Trade Receivables Notes

Chapter 10 - Trade Receivables Trade Receivables (Asset) ● Refers to the amounts owed by customers who buy goods or enjoy services from businesses on credit Valuation of Trade Receivables ● Trade receivables is valued at net trade receivables, which is total trade receivables less allowance for impairment of trade receivables Allowance for Impairment of Trade Receivables (Contra-Asset) ● Refers to the amount of debt owed by trade receivables that is estimated likely to be uncollectible Impairment Loss on Trade Receivables (Expense) ● The change in the allowance from the beginning of the year to the end of the year Prudence Theory (when asked about AFIOTR) ● 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 Matching Theory (when asked about Impairment Loss) ● As an increase in allowance for impairment of trade receivables is an expense, it should be recorded in the same accounting year to obtain a true and fair profit for the year Trade Discount Cash Discount Discount given on the list price Discount given on the invoiced price Given to encourage bulk purchase/loyalty Given to encourage prompt payment Not recorded in journal entries Recorded in journal entries

Double entries that you should master for this chapter Sold goods worth $1000 to customer on credit less 10% trade discount Dr Trade receivables (90% x 1000) 900 Cr Sales revenue 900 Customer returned goods worth $500 Dr Sales returns (90% x 500) 450 Cr Trade receivables 450 Customer paid amount owing which was $800 less 10% cash discount Dr Cash at bank (90% x 800) 720 Dr Discount allowed (10% x 800) 80 Cr Trade receivables 800 Cheque given by customer was dishonoured, withdraw cash discount Dr Trade receivables 800 Cr Discount allowed (10% x 800) 80 Cr Cash at bank (90% x 800) 720 Allowance for impairment of trade receivables increase by $300 from the start to the end of the year Dr Impairment loss on trade receivables 300 Cr Allowance for impairment of trade receivables 300 Allowance for impairment of trade receivables decrease by $200 from the start to the end of the year Dr Allowance for impairment of trade receivables 200 Cr Impairment loss on trade receivables 200

Customer declared bankrupt and entire amount owing of $800 is to be written off Dr Allowance for impairment of trade receivables 800 Cr Trade receivables 800 Customer paid $0.60 for every dollar owed and remaining amount owed is to be written off Dr Cash at bank 480 Dr Allowance for impairment of trade receivables 320 Cr Trade receivables 800 Calculating Allowance for impairment of trade receivables ● Trade receivables at year end = $100000 Allowance of TR at 5% AFIOTR = 5% x $100000 = $5000 (present in financial position) Calculating Impairment loss on trade receivables ● If AFIOTR @ the start = $300, amount written off = $100 AFIOTR @ the start = 300 - 100 = $200 (old) AFIOTR @ the end = $500 (new) Impairment loss (new - old) = 500 - 200 = $300 (present in financial performance) Extracts of Financial Statements Statement of financial performance for the year ended 31 Dec 2025 Less: Other expenses $ Discount allowed 80 Impairment loss on trade receivables (if AFIOTR increase) 300 Reversal of impairment loss on trade receivables (if AFIOTR decrease) (100)

Statement of financial position as at 31 Dec 2025 Current Assets $ $ Trade receivables 100000 Less: Allowance for impairment of trade receivables (5000) Net trade receivables 95000