1. ACCOUNTING FOR RECEIVABLES
ACCOUNTING FOR ASSETS
ACCOUNTING FOR RECEIVABLES

2. Learning objectives
The objectives of this session are to enable the learner:
Types of accounts receivable
Recognition of accounts receivable in the financial statements
Valuation of accounts receivable
Disposition of receivable

3. What are Receivables ?
Receivables represent claims from money, goods, services and other noncash assets from other firms.
Often supported by a sales invoice
Notes receivables are supported by formal promissory notes.
Trade receivables describe amounts owed by the company for goods and services sold in the normal course of the business.
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4. Types of AR AR can be classified into 3 types: Current or non-current
Trade or non-trade
Accounts or notes receivable
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5. Discounts
A trade discount reduces the list sales price to the net sales price charged to the customer.
A cash (sales) discount can only be taken if the customer makes the payment within a specified time period.
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6. Accounts Receivable Recognition: Recording Cash Discounts
There are two methods: Gross and Net
Gross method records discounts when taken by customers.
Net method records discounts not taken by customers.
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7. Accounts Receivable: Recording Cash Discounts
GROSS method
NET method
Record revenue at gross amount of sales.
When customer takes the discount, record cash discounts.
Cash discounts reduce gross sales revenue.
Record revenue at gross amount of sales less cash discount.
When customer forfeits discount, record discounts not taken.
Report discounts forfeited as other revenue.
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8. Example 1
Assume that N Limited sells goods to S limited at Sh. 1,000,000 on credit. Credit terms are 2/10, n/30.
N’s entries for the selected events will be:
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9. Dr. Accounts receivable 1 million 0.98 million Cr. Sales revenue
To record credit sale
Gross method
Net method
Dr. Accounts receivable
1 million
0.98 million
Cr. Sales revenue
To record collection within the 10 day discount period:
Dr. Cash
Dr. Sales discounts
0.02 million
Cr. Accounts receivable
To record collection after the 10 day discount period
Cr. Sales discounts forfeited
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10. Accounting for bad debts
Bad debts occur when customers do not pay for items or services purchased on credit.
Bad debts are uncollectible accounts receivable.
Bad debt expense is reported as a selling or general and administrative expense.
Accounts receivable are reported on the balance sheet at net realizable value; that is, the expected cash value.

11. Methods of Accounting for bad debts
1. Direct Write off Method.
Involves debiting Bad Debts Expense accounts and crediting accounts receivable in the period in which the firm finally realizes that the accounts are uncollectible.
The Allowance Method
A company estimates the total amount of its uncollectible accounts at the end of every accounting period.
It satisfies the matching principle.

12. Differences Direct Write-Off Allowance
Not based on the matching principle
Based on matching principle
Accounts are written off when determined non-collectible
Estimated bad debts are matched against revenue
Appropriate only if amounts are not material
Must be followed if amounts are material

13. The Allowance method
Increase in allowance is charged to the Statement of P & L as an expense.
Decrease in allowance is credited to the Statement of P & L as income.
In the Statement of financial position the allowance for doubtful debt at the end of the period is deducted from the receivables.

14. Estimating bad debts
Two methods can be applied to estimate the bad debt expense at the end of the year.
a) Income statement approach
(The Percentage of credit/total sales)
b) Balance Sheet approach
(Percentage of accounts receivable)
Under the balance sheet approach there are 2 methods that can be used. Percentage of accounts receivable and Ageing of accounts receivable

15. (a) Income Statement Approach
The estimated bad debts is determined by multiplying current period sales by an established bad debt percentage based on past history and current economic trends.

16. (b) Balance Sheet Approach
The focus is on the collectability of accounts receivable to make an estimate of uncollectible accounts.
The desired allowance for uncollectible accounts using a percentage of accounts receivable is computed.

17. Balance Sheet Approach
(i) Percentage of accounts receivable
The total accounts receivable for P Limited are Sh 50,000 and it is estimated that 3% of those accounts will be uncollectible, the allowance account already has a Sh 600 credit balance.
Compute the allowance for bad debts for the period.

18. Balance Sheet Approach
(ii) Aging Receivables
The most commonly used method for establishing an allowance based on outstanding receivables involves aging receivables.
Individual accounts are analyzed to determining those not yet due and those past due.

19. Ageing of Receivables
Compare desired uncollectible amount with the existing balance in the allowance account.
Compute the desired uncollectible amount
Each grouping has different likelihood of being uncollectible
Year end accounts Receivable is broken down into age classifications

20. Ageing schedule

21. Ageing schedule

22. Presentation of Receivables in the Financial Statements
Current receivables may be grouped in the balance sheet in the following classes:
Notes receivable—trade debtors
Accounts receivable—trade debtors
Other receivables
It is possible to combine trade notes and accounts receivable into a single amount.
Restrictions on any receivables should be disclosed.

23. Example 2
You are required to show the debtors balance and how this balance will be shown in the statement of financial position given the following information:
Sh.
Provision for doubtful debt (established at the end of the month)
640,000
Credit sales
3,800,000
Returns inwards
120,000
Interest charged to credit customers
200,500
Discounts allowed
100,900
Receipts from credit customers
3,306,400
Bad debts written off
80,700
Creditors ledger credits transferred to debtors ledger
214,600
Debtors balance at
2,100,000

24. Impairment of receivables
IASB-Companies should assess their receivables for impairment each reporting period and start the impairment assessment by considering whether objective evidence indicates that one or more loss events have occurred.

25. Examples of loss events
Significant financial problems of the customer.
Payment defaults.

26. IASB Impairment process
Receivables that are individually significant should be considered for impairment separately. If impaired the Co. recognizes it.
Any receivable individually assessed that is not considered impaired should be in a group with similar credit risk.
Any receivables not individually assessed should be collectively assessed for impairment.

27. What is a loan note?
A negotiable instrument that a maker signs in favor of a designated payee who may legally and readily sell or transfer the note to others.
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28. Recognition of Notes Receivable
Short term N/R
Long term N/R
Record at present value
of cash expected to
be collected
Record at face value
less allowance
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29. Recognition of Notes Receivable
Notes receivable are issued at face value when the stated rate of interest is the same as the effective (market) rate.
If the stated rate is less than the effective rate then a discount results.
If the stated rate is greater than the effective rate then a premium results.
The discount or premium is amortized to interest revenue by the effective interest method.
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30. Notes issued at face value
Illustration: Pablo ltd . Lends Jentayu Ltd goods worth Ksh 1000,000 in exchange for a three year note bearing 10% p.a. The market rate of interest or a note of similar risk is 10%. Compute the PV or exchange price.
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31. Notes not issued at face value (Zero-interest bearing notes)
Omwami Ltd receives a three year, 1000,000 zero interest bearing note, the PV is The implicit rate is 9%. Using the effective-interest method armotize the discount.
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32. Interest bearing notes
J.Kloop makes a loan to W.Enger and receives in exchange a three year, 1000,000 note bearing interest at 10% p.a. The market rate of a note of similar risk is 12%. Compute the PV of the two cash flows, then amortize the discount using the effective interest method.
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33. Accounting for Transfers of Receivables
Secured Borrowing
Sale
Without Recourse
With Recourse
Continuing involvement by
seller
No continuing
involvement by
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34. Disposition of AR
Contractual right to receive the cash flows no longer exist.
Transfer of AR to another party through:
Secured borrowing.
Sale of receivables/ Factoring.

35. Secured borrowing Transferor records a finance charge.
Transferor collects accounts receivable.
Transferor records sales returns and sales discounts.
Transferor absorbs bad debts expense.
Transferor records interest expense on notes payable.
Transferor pays on the note periodically from collections.
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36. Sale of Receivables
Transferor transfers ownership of receivables to factor.
Factor records the (transferred) accounts as assets in its books.
Transferor records any amount retained by transferee as “due from factor.”
Transferor records loss on sale of receivables.
Transferor records any component liability (when appropriate).
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37. Analysis of AR
Accounts receivables Turn over = Net sales/Av. Trade receivables

38. Q&A 38 Potential questions:
Does the CF discuss the role of business model?
Does the revised CF include guidance on derecognition?
[to be added]