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Accounts Receivable (with sample problem)

Ano ba ang mga transactions na nakakaapekto sa Accounts Receivables? Lahat ng klase ng pautang mo (lahat ng serbisyong binigay mo na hindi pa nababayaran o lahat ng bagay na may kapalit na di pa nababayaran). In layman’s term, pautang. Kelan madadagdagan ang AR? Kapag syempre, nagpautang ka (not necessarily nag-outlay ka ng cash. Pwedeng through service or goods).

Kelan naman nababawasan ang AR? Kapag: nagbayad, nag sales return(assuming na credit sales), at pag nag-write-off.

Madali lang naman ang basic theories ng account na “Accounts Receivable” nagiging mejo kumplikado lang kapag may Bad Debts na.

Bad Debts
Sa business, hindi natin maiiwasan ang customer na balasubas o yung mga hindi nagbabayad. Syempre, ano magiging epekto nun, nagpautang ka or nagbigay ka ng serbisyo mo para lang sa wala so, isa syang loss. Kaya may bad debts expense.

Ok, dalawang methods ang pagmemeasure ng bad debts expense. Ang DIRECT WRITE-OFF at ALLOWANCE METHOD.

Ang direct write-off, kinikilala mo lang ang bad debts kapag siguradong nataguan ka na nga ng customer mo o pag bankrupt na ang customer at di na talaga sya makakabayad. PERO ang direct write-off, as per IFRS and FASB, hindi na talaga allowed. Kaya kahit anong bansa ka magpunta hindi ginagamit ang direct writeoff sa GAAP. Pero in practice, ginagamit pa naman yan lalo pag immaterial ang amount. Pero since nasa school pa tayo, gawin natin kung ano ang sinasabi ng GAAP.

Ang Allowance Method naman, inaassume nito na normal lang na may balasubas talaga na mangungutang kaya every period, nagrerecognize tayo ng Bad Debts Expense. Ngayon, anong logic nyan? Kasi, considering na hindi lahat ng customer mo siguradong makakabayad, magiging parang OVERSTATED ang accounts receivable mo kung HINDI ka magrerecognize ng bad debts every period. So, para makasunod sa principle of “Conservatism”, we recognize Bad Debts Expense every period even though there’s no actual default from customers. Gets?

Ano mga entrada (allowance method nalang ha, kasi bale wala
naman yung direct w/off)?

To Recognize Bad debts Every Period

(dr) Bad Debts Expense
(cr) Allowance for Bad Debts

To Write Off Accounts:

(dr) Allowance for Bad Debts
(cr) Accounts Receivable

Account Recovery (tandaan, dalawang entry ah huwag i-net ang AR. Importante to for disclosure kasi):

(dr) Accounts Receivable
(cr) Allowance for Bad Debts

(dr) Cash
(cr) Accounts Receivable

Bakit hindi innet agad ang Accounts Receivable, eh parang ganon din naman? Una, for disclosure purposes. Pangalawa, papano kung nakarecover ka na pero hindi ka pa nakakakolekta (rare to’ng case na to ah)?

Ok, sa allowance method, dalawang approaches ang estimation ng bad debts namely: Income Statement approach at balance sheet approach.

Pag income statement approach, yung rate na given, inaapply sa Income Statement accounts tulad ng Net Sales. Pag based sa income statement approach ang computation, yung makokompute mo na amount, yun na mismo yung Bad Debt. So kunyari lang, may P1,000,000 ka na net sales at ang estimation ng company for bad debts ay 5% ng net sales ang bad debts expense mo ay yung P50,000 na mismo agad .

Pag balance sheet approach naman, yung rate na given, inapply sa Balance Sheet account, which is the balance of the Accounts Receivable, usually, ending balance. Pag yun ang ginamit, ang makokompute mong amount will be the ENDING BALANCE OF THE ALLOWANCE FOR BAD DEBTS. So, importante gumamit ng T-Account para dito.

Ok, to Illustrate, let’s use the problem in your book


Info:
A/R, January 1, 2009 …………………………..1,200,000
Allowance for BD, Jan 1, 2009 …………………..60,000
Sales during 2009 ……………………………..10,000,000
Cash collected from customers …………………..8,720,000

The cash collected from customers included a 20,000 recovery from a customer whose account was written off in prior year. On Nov 15, a customer settled his overdue account by issuing 1 15%, 4 month note fro 400,000. During 2009, accounts of 100,000 were written off as worthless.

Analysis of the accounts receivable at Dec 31, 2009 revealed that 600,000 were considered past due. Management’s estimate of probable loss on past due accounts is 20% and on current accounts at 5%

Define the ff:
-Adjusted balance of Allowance for BD at Dec 31, 2009
-Bad debts expense for year 2009
-Net amortized cost of A/R at Dec 31, 2009

Tip ko nga pala, pag nagsasagot kayo, gumamit kayo ng T-Account. At pag medyo madami, himay-himayin. Tandaan, ang accounting parang pagkain. Pag pinag-sabaysabay mo, mabubulunan ka, at mahihirapan ka. Kung hihimay-himayin mo, mas smooth at madali. Ok.

Ang technique dito, basahin yung problem at tignan kung papano makakaapekto sa AR Account

Sales:
Unahin natin yung sales. Ang ginagawa ko, pag walang sinabi kung magkano ang cash sales at credit sales, ang assumption ko, lahat ng sales ay credit sales para mas madali at hindi maguluhan ang aking isip.

Cash Collection:
Ok, sabi yung 20,000 daw, koleksyon ng recovery diba? So Yung 8,700,000 lang ang para sa collection sa sales.
Ok, alalahanin ang entry. Makakaapekto ba yung 8,700,000 sa AR? Syempre, koleksyon yan eh. Eh yung P20,000? Tignan natin:

Entry ng recovery:
(dr) AR 20,000
(cr) Allowance for Bad debts 20,000

(dr) Cash 20,000
(cr) AR 20,000

In effect, walang epekto sa AR kasi mao-offest din. Diba? So, yung makakaapekto lang ay yung 8,700,000

Overdue account for notes:
Bale ang nangyari dyan, since overdue na yung account ng customer, nag-issue nalang yung customer ng promissory note para masiguro tayo na mababayaran talaga nya tayo. So, reclassify nalang to NR.

(dr) Notes Receivable 400,000
(cr) AR 400,000

(syempre sa problem hindi nyo na kelangan mag-entries. Kaya nga sabi ko gumamit kayo ng T-Account. Pinapakita ko lang dito sa entries kung papano ang epekto sa accounts. Pero pag nagsosolve na kayo, galingan nyo na sa diskarte)

Accounts Written off

Ano epekto nyan? Bawas sa AR at bawas din sa ABD. So:
(dr) Allowance for Bad Debts 100,000
(cr) AR 100,000

O, baka tanungin sa quiz, “what is the effect of a write-off to the NET Accounts receivable”. Baka sabihin nyo decrease, mali yun. Ang tama, NO EFFECT. Kasi, bumaba yung AR account at yung contra account nya na ABD for the same amount so, NO EFFECT sa NET Accounts receivable. Eh papano pag “what is the effect of a write-off to the Accounts receivable ACCOUNT”. Ang sagot, decrease. Baket? Kasi ang tinatanong yung ACCOUNT mismo ng AR, yung GROSS pa, hindi yung NET AR. Nakuha po? Iba ang “Accounts Receivable Account” sa “Net Accounts Receivable ah. Yung una, pag dinagdag yung word na “account” ibig sabhihin gross yung tinatanong.

Ok, so, compute natin muna yung AR
So,
1,200,000 + 10,000,000 – 400,000 – 8,700,000 – 100,000 = P2,000,000

Eh yung ABD:
60,000 + 20,000 – 100,000 = 20,000 (debit balance)

Oops, di pa natatapos dyan ang istorya. Tandaan, mayron pang computation ng bad debts expense!

Balik tayo sa 1a&b nyo. Anong klaseng entry ang Bad Debts Expense? Adjusting Entry. Kelan ginagawa ang adjusting entry? At the end of the period. SO, TANDAAN, ipasok muna lahat ng transaksyon na nakaapekto sa AR (sales, collection, etc) at sa ABD (writeoff and recoveries) BAGO tayo mag-estimate ng bad debts expense. Malinaw?

So sabi sa problem, sa AR daw, 600,000 yung past due. Magkano yung current? Eh di 1,400,000. Kaya importanteng ipasok muna lahat ng transaksyong nakakaapekto sa AR kasi para malaman natin kung magkano ba ang “Current” at “Past Due” accounts at the end of the year. Naalala nyo yung sabi ko kanina about computation of bad debts expense? Sa case na to, balance sheet yung approach kasi based sya sa accounts receivable. So,

600,000 * 20% = 120,000
1,400,000 * 5% = 70,000

So, magkano dapat ang ENDING BALANCE mo ng ALLOWANCE FOR BAD DEBTS? Eh di 120,000+70,000= 190,000 credit balance.

Computation ng bad Debts expense:
Ok, since di ako makagamit ng t-account dito, I’ll use algebra nalang
-20,000 + x = 190,000
X = 190,000 + 20,000
X = P 210,000 Bad Debts Expense.

So sagutan na natin ang mga tanong:

Adjusted balance of Allowance for BD at Dec 31, 2009: P190,000

Bad debts expense for year 2009 P 210,000

Net amortized cost of A/R at Dec 31, 2009 (dati ang term ay Net Realizable Value, ngayon net amortized cost na. papaliwanag ko mamaya kung bakit)
2,000,000 – 190,000 = P1,810,000

Ok po? Malinaw po sya? Susunod yung Amortization ng AR. Post muna kayo ng problem na may impairment ng AR para mas maapply nyo. Tpos papaliwanag ko kung papano. Very Happy Very Happy

Follow-up:

Ipaliwanag ko lang yung reason behind “Disclosure” requirement for the ABD recovery kung baket kelangan dalawa yung entry:

para kasi ipakita na na-recover mo talaga yung dating written-off account.

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  1. Didi
    February 7, 2010 at 2:13 am

    I Wish the explanation could be in complete English. I can’t understand the tagalog or something though my mother hails from the Phillipines. Thank you

    • February 7, 2010 at 10:50 am

      I wish it were too but most of the readers of this blog appreciates the way it’s written in Filipino that’s why I write my explanations as such.

  2. JOSEPH H. LAGMAN
    June 17, 2010 at 5:07 pm

    Hi,

    big help, ang ginagawa mo, im reviewing and working at thesame, its like having my classess at the office – kasi i have time to read your post pag break.hope you can add the initial valuation of accounts and at the end of the calendar year or fiscal year, and disclosures needed/

    more power

    jojo

  3. JOSEPH H. LAGMAN
    June 17, 2010 at 9:35 pm

    Hi,

    just finished reading the whole post, complete na pala sya, from initial valution to net realizable value and the requirement for valuation.

    jojo

  4. ayan
    December 12, 2010 at 11:16 pm

    pare ang galing muh ,,, hulog k ng langit,, mas mabils ko xa na naiintindihan tnx,, ask ko lng puro pang fin accounting 1 lng b ang blog na 2?? meron k b s fin 2 or 3 ”

    ps” gling tlga”

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