount of A/R → Loss on factoring
 Net selling price is not necessarily equal to the amount of cash received from
factoring especially when the factor withholds a certain amount as a protection
against customer returns, allowances, and other adjustments.
o The amount is called the factor’s holdback.
 This is actually a receivable from the factor and to be settled only when the factored
receivables have been fully collected.
o Factor’s holdback is deducted from the amount of net selling price to determine
the amount of cash received from factoring.
Net selling price
xx
Less: Factor’s holdback
xx
Cash received from factoring XX
Journal entry:
Cash
xx
Allowance for doubtful accounts
xx
Loss on factoring
xx
Receivable from factor
xx
Accounts receivable
xx
Gain on factoring
xx
Discounting of Notes Receivable
 A sale of note to a third party (i. e., bank)
 Formulas applied in discounting of notes receivable:
Accounting for Note Receivable Discounting
Without recourse
Discounting of Note
xx
Gain or loss on
discounting shall be
recognized
Conditional sale
with recognition of
contingent liability
Gain or loss on
discounting shall be
recognized
Secured borrowing
Gain or loss on
discounting shall
not be recognized
With recourse
Accounting for Note Receivable Discounting
Note:
 If the discounting of the note is on a without recourse basis, the buyer of the
note cannot demand payment from the seller in case the note is dishonored or
not paid by the maker at maturity because the sale is already absolute.
 If the discounting of the note is on a with recourse basis, the buyer of the note
can demand payment from the seller in case the note is dishonored at
maturity.
Journal entries:
1. Discounting of note is on a without recourse basis
Cash
xx
Loss on discounting
xx
Note receivable
xx
Interest income
xx
Gain on discounting
xx
Journal entries:
2. Discounting of note is on a with recourse basis
a) Accounted for as conditional sale with recognition of contingent liability
Cash
xx
Loss on discounting
xx
Note receivable discounted*
xx
Interest income
xx
Gain on discounting
xx
*Note receivable discounted is presented as a deduction from the note receivable with disclosure of
the contingent liability. Equal to the face amount of the note receivable discounted.
b) Accounted for as secured borrowing
Cash
xx
Interest expense
xx
Liability for note receivable discounted**
xx
Interest income
xx
**Equal to the face amount of the note receivable discounted.
References:
Millan, ZV. B. (2020). Intermediate Accounting 1A & 1B. Baguio City: Bandolin Enterprise Publishing
Ocampo, R. R. (2022). Intermediate Accounting Volume 1. Manila: DomDane Publishers
Villaluz, BC. S., Cruz, MS. M. (2022). Financial Accounting and Reporting. Cainta, Rizal: BCV
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