Trade and Other Receivables Receivables

TRADE and OTHER RECEIVABLES When a customer owes the seller money not related to providing a service or selling a product. Unlike Trade Receivables, for it to be considered current non-trade receivables, it should be 1 year or within 1 year only. RECEIVABLES Refers to amounts owed by customers to a company at a particular time and not yet paid. PFRS 15, paragraph 108 a receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. Contractual rights to receive cash or other Financial Asset from another entity. SOURCE: Claims from sale of goods or services in the ordinary course of business. Accounts Receivable Notes Receivable Receivable that is not supported by promissory note. Receivable that is supported by promissory note. CURRENT TRADE RECEIVABLES TRADE RECEIVABLES One (1) Year Normal Operating Cycle Whichever is LONGER NON-CURRENT TRADE RECEIVABLES Claims from sale of goods or services in the ordinary course of business that are not expected to be realized in cash within 12. months. NON-TRADE RECEIVABLES EXAMPLES OF NON-TRADE RECEIVABLES Represent the amount of money that has been lent out by an entity and is expected to be returned by the borrowers. Is a written promise (promissory note) to receive a specific amount of cash from another party on one or more future dates. Refers to the money a company’s customer owe for goods or services they have received but not yet paid for. RECEIVABLES TYPES: ACCOUNTS RECEIVABLE LOANS RECEIVABLE NOTES RECEIVABLE INITIAL MEASUREMENT: SUBSEQUENT MEASUREMENT: Invoice Price (a.k.a. Transaction price) Net Realizable Value INITIAL MEASUREMENT: SUBSEQUENT MEASUREMENT: (Short-term Interest Bearing): Face Value (Short-term Non-Interest Bearing): Face Value (Long-term Interest Bearing): Reasonable rate Unreasonable rate Face Value Present Value Non-Interest Bearing Present Value Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost INITIAL MEASUREMENT: SUBSEQUENT MEASUREMENT: Face Value Add: Direct Origination Cost Less: Origination Fee Amortized Cost ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE: Initial Measurement DEFINITION OF TERMS: INVOICE PRICE is the actual price that the end-customer retailer pays to the manufacturer or distributor for a product. TRADE DISCOUNT are discounts often offered to companies that buy in bulk, buy in large volumes, or meet the conditions. LIST PRICE is the price of a product or service that a seller lists for sale. It is usually set by the manufacturer and is not necessarily what a buyer pays because list price is the gross amount which means “trade discounts” and “cash discounts” are not yet deducted. CASH DISCOUNT refers to an incentive that a seller offers to a buyer in return for paying a bill before the scheduled due date. NET REALIZABLE VALUE refers to the net amount of accounts receivable that will be collected. OUTSTANDING BALANCE refers to the amount still owed on a loan from the perspective of a borrower or lender. CREDIT BALANCE describes an amount that a business owes to a customer. This occur if a customer has paid you more than the current invoice. LIST PRICE XX Less: Trade Discount XX Less: Cash Discount XX INVOICE PRICE XX EXAMPLE: List price of $20,000 on account under credit terms 5, 10, 2/10 n/30. Explanation: The $20,000 is the gross amount which means it is not yet reduced by Trade discounts and Cash Discounts. The 5 and 10 represents the trade discounts while 2/10 means that there is 2% cash discount provided the customer pay on or before the 10th day. On the other hand, n/30 means the credit term. LIST PRICE 20,000 Less: Trade discount (20,000 x 5%) 1,000 Amount 19,000 Less: Trade discount (19,000 x 10%) 1,900 Amount 17,100 Less: Cash discount (17,100 x 2%) 342 INVOICE PRICE 16,758 JOURNAL ENTRIES SALE PAYMENT WITHIN THE DISCOUNT PERIOD PAYMENT BEYOND THE DISCOUNT PERIOD Gross Method is PRACTICALLY CORRECT METHOD. This method records the Face value of receivables, which means that we record debit to “sales discount” only if the customer paid within the discount period and on the other hand, ignore sales discount if payment is beyond the discount period. Net Method is THEORETICALLY CORRECT METHOD. It assumes that every customer will pay in time to receive a sales discount. Therefore, this method only records the “Sales discount forfeited” to correct the assumption that “every customer will pay in time” in case the customer paid beyond the discount period. A company makes an adjusting entry to record an estimate of bad debts as an expense in the income statement and a corresponding reduction in accounts receivable on the balance sheet. ACCOUNTS RECEIVABLE: T-account = ALLOWANCE FOR BAD DEBTS: T-account = ACCOUNTS RECEIVABLE: Subsequent Measurement Accounts Receivable XX Less: Allowance for Sales Return XX Less: Allowance for Sales Discount XX Less: Allowance for Freight Charge XX Less: Allowance for Bad Debts XX INVOICE PRICE XX ACCOUNTING FOR FREIGHT Shipping Terms The owner of goods while in transit is liable for the freight. FOB Shipping Point Owner: BUYER The buyer will receive the title of ownership for the goods they purchased once the goods reached the shipping dock. SELLER’S WAREHOUSE BUYER’S WAREHOUSE SHIPPING DOCK Owner is the SELLER until the goods is on the shipping dock. Owner is the BUYER upon shipment of the goods by the seller to buyer. FOB Destination Owner: SELLER The seller retains the legal title to the goods until they reach the location of the buyer. SELLER’S WAREHOUSE SHIPPING DOCK BUYER’S WAREHOUSE Owner is the SELLER when the goods arrive at the Shipping dock. Owner is still the SELLER until the goods arrive at the Buyer’s Warehouse. Freight Collect, means that the freight charge on the goods shipped is not yet paid by the seller and the common carrier shall collect the same from the buyer. Freight Prepaid, means that the freight charge on the goods shipped was already paid by the seller. FOB Destination, Freight Prepaid JOURNAL ENTRIES SELLER BUYER Owner: Seller Payor: Seller NO JOURNAL ENTRY FOB Destination, Freight Collect Owner: Seller Payor: Buyer FOB Shipping point, Freight Collect Owner: Buyer Payor: Buyer FOB Shipping point, Freight Prepaid Owner: Buyer Payor: Seller NO JOURNAL ENTRY NOTES! FOB Destination, Freight Prepaid Buyer has no journal entry because the Freight is appropriately paid by the seller. FOB Shipping Point, Freight Collect Seller has no journal entry because the Freight is appropriately paid by the buyer. • If the term is FOB Destination, the seller will record freight-out (seller’s expense of delivering goods to a customer) • If the term is FOB Shipping Point, the buyer will record freight-in (this is added to the purchase which increases the cost of the goods) Other terms for FOB Shipping Point: - FOB Seller - Free Alongside - Cost, Insurance, Freight Other terms for FOB Destination: - FOB Buyer - Ex-ship ACCOUNTING FOR SALES RETURN ACTUAL RETURN EXPECTED RETURN ACCOUNTING FOR BAD DEBTS DIRECT WRITE-OFF ALLOWANCE METHOD If Collection is Doubtful If account is proven worthless Recovery NO JOURNAL ENTRY PERCENTAGE OF SALES Sales account Multiply by: Percentage Uncollectible Bad Debt Expense Income Statement Approach PERCENTAGE OF ACCOUNTS RECEIVABLE Balance Sheet Approach Accounts Receivable, end Multiply by: Percentage Uncollectible Allowance for Doubtful Accounts, end PERCENTAGE OF ACCOUNTS RECEIVABLE Balance Sheet Approach