ACC 103: Conceptual Framework & Accounting Standards

Module #25 Teacher’s Guide

Lesson title: Accounting for Trade Receivables Materials:

(Accounts Receivable) - Continuation Calculator, Reviewer Notebook,
Learning Targets: Textbook
At the end of the module, students will be able to:
1. Determine the subsequent measurement of References:
accounts receivable Millan, Zeus Vernon B.; Intermediate
2. Account for sales discount Accounting 1
3. Compute and account for allowance for
doubtful accounts -[Link]
4. Account for receivables denominated in foreign between-trade-discount-and-cash-
currency [Link]

A. LESSON PREVIEW/REVIEW

Introduction
Let’s continue our topic on Accounts Receivable today! Things get better every single day as long as
you are trying. Answer the pre-test below to gauge your understanding. You can do it!

Write your answer on the space before each number.

1. How are accounts receivable subsequently measured?

_________________________________________________________________________
2. How do you define an allowance for doubtful accounts?
_________________________________________________________________________
_________________________________________________________________________
3. What are the methods of computing for doubtful accounts expense?
_________________________________________________________________________
_________________________________________________________________________.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

B. MAIN LESSON

Lesson Content
Make sure to highlight or underline the important parts!

Subsequent a. Recoverable historical cost – represents the amount of

measurement cash expected to be recovered from the contractual cash
flows of the receivables

b. Net realizable value – normally computed as the transaction

price minus subsequent repayments of principal minus any
reduction (directly or through the use of an allowance
account) for uncollectability or impairment
Estimating a. Sales discount – the entity considers any discounts that are
recoverable expected to be taken by customers when recognizing
historical cost accounts receivables; at the reporting date, the entity
updates the measurement and any adjustment is accounted
for prospectively as an adjustment to revenue

b. Doubtful accounts – recoverable historical cost is assessed

at each reporting date; when collectability becomes doubtful,
an allowance is recognized to adjust the receivables to their
recoverable amount; a basic accounting concept is that
assets should not be recognized at more than their
recoverable amount; the resulting allowance, commonly
termed as “allowance for doubtful accounts”, is treated as a
contra-asset (deduction) to accounts receivable when
determining net realizable value.
Accounting for a. Allowance method
bad debts  an allowance is recognized for bad debts expense
when the collectability of accounts becomes
doubtful or questionable (probable)
 conforms to the concepts of accrual basis of
accounting, matching and conservatism
 when it becomes certain that accounts are
worthless (as opposed to merely being ‘doubtful’ of
collection), accounts are written-off
 when accounts previously written-off are
subsequently recovered, the previous entry to record
the write-off is reversed or re-established and the
collection recorded in the customary way

b. Direct write-off method

 Bad debts expense is directly written-off from the
balance of the accounts receivable only when the

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

accounts are deemed worthless

 No entry is made for accounts that are merely
doubtful of collection
 Does not conform to the concepts of accrual basis of
accounting, matching and conservatism
 Usually not acceptable for financial reporting
purposes, except for micro-entities; however,
favoured for taxation purposes
 When accounts previously written-off are
subsequently recovered, the collection is simply
recorded as gain

Journal Entries
Collectability becomes doubtful
Allowance Method Direct Method
Bad debt expense XX No entry
Allowance for bad debt expense XX
to record bad debt expense
Write-off
Allowance Method Direct Method
Allowance for bad debts XX Bad debt expense XX
Accounts receivable XX Accounts receivable XX
to record the write-off accounts receivable to record bad debt expense
Recovery
Allowance Method Direct Method
Accounts receivable XX No entry
Allowance for bad debts XX
To reverse previous write-off
Cash XX Cash XX
Accounts receivable XX Gain on recovery XX
To record the collection of accounts receivable To record the collection of accounts receivable

T-Account
The effects of the journal entries under the allowance method are summarized below:

Allowance for doubtful accounts

xx beg.
write-off xx xx recovery
xx bad debt expense
end. xx

Effect on Working Capital

 Under the allowance method, the entry to record the bad debt expense decreases
profit, total current assets, working capital and current ratio
 However write-offs and recoveries do not affect profit, total current assets, working

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

capital and current ratio

o Working capital = current assets minus current liabilities
o Current ratio = current assets divided by current liabilities

Estimating Doubtful Accounts

a. Percentage Formula:
of net Bad debt expense = Percentage x Net credit sales
credit sales
 Favours the income statement in that it adheres to
matching principle
b. Percentage Formula:
of Required bal. of allowance = Percentage x Accounts receivable, end.
receivables
 Favours the statement of financial position in that it
provides a reasonable estimate of the receivables’ net
realizable value

Computation of percentage
Formula:
Percentage = (Write-offs – Recoveries) + (Net Credit Sales)
c. Aging of  Required bal. of allowance for doubtful accounts = various
receivables estimated percentages x ending receivable breakdown
according to ages
a. Number of days receivables are outstanding
b. Number of days receivables are past due

 PFRS 7 Financial Instruments requires disclosures of past

due and not past due receivables
 Favours the statement of financial position in that it
provides a reasonable approximation of the receivables’ net
realizable value

Classification of bad debts

 Presented in the statement of profit or loss and other comprehensive income prepared
using the function of expense method as administrative expense

Receivables dominated in foreign currency

 Initially translated at the exchange rate at the date of transaction
 Subsequently translated at the exchange rate at the end of the reporting period
 Adjustments for changes in exchanges rates are recognized in profit or loss as foreign
exchange gain or loss

Risk of accounting loss and Off-balance-sheet risk

 Risk of accounting loss – the risk that the carrying amount of a recognized asset will not
be recovered

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

 Off-balance-sheet risk – a potential loss that may exceed the amount recognized as an
asset

Skill-building Activities
Let’s try to practice what you have learned! Check your answers against the Key to Corrections found
at the end of this SAS. Write your score on the space provided.

PROBLEM SOLVING. PROVIDE WHAT IS ASKED IN EACH ITEM.

1. Provide the journal entries of the following using the Allowance Method and Direct Method:
a. Accounts receivable of P15,000 is found to be doubtful of collection;
b. The P15,000 doubtful account is deemed worthless (uncollectability is certain) and needs
to be written-off; and
c. The P15,000 account previously written-off is subsequently recovered;

2. ABC Co. has the following information on December 31, 20x1 before any year-end
adjustments:
Allowance for doubtful accounts, Jan. 1 8,000
Write-offs 5,000
Recoveries 1,000
Sales (including cash sales of P100,000) 600,000
Sales returns and discounts (including P1,000

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

sales returns on cash sales) 6,000

Accounts receivable, Dec. 31 150,000
Percentage of credit sales 2%

Compute for the following:

a. Bad debt expense
b. Allowance for doubtful accounts on December 31
c. Net realizable value of accounts receivable

3. ABC Co. has the following information:

Days outstanding Receivable balances % uncollectible
0 - 60 120,000 1%
61 - 120 90,000 2%
Over 120 100,000 6%

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

Total accounts
receivable 310,000

During the year, ABC Co. wrote off P7,000 receivables and recovered P4,000 that had been
written off in prior years. The allowance for doubtful accounts has a beginning balance of P2,000.
Compute for:
a. doubtful accounts expense for the year; and
b. net realizable value (recoverable historical cost or carrying amount) of accounts receivable

Check for Understanding (Graded Quiz)

To the teacher:
 This serves as the student’s basis if he/she understood the topic.
 The answer for this activity is found at the end of this activity sheet and is only found in this TG
 and not the SAS.

To better test your knowledge on the topic, encircle the best answer below without looking in your
content notes. Be honest at all times. Your teacher will provide you the key answer in this activity.

Multiple Choice: Encircle the letter of your answer.

1. Why is the allowance method preferred over the direct write-off method of accounting for
bad debts?

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

a. Allowance method is used for tax purposes.

b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.

2. Wellington Corp. has outstanding accounts receivable totalling 2.54 million as of December
31 and sales on credit during the year of 12.8 million. There is also a debit balance of 6,000
in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales
will be uncollectible, what will be the balance in the allowance for doubtful accounts after the
year-end adjustment to record bad debt expense?
a. 25,400.
b. 31,400.
c. 122,000.
d. 134,000

II. True or False: Write your answer on the space provided. Erasure of any kind is strictly
prohibited.
_________3. The percentage-of-receivables approach of estimating uncollectible accounts
emphasizes matching over valuation of accounts receivable.
_________4. The percentage-of-sales method results in a more accurate valuation of receivables
on the balance sheet.

III. Problem Solving

5. ABC Co. sells to wholesalers on terms 2/15, net 30. An analysis of ABC Co.’s accounts
receivable on December 31 follows:

Age in Days Receivable balances

0 - 15 100,000
16 - 30 60,000
31 - 60 50,000
61 - 90 40,000
91-120 30,000
121 - 150 20,000
Total accounts receivable 300,000

ABC Co. uses the aging of accounts receivables method. The estimated percentage of collectability
are as follows:
Accounts that are overdue for less than 31 days 97%
Accounts that are overdue 31- 60 days 90%
Accounts that are overdue 61 - 90 days 85%
Accounts that are overdue 91 - 120 days 65%
Accounts that are overdue for over 120 days 40%

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

The allowance for doubtful accounts has a balance of P8,000 as of January 1. No write-offs or
recoveries were made during the year. Compute for:
a. Balance of allowance for doubtful accounts on December 31; and
b. The doubtful accounts expense for the year

C. LESSON WRAP-UP
FAQs
Is it possible for the allowance for doubtful accounts to have a debit balance? If so, how is it
accounted?
- There may be instances when the allowance for doubtful accounts results to a debit balance,
such as when the account needed to be written-off exceeds the existing balance of the
allowance. When this occurs, the allowance for doubtful accounts is said to have an abnormal
balance. An adjusting entry is needed to eliminate the abnormal balance by debiting “bad debt
expense” and crediting “allowance for doubtful accounts”. The debit balance is eliminated by
increasing the bad debt expense for the year.

Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

Thinking about Learning

From a rating of 1-10, determine if you have learned all the learning objectives. What is the reason for
your rating?
________________________________________________________________________________
________________________________________________________________________________

What part of the module gave you a hard time to comprehend?

________________________________________________________________________________
________________________________________________________________________________

Any other questions or concerns you want to raise?

________________________________________________________________________________
________________________________________________________________________________

KEY TO CORRECTIONS
Introduction/Review/Pre-test

Activity 1: Pre-test
1. At recoverable historical cost (or net realizable value)
2. A contra-asset (deduction) to accounts receivable when determining net realizable value
3. (a) Percentage of net credit sales, (b) Percentage of receivables, and (c) Aging of
receivables

Activity 4: Problem Solving

1.a. Collectability becomes doubtful
Allowance Method Direct Method
Bad debt expense 15,000 No entry
Allowance for bad debt expense 15,000
to record bad debt expense
1.b. Write-off
Allowance Method Direct Method
Allowance for bad debts 15,000 Bad debt expense 15,000
Accounts receivable 15,000 Accounts receivable 15,000
to record the write-off accounts receivable to record bad debt expense
1.c. Recovery
Allowance Method Direct Method
Accounts receivable 15,000 No entry
Allowance for bad debts 15,000
To reverse previous write-off

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

Cash 15,000 Cash 15,000

Accounts receivable 15,000 Gain on recovery 15,000
To record the collection of accounts receivable To record the collection of accounts receivable

2.a Bad debt expense

Total sales 600,000
Cash sales (100,000)
Gross credit sales 500,000
Sales returns and discounts on credit sales (6,000 - 1000) (5,000)
Net credit sales 495,000
Multiply by: Percentage of net credit sales 2%
Bad debt expense 9,900

2.b Allowance for doubtful accounts at Dec. 31

Allowance for doubtful

accounts
8,000 Jan. 1
Write-off 5,000 1,000 Recovery
bad debt
9,900 expense
Dec. 31 (squeeze) 13,900

3.a Doubtful accounts expense

Required
% allowance
Receivable uncollectible (c) = (a) x
Days outstanding balances (a) (b) (b)
0 - 60 120,000 1% 1,200
61 - 120 90,000 2% 1,800
Over 120 100,000 6% 6,000
Totals 310,000 9,000

Allowance for doubtful

accounts
2,000 beg. Bal.
Write-offs 7,000 4,000 Recoveries
Doubtful accounts
10,000 expense (squeeze)
End. Bal. 9,000

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

3.b Net realizable value/ (Carrying amount)

 The recoverable historical cost of the receivables as of year-end is P301,000 (P310,000 -
P9,000).

Activity 6: Check for Understanding. The teacher will provide the key answers in this activity.

1. D 2. C

No. 1- The allowance method is preferred over the direct write-off method because the income
statement will report the bad debts expense closer to the time of the sale or service, and the balance
sheet will report a more realistic net amount of accounts receivable that will actually be turning to cash.

No 2- Sales on Credit P12,800,000

% Uncollectible 1%
Bad Debt Expense 128,000
Less: Debit Balance in Allowance for Bad Debts (6,000)
Allowance for Bad Debts, end 122,000

3. False 4. False

5.a Allowance for doubtful accounts

Receivable % Required
balances Uncollectble allowance
Days past due (a) (b) (a) x (b)
Not due (cash discounts available) - 0 to 15
days of age 100,000 None -

Not due (cash discounts forfeited) - 16 to 30

days of age 60,000 None -
1 -30 days past due 50,000 3% 1,500
31 -60 days past due 40,000 10% 4,000
61 -90 days past due 30,000 15% 4,500
91 -120 days past due 20,000 35% 7,000
Totals 300,000 17,000

5.b Doubtful accounts expense

Allowance for doubtful
accounts
8,000 beg. Bal.
Write-offs - - Recoveries
9,000 Doubtful accounts expense (squeeze)
End. Bal. 17,000

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 ACC 103: Conceptual Framework & Accounting Standards
Module #25 Teacher’s Guide

“Put your best foot forward.”

-Nothing Follows-

ADDITIONAL NOTES FOR TEACHERS

In this portion, you may include:

● Additional exercises that teachers may give to students during face-to-face classes or during
remote coaching sessions
● Additional reading materials or references that teachers may use
● Instructions for activities during face-to-face classes
● Answer Keys for quizzes and exams

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