ACCTG101 Receivables I

ACCTG101

Receivables I

Arthur Rosada, CPA

What is ACCOUNTS RECEIVABLE?

Accounts receivable is the money owed to the company by its debtors. 

For instance, if the company performs service or sells inventory and the customer has not yet paid for such, the company records accounts receivable.

Accounts receivable is an asset.

As such, it has a debit normal balance.

ACCRUAL BASIS OF ACCOUNTING

Under accrual basis of accounting, revenue is recognized when earned rather than when collected and expenses are recognized when incurred rather than when paid.

The related revenues are already recorded when they are earned even if the related amount has not yet been collected.  If the amount has not yet been collected and the related revenue has already been credited in the records, the appropriate debit is “accounts receivable.”  

THE NORMAL BALANCE

OF ACCOUNTS RECEIVABLE

Accounts receivable is an asset.

Hence, its normal balance is debit.

CAN ACCOUNTS RECEIVABLE HAVE CREDIT BALANCE?

• YES.

• Credit balances in accounts receivables means that the business received more than what is receivable. 

• They shall be classified as current liabilities.

WHAT IS A

DOUBTFUL ACCOUNTS EXPENSE?

DOUBTFUL ACCOUNTS EXPENSE

Doubtful accounts expense or bad debt expense is recognized when there is doubt as to the collectability of related receivables. 

It is recorded by a debit to doubtful accounts expense or bad debt expense and a credit to allowance for doubtful accounts or allowance for bad debts.

All expenses are recorded by debiting them.  The allowance account is a contra-asset account which is a reduction in the carrying amount computation of the accounts receivable. 

As a contra-asset, the allowance for doubtful accounts has a credit normal balance.  

RECORDING OF SALES

AND ACCOUNTS RECEIVABLE

Illustrations

How do you record sales of inventory for cash?

• Take note that the sales account is a revenue item.  

• Hence, it is recorded as a credit.

How do you record sales of inventory on account?

• Take note that accounts receivable is recorded in lieu of cash because cash has not yet been received.  

• But, despite the fact that cash has not yet been received, sales revenue is already recorded when the inventory is sold.

• Because we are using accrual basis of accounting.

Multiple Choice

Sales account is increased by:

• DEBIT

• CREDIT

Multiple Choice

Accounts receivable is increased by:

• DEBIT

• CREDIT

If sales on account for the period amounted to P100,000 and P70,000 of this was collected, how much is the remaining accounts receivable at the end of the period?

• Answer: P30,000

• P100,000 – P70,000 = P30,000

• Accounts receivable was increased by the credit sales or sales on account and decreased by the collection.

RECORDING OF

ALLOWANCE FOR DOUBTFUL ACCOUNTS

- COMPUTATION BASED ON SALES -

Illustration 1:

The business made sales on account amounting to P100,000.  Doubtful accounts expense is computed based on credit sales or sales on account.  Doubtful accounts expense is 5% of credit sales.  No amount has yet been collected.  How should the sales and doubtful accounts be recorded?

Doubtful accounts computation

P100,000 X 0.05 = P5,000

• Doubtful accounts expense is an expense.  Hence, it is recorded as a debit.  

• Allowance for doubtful accounts is a contra asset account.  Hence, it is recorded as a credit.

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  P100,000 – P5,000 = P95,000

Illustration 2:

The business made sales on account amounting to P100,000.  Doubtful accounts expense is computed based on credit sales or sales on account.  Doubtful accounts expense is 5% of credit sales.  P70,000 has already been collected before year-end.

How should the sales and doubtful accounts be recorded?

Doubtful accounts computation

P100,000 X 0.05 = P5,000

• Doubtful accounts expense is an expense.  Hence, it is recorded as a debit.  

• Allowance for doubtful accounts is a contra asset account.  Hence, it is recorded as a credit.

• The gross amount of receivable remaining is

  P100,000 – P70,000 = P30,000

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  
  

  P30,000 – P5,000 = P25,000

Multiple Choice

The business made sales on account amounting to P300,000. Doubtful accounts expense is computed based on credit sales or sales on account. Doubtful accounts expense is 5% of credit sales. P170,000 has already been collected before year-end. How much is the carrying amount of the accounts receivable at the end of the period?

• 105,000

• 110,000

• 115,000

• 130,000

Explanation

• The gross amount of receivable remaining is

  P300,000 – P170,000 = P130,000

  
  

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  
  

  P130,000 – P15,000 = P115,000

RECORDING OF

ALLOWANCE FOR DOUBTFUL ACCOUNTS

- COMPUTATION BASED ON ACCOUNTS RECEIVABLE BALANCE -

Illustration 1:

The business made sales on account amounting to P100,000.  Doubtful accounts expense is computed based on accounts receivable.  Doubtful accounts allowance is 10% of remaining accounts receivable.  No amount has yet been collected.  How should the sales and doubtful accounts be recorded?

Doubtful accounts computation

P100,000 X 0.10 = P10,000

• Doubtful accounts expense is an expense.  Hence, it is recorded as a debit.  

• Allowance for doubtful accounts is a contra asset account.  Hence, it is recorded as a credit.

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  P100,000 – P10,000 = P90,000

Illustration 2:

The business made sales on account amounting to P100,000.  Doubtful accounts expense is computed based on accounts receivable.  Doubtful accounts allowance is 10% of remaining accounts receivable.  P70,000 has already been collected before year-end. How should the sales and doubtful accounts be recorded?

• The gross amount of receivable remaining is

  P100,000 – P70,000 = P30,000

• Doubtful accounts computation

  P30,000 X 0.10 = P3,000

• Recording of doubtful accounts

  Doubtful accounts expense           3,000     

     Allowance for doubtful accounts                                3,000

• Doubtful accounts expense is an expense.  Hence, it is recorded as a debit.  

• Allowance for doubtful accounts is a contra asset account.  Hence, it is recorded as a credit.

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  P30,000 – P3,000 = P27,000

Multiple Choice

The business made sales on account amounting to P300,000. Doubtful accounts expense is computed based on accounts receivable. Doubtful accounts allowance is 10% of remaining accounts receivable. P170,000 has already been collected before year-end. How much should be the carrying amount of the accounts receivable at the end of the period?

• 130,000

• 117,000

• 115,000

• 120,000

Explanation

• The gross amount of receivable remaining is

  P300,000 – P170,000 = P130,000

  
  

• Doubtful accounts computation

  P130,000 X 0.10 = P13,000

  
  

• Recording of doubtful accounts

  Doubtful accounts expense           13,000  

     Allowance for doubtful accounts                                13,000

• Doubtful accounts expense is an expense.  Hence, it is recorded as a debit.  

• Allowance for doubtful accounts is a contra asset account.  Hence, it is recorded as a credit.

• The carrying amount of the accounts receivable will be net of any contra account.  Hence, the amount to be shown in the balance sheet or statement of financial position as regards accounts receivable is solved as follows:

  P130,000 – P13,000 = P117,000

RECORDING OF

ALLOWANCE FOR DOUBTFUL ACCOUNTS

- COMPUTATION BASED ON CREDIT SALES

AND BASED ON ACCOUNTS RECEIVABLE BALANCE -

Illustration 1:

The business made sales on account amounting to P100,000.  Doubtful accounts expense is computed based on sales and based on accounts receivable balance.  Doubtful accounts expense is initially recomputed at 1% of credit sales and then the allowance for doubtful accounts is adjusted to 10% of remaining accounts receivable.  P70,000 has already been collected before year-end. How should the sales and doubtful accounts be recorded?

Explanation:

• The gross amount of receivable remaining is

  P100,000 – P70,000 = P30,000

• Doubtful accounts computation

  P30,000 X 0.10 = P3,000

• The existing balance of allowance is 1,000.  It will be increased to 3,000.  Hence, the increase should be 2,000.

• Recording of additional doubtful accounts

  Doubtful accounts expense                             2,000    

     Allowance for doubtful accounts                                2,000

E N D

Make sure to answer the Receivables Part 1 Activity