Scribd
Upload
6 views4 pages

17 Receivables and Payables

The document outlines the definitions and accounting treatments for accounts receivable and payable, including the concepts of irrecoverable and doubtful debts, and the prudence concept for assessing allowances. It details the double entries for various transactions related to receivables and payables, as well as the treatment of provisions and contingent liabilities and assets according to IAS 37. A summary table is provided to clarify the probability of occurrence for contingent liabilities and assets.

Uploaded by

paulfomude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
6 views4 pages

17 Receivables and Payables

The document outlines the definitions and accounting treatments for accounts receivable and payable, including the concepts of irrecoverable and doubtful debts, and the prudence concept for assessing allowances. It details the double entries for various transactions related to receivables and payables, as well as the treatment of provisions and contingent liabilities and assets according to IAS 37. A summary table is provided to clarify the probability of occurrence for contingent liabilities and assets.

Uploaded by

paulfomude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

FA – Recording Transactions and Events

Receivables and Payables

DEFINITIONS AND ACCOUNTING TREATMENT OF ACCOUNTS RECEIVABLE:

Account receivable – is a current asset represented by the amount owed by a customer who has bought goods
or services from us but is not yet paid for them.

Irrecoverable debts – receivables from customers certainly not able to pay due amount.

Doubtful debts – receivables from customers in respect of which we have concerns they may not pay us some
or all amount due to us.

Prudence concept – should be followed when assessing allowance for doubtful debts: do not overstate
revenues or understate expenses.

Allowance for doubtful debts:


 Specific allowance for specific customer;
 General allowance = (Closing AR – write-offs – specific allowance) x % based on historical data.

Notes: Only record change from opening to closing balance of total allowance. Deduct allowance for doubtful
debt from receivables to get closing accounts receivable in SFP.

Double entries:

1. Initial sale to customer:


Dr - Accounts receivable (current asset)
Cr - Sales (net of trade discount)

2. Early settlement discount:


Dr - Discount allowed (expense)
Cr - Accounts receivable
3. Cash received from customer:
Dr – Bank
Cr - Accounts receivable

4. Irrecoverable debt write-off:


Dr - Irrecoverable debt expense
Cr - Accounts receivable

5. Customer pays after debt was written-off:


Dr – Bank
Cr - Irrecoverable debt expense

6. Doubtful debts increase:


Dr - Irrecoverable debt expense
Cr - Allowance for receivables

7. Doubtful debts decrease:


Dr - Allowance for receivables
Cr - Irrecoverable debt expense

Example:
As with many topics in accounting it is easier to understand these concepts with numbers so suppose we have
Driven Around Ltd. which has a closing year-end accounts receivable balance of $125,000 and an opening
allowance for receivables of $1,260. Company have decided to write-off $4,000 of debts and also wish to make
a general allowance of 3%.

To calculate the general allowance we need to deduct the write-offs from the accounts receivable closing
balance and then apply 3% to the $121,000 net balance, this gives a closing allowance of ($121,000 x 3% =)
$3,630.

As the opening allowance was $1,260 we can see there has been an increase in the allowance of ($3,630 –
$1,260 =) $2,370 and this will need to be expensed to the statement of profit or loss along with the write-offs of
$4,000, giving a total expense of ($4,000 + $2,370 =) $6,370.

The amount that we will show on the statement of financial position is the closing accounts receivable balance
minus the write-offs and the closing allowance for receivables balance. This gives a net accounts receivable
figure of ($125,000 – $4,000 – $3,630 =) $117,370. Remember though that it is the $4,000 that will actually be
recorded as a credit in the accounts receivable ledger, the $2,370 will be recorded as a credit in the allowance
for receivables ledger.
Dr  Irrecoverable debts  $6,370 (charge to P&L)
Cr  Account receivables  $6,370 (decreasing the net balance of receivables on SFP)

Notice that the amount going to the statement of profit or loss as an expense is the CHANGE in the allowance
whereas the amount used to calculate the figure for the statement of financial position is the TOTAL allowance
to date, this is just like the depreciation charge going to the statement of profit or loss and accumulated
depreciation going to the statement of financial position to be net off against the non-current asset cost.

DEFINITIONS AND ACCOUNTING TREATMENT OF ACCOUNTS PAYABLE:

Account payable is a current liability arisen when we buy goods or services from a supplier and do not pay for
them at the time of purchase.

Double entries:

1. Initial purchase:
Dr - Purchases
Cr- Accounts payable

2. Discounts received:
Dr - Accounts payable
Cr - Discounts received (income)

3. Payment to supplier:
Dr - Accounts payable
Cr - Bank

ACCOUNTING TREATMENT OF PROVISIONS, CONTINGENT LIABILITIES AND


ASSETS:

Provision is a liability of uncertain timing and amount.

Note: Prudence concept must be applied when considering provisions, contingent liabilities and assets.

IAS 37 rules:

1. A provision must be provided if:


 There is a present obligation from past event;
 There is a probable transfer of economic benefit;
 Amount can be reliably estimated.

2. A contingent liability must be provided if:


 There is a possible transfer of economic benefit, or
 There is a probable transfer of economic benefit but no reliable estimation.

3. A contingent asset must be:


 Provided only if it is virtually certain;
 Disclosed if it is probable.

Summary table:
Probability of occurrence Contingent liabilities Contingent assets
Virtually certain > 95% Provide (provision) Recongnise
Probable 51% – 95% Provide (provision) Disclose
Possible 5% – 50% Disclose Ignore
Remote < 5% Ignore Ignore

Double entries:

1. Creating the provision (contingent liability):


Dr - Expenses
Cr - Provision liability (contingent liability)

2. Creating the contingent asset:


Dr - Contingent asset
Cr - Income

You might also like