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Receivables are financial assets that represent a contractual right to receive cash or another financial asset from
another entity.

Trade Receivables – these are claims arising from the sale Nontrade Receivables – represent claims arising from
of merchandise or services in the ordinary course of sources other than the sale of merchandise or services in
business. These claims are classified as current assets the ordinary course of business. These claims are
because they are expected to be realized in cash within classified as current assets when they are expected to be
the normal operating cycle or one year, whichever is realized in cash within one year notwithstanding the
longer. It includes: length of the operating cycle. Otherwise, they are
1. Account receivables – are open accounts or those classified as noncurrent assets.
not supported by promissory notes. Examples:
2. Notes receivables – those supported by formal 1. Receivables from shareholders, directors, officers
promises to pay in the form of notes. or employees – classified as either current or
noncurrent assets depending on the period of its
collectability.
2. Advances to affiliates – usually treated as
noncurrent assets.
3. Advances to supplier for acquisition of
merchandise – current asset
4. Subscriptions receivable – current assets if
collectible within one year. Otherwise, they are
shown as a deduction from subscribed share
capital.
5. Creditors’ accounts with debit balances – results
from overpayment or returns and allowances.
Classified as current assets. If the debit balances
are not material, an offset against the creditors’
accounts with credit balances may be made and
only the net accounts payable may be presented.
6. Special deposits on contract bids – classified as
either current or noncurrent assets depending on
the period of its collectability.
7. Accrued income (dividends receivable, accrued
rent income, accrued royalties income and
accrued interest on bond investment) – current
assets.
8. Claims receivable (claims against common carriers
for losses or damages, claim for rebates and tax
refunds, claims from insurance companies) –
current assets

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12 USL Blue Notes Chapter 3 – Accounts Receivable

Initial Measurement of Receivables

PFRS 9, paragraph 5.1.1, states that a financial asset shall be recognized initially at fair value plus transaction cost
that are directly attributable to the acquisition.
Long-term Receivables
Short-term Receivables
Interest-bearing Noninterest-bearing
Fair value Face value or original Face value Present value of all future
equivalent invoice amount cash flows discounted
using the prevailing
market rate of interest for
similar receivables.

Presentation of Receivables
Trade and nontrade receivables that 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.
Note: Customers’ credit balances are classified as current liabilities. If the debit balances are not material, an offset against the
customers’ accounts with credit balances may be made and only the net accounts receivable may be presented.

Accounts receivable are open accounts or those not supported by promissory notes arising from sale of merchandise or
services in the ordinary course of business.

Initial Measurement
 at face value or original invoice amount

Subsequent Measurement
 at net realizable value (NRV) which means the amount of cash expected to be collected or the estimated
recoverable amount
 In estimating the NRV of trade accounts receivable, deductions for the following are made:
1. Allowance for freight charge – occurs when the goods are sold FOB destination but shipped freight
collect with the understanding that the freight will be paid by the buyer and will be deducted from
the receivable of the seller. The seller records this by debiting freight out and crediting allowance
for freight charge.
FOB destination – ownership of the goods sold is vested in the seller until it reaches the buyer.
Thus, the seller shall be responsible for freight charge.
FOB shipping point – ownership of the goods sold is vested in the buyer upon shipment. Thus, the
buyer shall be responsible for freight charge.
Freight collect – freight charge is not yet paid and will be collected from the buyer.
Freight prepaid – freight charge is already paid by the seller.
2. Allowance for sales returns – recognizes the probability that some customers will return goods that
are unsatisfactory or will claim a reduction of the amount due in case of shipment shortages and
defects.
3. Allowance for sales discount – these are estimates of cash discounts granted to customers for their
prompt payment at the end of the period based on past experience.
4. Allowance for doubtful accounts – estimates of uncollectible accounts. It recognizes the risk that
some customers will not pay their accounts.

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Chapter 3 – Accounts Receivable USL Blue Notes 13

 Accounts Receivable
Less:
Allowance for Doubtful Accounts
Allowance for Sales Discounts
Allowance for Sales Returns
Allowance for Freight Charge
Net Realizable Value
Accounting for Sales Discount
1. Gross method - the accounts receivable and sales are recorded at gross amount of the invoice.
2. Net method - the accounts receivable and sales are recorded at net amount of the invoice (invoice price
minus the cash discount)
Note: Under the Net Method, Sales Discount Forfeited is classified as other income.

Accounting for Bad Debts/ Doubtful Accounts

 Generally accepted accounting principles require the use of the allowance method because it conforms to
the matching principle.
 Doubtful accounts expense is recognized if the account is doubtful of collection, as contrast to the direct
write-off method that recognizes bad debt expense if the account is worthless or uncollectible.
Methods of Estimating Doubtful Accounts
1. Aging of accounts receivable (“Statement of financial position approach”)
2. Percent of accounts receivable (“Statement of financial position approach”)
3. Percent of sales (“Income statement approach”)
Note: Aging of Accounts Receiveble and Percent of Accounts Receivable presents the accounts receivable at net realizable value. Under
these two methods, the computed amount is already the ending balance of allowance for doubtful accounts. Under the Percent
of Sales Method, the computed amount is the bad debt expense for the period.

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