Chapter 10 Trade Receivables (PDF)

CHAPTER 10 TRADE RECEIVABLES (TR) A trade receivable is a customer who bought goods on credit. It is an asset, and is debit in nature. Journal Entry Journal Date Particulars Dr Cr...

CHAPTER 10 TRADE RECEIVABLES (TR) A trade receivable is a customer who bought goods on credit. It is an asset, and is debit in nature. Journal Entry Journal Date Particulars Dr Cr $ $ 2021 Jan 2 Trade receivable Hazim (A+) 950 Sales revenue (I+) 950 Cost of sales (E+) 200 Inventory (A-) 200 Sold goods on credit to Hazim for $950. The cost of goods sold was $200. Jan 9 Sales returns (I-) 76 Trade receivable Hazim (A-) 76 Inventory (A+) 30 Cost of sales (E-) 30 Credit customer Hazim returned goods previously sold at $76. The cost of goods sold was $30. Jan 11 Trade receivable Hazim (A+) 100 Sales revenue (I+) 100 Cost of sales (E+) 40 Inventory (A-) 40 Sold goods on credit to Hazim for $950. The cost of goods sold was $200. Jan 15 Cash in hand / cash at bank (A+) 882 Discount allowed (E+) 18 Trade receivable Hazim (A-) 900 Cash/cheque payment from credit customer Hazim to settle $900 owing, after 2% cash discount was given. Jan 18 Trade receivable Hazim (A+) 900 Cash in hand / cash at bank (A-) 882 Discount allowed (E-) 18 The bank informed that the cheque received on 15 Jan was dishonoured. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 58  Trade Receivable Ledger account Customer Hazim Customer Hazim For TR acc, particulars owes business owes business should not be inventory when the biz is selling goods more less (Asset) Trade receivable Hazim account Particulars Dr $ Cr $ Source 2021 Bal $ + - document Jan 1 Balance b/d 900 Dr 2 Sales revenue (95%x1000) 950 Invoice 9 Sales returns (95%x80) 76 Credit note 11 Sales revenue 100 Debit note 15 Cash in hand / cash at bank (98%x900) 882 Receipt 15 Discount allowed (2%x900) 18 Receipt 18 Cash at bank 882 Bank statement 18 Discount allowed 18 1 874 Dr Feb 1 Balance b/d 1 874 Dr Date Interpretation of Ledger Account Remarks Jan 1 $900 owed by credit customer Hazim from the previous month. Jan 2 Sold goods on credit to Hazim for $950. If Qn states list price $1000 less 5% trade discount, only the 95% owed by Hazim is recorded. 5% trade discount is not recorded. Jan 9 Credit customer Hazim returned goods If Qn states list price $80, the trade discount given earlier when the goods was purchased should also previously sold at $76. apply to the returns of the same batch of goods. If Qn states net price $76, no working is needed. Jan 11 Credit purchases made on 2 Jan was The double entry for invoice and debit note is the undercharged. same. Jan 15 Cash/cheque payment from credit ‘Settle’ means the business no longer owes customer Hazim to settle $900 owing,supplier $900, for 2 reasons: The 98% paid and the 2% discount. after 2% cash discount was given. Cash discount must be recorded. Jan 18 The bank informed that the cheque The entries recorded on 15 Jan must be reversed received on 15 Jan was dishonoured. on 18 Jan. Refer to Chapter 8 (dishonoured cheque) for more details. Feb 1 $1 874 owed by credit customer Hazim was brought down from Jan to Feb. Cash sales is NOT recorded in TR account because the double entry is: Dr Cash at bank / Cash in hand (A+) Cr Sales revenue (I+) Refer to Chapter 2 for source documents and Chapter 4 for discounts. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 59 ALLOWANCE FOR IMPAIRMENT OF TRADE RECEIVABLES Trade Receivables (TR) Refers to the amounts owed by customers who buy goods or enjoy services from the business on credit. It is a current asset, and is debit in nature. Trade Receivable Valuation Method Trade receivables is valued at net trade receivables, which is total trade receivables less allowance for impairment of trade receivables, in the statement of financial position. Allowance for Impairment of Trade Receivables Refers to the amount of debt owed by trade receivables that is estimated likely to be uncollectible. It is a contra-asset, and is credit in nature. Allowance = Estimated % x Ending TR balance Application of Accounting Theory 1. Prudence theory The allowance for impairment of trade receivables is reported in the statement of financial position as a deduction against the trade receivables book value to ensure that the trade receivables balance is not overstated. 2. Matching theory As the increase in allowance for impairment of trade receivables is a likely expense, it should be recorded in the same accounting year as the sales revenue earned to obtain a true and far profit for the year. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 60  IMPAIRMENT LOSS ON TRADE RECEIVABLES Impairment Loss on Trade Receivables is the difference between the allowance at the beginning and end of the year. It is the change (increase or decrease) in allowance. It is an expense account, and is debit in nature. Given info 31 Dec 2019 31 Dec 2020 31 Dec 2021 ($) ($) ($) Impairment Impairment TR 4000 Loss - 40 3200 Loss + 130 5800 Allowance at 5% of TR 200 160 290 Net TR 3800 3040 5510 Journal Entry Journal Date Particulars Dr Cr $ $ 2019 Dec 31 Impairment loss on trade receivables (E+) 200 Allowance for impairment of trade recievables (A-) 200 The estimated uncollectible debt increased from $0 to $200. 2020 Dec 31 Allowance for impairment of trade recievables (A+) 40 Impairment loss on trade receivables (E-) 40 The estimated uncollectible debt decreased by $40. 2021 Dec 31 Impairment loss on trade receivables (E+) 130 Allowance for impairment of trade recievables (A-) 130 The estimated uncollectible debt increased by $130.   JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 61    AFIOTR account (contra-asset) 2019 Particulars Dr $ Cr $ Bal $ - + Dec 31 Impairment loss on trade receivables 200 200 Cr 2020 Jan 1 Bal b/d 200 Cr Dec 31 Impairment loss on trade receivables 40 160 Cr 2021 Jan 1 Bal b/d 160 Cr Dec 31 Impairment loss on trade receivables 130 290 Cr 2022 Jan 1 Bal b/d 290 Cr Interpretation of Ledger Account  2019 Dec 31: The business reviewed its trade receivables and increased its estimated uncollectible debts by and to $200.  2020 Jan 1: The estimated uncollectible debts owed by credit customers totalled $200.  2020 Dec 31: The estimated uncollectible debts decreased by $40, from $200 to $160.  2021 Jan 1: The estimated uncollectible debts of trade receivables amounted to $160.  2021 Dec 31: The estimated uncollectible debts increased by $130, from $160 to $290.  2022 Jan 1: The estimated uncollectible debts owed by customers was $290.   JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 62    Impairment loss on trade receivables account (expense) 2019 Particulars Dr $ Cr $ Bal $ + - Dec 31 AFIOTR 200 200 Dr Dec 31 Income summary 200 0 2020 Dec 31 AFIOTR 40 40 Cr Dec 31 Income summary 40 0 2021 Dec 31 AFIOTR 130 130 Dr Dec 31 Income summary 130 0 Interpretation of Ledger Account  2019 Dec 31: The business reviewed its trade receivables and increased the estimated uncollectible debts by $200. The $200 impairment loss on trade receivables was transferred to income summary account as an expense.  2020 Dec 31: The business reviewed its trade receivables and decreased the estimated uncollectible debts by $40. The $40 impairment loss on trade receivables was transferred to income summary account as a reversal of expense.  2021 Dec 31: The business reviewed its trade receivables and increased the estimated uncollectible debts by $130. The $130 impairment loss on trade receivables was transferred to income summary account as an expense. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 63  Extracts of Financial Statements JYSS Ltd Statement of Financial Performance for year ended 31 December 2019 (extract) $ Less: Other expenses Impairment loss on trade receivables 200 JYSS Ltd Statement of Financial Performance for year ended 31 December 2020 (extract) $ Less: Other expenses Reversal of impairment loss on trade receivables Decrease in AFIOTR (40) JYSS Ltd Statement of Financial Performance for year ended 31 December 2021 (extract) $ Less: Other expenses Impairment loss on trade receivables 130 JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 64  Extracts of Financial Statements JYSS Ltd Statement of Financial Position as at 31 December 2019 (extract) $ $ Current assets Trade receivables 4 000 Less: Allowance for impairment of trade receivables 200 3 800 JYSS Ltd Statement of Financial Position as at 31 December 2020 (extract) $ $ Current assets Trade receivables 3 200 Less: Allowance for impairment of trade receivables 160 3 040 JYSS Ltd Statement of Financial Position as at 31 December 2021 (extract) $ $ Current assets Trade receivables 5 800 Less: Allowance for impairment of trade receivables 290 5 510 Likely to be uncollectible Amount that the business is confident of collecting JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 65  WRITING OFF DEBT When it is certain/confirmed that the debts are uncollectible, the business should write-off the debt owed by the specific customer. Journal Entry Journal Date Particulars Dr Cr $ $ 2020 Mar 20 Allowance for impairment of trade recievables 180 Trade receivable Jansen (A-) 180 Trade receivable Jansen declared bankrupt and the $180 debt he owed was written off. 2021 Sep 15 Cash in hand (A+) [30% x 300] 90 Allowance for impairment of trade recievables [70% x 300] 210 Trade receivable Cindy (A-) 300 Credit customer Cindy paid 30% of her $300 debt by cash and the remaining was written off as irrecoverable. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 66  Writing Off of Irrecoverable Debt Using the same given 31 Dec 2019 31 Dec 2020 31 Dec 2021 info ($) ($) ($) TR 4000 3200 5800 Allowance at 5% of TR 200 160 290 Net TR 3800 3040 5510 2019 2020 2021 Allowance 0 200 =20 160 -210 = -50 $290 -180 TR Jansen TR Cindy 2019 2020 2021 Impairment Loss Impairment loss Impairment loss   (E+) $200 (E+) $140 (E+) $340    AFIOTR account (contra-asset) 2019 Particulars Dr $ Cr $ Bal $ - + Dec 31 Impairment loss on trade receivables 200 200 Cr 2020 Jan 1 Bal b/d 200 Cr Mar 20 Trade receivable Jansen 180 20 Cr Dec 31 Impairment loss on trade receivables 140 160 Cr 2021 Jan 1 Bal b/d 160 Cr Sep 15 Trade receivable Cindy 210 50 Dr Dec 31 Impairment loss on trade receivables 340 290 Cr 2022 Jan 1 Bal b/d 290 Cr Interpretation of Ledger Account  2020 Mar 20: The business wrote off $180 worth of debts owed by Jansen.  2021 Sep 15: Trade receivable Cindy’s debt of $210 was written off. JYSS: POA FORMAT & MEMORY ESSENCE | P a g e 67