ACC 106 ACCOUNTS RECEIVABLE Flashcards
Discuss what receivables are and its examples.
Receivables are assets that represent contractual rights to receive cash or other assets from another entity.
Examples:
1. accounts receivable - oral or informal promises to pay.
2. notes receivable - written or formal promises to pay in the form of promissory notes. some notes are supported by postdated checks.
3. loans receivable - arising from loans extended by financial institutions such as banks.
4. advances - advances to employees, suppliers
5. accrued income - income earned but not yet collected such as interest income
6. deposits
7. claims receivable - from insurance companies
A) Explain what are trade and non-trade receivables.
B) Explain when will trade and non-trade receivables be classified as current assets.
C) Discuss what and when is normal operating cycle of an entity.
D) Explain why financial institutions need not to classify receivables to either trade or non-trade.
A) Trade receivables are receivables arising from the sale of goods or services in the ordinary course of a business. Non-trade receivables are receivables arising from other sources.
B) Trade receivables are labeled current when it is expected to be realized in cash within the normal operating cycle or one year, whichever is longer. Non trade receivables are only classified as current when they are expected to be realized within a year.
C) The normal operating cycle is the period between the acquisition of assets for processing and the realization of/to cash and cash equivalents.
D) Financial institutions need not to classify their receivables as trade or non-trade because their statement of financial position is based on liquidity, i.e. no current or non-current distinction. Only non-financial institutions need to classify their receivables.
discuss the basic accounting concept regarding abnormal balances in accounts.
the basic accounting concept is that an asset should not have a credit balance, and a liability should not have a debit balance. when such instances occurs, adjustment is needed to eliminate the abnormal balance prior to the preparation of financial statements.
Discuss credit balance in AR and debit balance in AP, how do these happen and the treatment to such abnormal balances.
The basic accounting concept:
a) assets should not have a credit balance
b) liability should not have a debit balance
credit balance in customer’s account / AR may result from overpayments or advances and errors. regardless of what these payments are for, it is initially credited to the customer’s account, then would lead to a credit balance in AR. therefore, there is the need for an adjustment. this credit balance in AR is not offset against receivables but rather treated as a current liability.
the same rule applies in supplier’s account / AP that has a debit balance, only reversed.
discuss the initial measurement of the receivables and explain what is a transaction price. explain the practical expedient allowed under PFRS 15.
receivables are initially measured at its fair value plus transaction costs.
however trade receivables that do not have significant financing component are measured at its transaction price.
a transaction price is the amount in consideration that an entity expects to be entitled in exchange for transferring of promised goods or services to customers, with the exclusion of the amount collected on behalf of third parties. e.g. sales tax.
the practical expedient allowed under PFRS is the non-discounting of the transaction price if it is due within 1 year from the date of transfer.
Accounting for freight charges.
No special accounting is needed for fob shipping point, freight collect and fob destination freight prepaid because of the general rule that the one who owns the good bears the freight costs.
