Download Audit of Receivables: Accounting Principles and Practices - Prof. Reyes and more Summaries Accounting in PDF only on Docsity!
Audit of receivables part 1 Trade receivables which are expected to be realized in cash within the normal operating cycle or one year, whichever is longer , are classified as current assets. Non trade receivables which are expected to be realized in cash within one year , the length of the operating cycle notwithstanding are classified as current assets. If collectible beyond one year , non trade receivables are classified as non current assets. Accounts receivable shall be measured initially at face amount or original invoice amount. However , subsequently the accounts receivable shall be measured at net realizable value , meaning the amount of cash expected to be collected or the estimated recoverable amount. In estimating the net realizable value of trade accounts receivable , the following deductions are made a. Allowance for freight charge b. Allowance for sales return c. Allowance for sales discount d. Allowance for doubtful accounts The two methods of accounting for bad debts are the allowance method and direct write off method. The allowance method requires recognition of bad debt loss if the accounts are doubtful of collection. The doubtful accounts are recorded by debiting doubtful accounts are recorded by debiting doubtful accounts expense and crediting allowance for doubtful accounts
Generally accepted accounting principles require the use of the allowance method because it conforms with the matching principle. Moreover , accounts receivable will be properly measured at net realizable. The direct write off method requires recognition of a bad debts loss only when the accounts are worthless or uncollectible Worthless accounts are recorded by debiting bad debts and crediting accounts receivable. This approach is often used by small businesses because it is simple to apply. As a matter of fact , the Bureau of internal revenue recognizes only this method for income tax purposes. Customers credit balances are credit balances in accounts receivable resulting from overpayments, returns and allowances and advance payments from customers. Customers credit balances are classified as current liabilities , and shall not be offset against the debit balances in other customers accounts. However , when the amount is not material, only the net accounts receivable may be presented in the statement of financial position. Doubtful accounts expense in the income statement are classified as
- Distribution cost If the granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution costs.
- Administrative costs If the granting of credit and collection of accounts are under the charge of an officer other than sales manager , doubtful accounts shall be considered as administrative expenses. In the absence of any contrary statement , doubtful accounts shall be classified as administrative expenses.
The recovery of accounts written off does not affect the balance of accounts receivable because the effect is offsetting. 2.MAAN COMPANY reported the following information at year end. Total accounts receivable 930, Allowance for uncollectible accounts ( 20,000) Claim receivable 30, Selling price of unsold goods sent by MAAN On consignment at 130% of cost and not Included in MAAN’s ending inventory 260, Security deposit on lease of warehouse used For storing some inventories 300, Total 1,500, What total amount should be reported as trade and other receivables under current assets at year end? a. 940, b. 1,200, c. 1,240, d. 1,500, Solution Trade accounts receivable 930, Allowance for uncollectible accounts ( 20,000 ) Claim receivable 30,
Total trade and other receivables 940,000 a The selling price of goods on consignment is excluded from accounts receivable because the goods are still unsold. The cost of the goods consigned of 200,000 (260,000/130% ) should be included in inventory. The security deposit is a non current receivable. 3 .ONE Company prepared an aging of accounts receivable on December 31 and determined that the net realizable value of the accounts receivable was 2,500, What amount should be recognized as doubtful accounts expense for the current year? a. 230, b. 200, c. 150, d. 100, Solution; Allowance for doubtful January 1 280,000 * Recovery of accounts written off 50,000 * Doubtful accounts expense (squeeze) 100,000 d. Total 430, Accounts written off ( 230,000) Allowance for doubtful accounts December 31 200, Since the December 31 accounts receivable balance is 2,700,000and the net realizable value is 2,500,000 , the December 31allowance for doubtful accounts should be 200,. The doubtful accounts expense is squeezed by working back from the December 31 allowance for doubtful accounts of 200,000.
THE collections from customers during 2021 totaled 14,000,000 excluding recoveries. Doubtful accounts are provided for as a percentage of credit sales. The entity calculated the percentage annually by using the experience of the three years prior to the current year.
- What amount should be reported as doubtful account expense for 2021? a. 200, b. 300, c. 400, d. 250,
- What amount should be reported as allowance for doubtful accounts on December 31, 2021? a. 250, b. 400, c. 300, d. 450,
- What is the net realizable value of accounts receivable on December 31, 2021? a. 2,550, b. 2,600, c. 2,750, d. 2,800,
