What is Account Receivable?

In the statement of financial position, there are three main elements such as assets, liabilities and equity. Assets contain two main elements; current assets and non-current assets. Account Receivable is one of the items under current assets. So what is Account Receivable?

Definition of Account Receivable

Account Receivable is also commonly known as trade receivable is an amount that an entity owes from customers or client as result of the business activity with certain credit limit or term. For merchandise entity ,it arises from the sales of goods to customers while for service entity, it arises from the provision of service.

Classification

Account Receivable is classified as current asset because it is easily converted into cash by demand when the company follows up or claims from customers.

For example, company XYZ is a service company. In 20 January 2015, the company provided maintenance service amounting to $2,000 to its client on credit with credit term of 30 days.

From the above example, because the company provided service on credit, the company need to recognize revenue on 20 January 2015 with correspondence Account Receivable in accordance with the double entry system. In addition, because the credit term is within 30 days and the company can claim the payment any times, thus it falls within the definition or classification of current asset.

Below is the basic double entry to account for the above transaction:

                        Dr. Account Receivable ………………..$2,000

                              Cr. Service Revenue ……………………………$2,000

Impairment

With the IFRS 9 – Financial Instrument comes to effect, from January 2019 onward, all Account Receivable need to be tested for any impairment or allowance to be provided for.

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As per IFRS 9, in order to calculate the expected credit loss, Account Receivable need to be classified into three main stages as below:

  • Stage 1 – At initial recognition. At the initial recognition which is when we recognize as receivable, the loss need to be recognized at 12 month credit loss.
  • Stage 2 – When credit risk has increased significantly since initial recognition. When an account receivable transfers to stage 2 entities are required to recognize lifetime expected credit loss.
  • Stage 3 – When account receivable is credit impaired. This is effectively the point at which there has been an incurred loss event under the IAS 39 model. For account receivable in stage 3, entities will continue to recognize lifetime expected credit.

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