Chapter 05 Account Receivables & Foreign Currency Transactions Flashcards
What is the definition of an asset?
Asset is a present economic resource controlled by an enterprise as a result of past events. It has the potential to produce future economic benefits
What are receivables?
Receivables are monetary claims against other. They are acquired mainly by selling goods & services or lending money.
What are the pros and cons of selling on credit?
Pros of selling on credit:
1) Increase sales for customers that do not have cash
Cons of selling on credit
1) Company will struggle to collect from some customers
2) This cost is called impairment loss of accounts receivables/bad-debt expense/ doubtful debt.
What are the methods that a company can use to affect collection of cash from receivables?
- Credit Policy
2. Sales Discount
What are the pros and cons of using a tight credit policies to manage accounts receivables?
Pros
- Limits losses
Cons
- If the credit policy is too tight, there will be an expected loss of customers.
When are accounts receivables recognised?
When the entity becomes a party to the contractual provisions of a contract with a customer
When sale transactions on credit has been recognised i.e. when each performance obligation is fulfilled
How do you measure on accounts receivables?
On initial recognition within the P&L, recognise the transaction price.
On the balance sheet, recognise the NET realisable value after deducting the allowance for impairment loss from accounts receivables.
What are the two methods for accounting for impairment
- Allowance method (preferred method)
2. Direct write off method
What is the allowance method?
The allowance method records collection based on company’s collection experience.
It is a contra account to account receivable, shows the amount of receivables that the company expects it cannot collect.
In P&L, impairment loss is considered an expense account.
How do you write off uncollectible amounts using the allowance method?
DR Allowance for impairment of Accounts Receivables
CR Accounts Receivables
What is the impact of a WRITE OFF on Net Realisable Value of Account Receivable & Profit and Loss statement using ALLOWANCE METHOD?
There will be no effect on NRV as well as a null effect on P&L statements.
Accounts receivables as well as allowance for impairment of accounts receivables decrease by the same amount. Hence, there will not be a difference.
Why is the direct write off method inferior to the allowance method?
The direct write off method will write off only when accounts receivables are confirmed to be irredeemable. Hence, the direct method overstates assets in the balance sheet.
A Ltd, its functional currency in SGD, sold USD10,000 of goods on 1 Nov 20x1 on credit. Spot exchange rate on
1 Nov 2021 USD 1 = SGD 1.20 Record Date
31 Dec 2021 USD 1= SGD1.30 Balance Sheet Date
02 Feb 2022 USD 1 = SGD 1.10 Collection Date
What are BOTH of the required journal entries?
1 NOV 21
DR Accounts receivables 12,000 (10K * 1.2)
CR Revenue 12,000
31 DEC 21
DR Accounts receivables 1,000 (10K * 1.3 - 10K * 1.2)
CR Exchange Gain (P&L) 1,000
02 Feb 22
DR Cash 11K
DR Exchange Loss (P&L) 2K
CR Accounts Receivables 13K
