Other receivables generally come with headings “Trade receivables and others” in the financial statement of large listed public companies. Other receivables are disclosed under the headings “Current Assets”.
These are residual trade or non-Trade receivables that have not been specified by the company or regulations or do not meet the criteria of being classified separately. They are referred to as they are uncommon and insignificant like the major accounts of Current assets as Trade receivables, accounts payable, income taxes payable.
Other receivables are listed under the assets side of the firm’s balance sheet. These come below the headings of Trade receivables. Other receivables are characterized as uncommon or insignificant. Other receivables are rarely recorded in the financial statements, hence, the net balance in Other receivables account is typically small.
The company is running an account of petty expenses. It has paid in advance to coffee shop for 15 days and the coffee shop will reduce all the expenses against the advance.
Even then, at the end of the month, the advances of $ 140 still remain. The company has to show this amount in its balance sheet. It has to show this receivable in “Other receivables”
Understanding Other receivables
Other receivables consist of temporary accounts which even do not repeat every year. Depending on the industry and industry practices, the explanations on Other receivables can be found on the quarterly and annual filings by the company.
To simplify miscellaneous trade and non-Trade receivables of the large sized companies, the term “Other receivables” have been established to represent all the small items of trade and non-Trade receivables. The major components of assets are either long term assets or Current assets.
Long term assets are non-current assets such as plant and machinery, buildings, land, long term investments. These assets have span of more than 1 year and are payable in more than 1 year. On the other hand, Current assets are short term assets which have to be paid within 12 months.
They are the assets that can be easily paid with liquidating current assets in the process of daily operations. Current assets include Trade receivables, accounts payable, income taxes payable. Current assets that are not specified or uncommon won’t be categorized under Current assets.
Instead, they will be thrown into the residual heading of Other receivables. Instead, these assets will be taken to a generic “other” category and would be recognized as Other receivables on the balance sheet.
Examples of Other receivables shall include:
Things to be noted
For publicly listed companies, they have to give clear breakdown of Other receivables in their quarterly and annual filings. However, they represent no so significant amount of money. Hence, the companies may choose to ignore showing Other receivables separately.
However, Other receivables would be placed under footnotes to financial statements. Rarely explanations are needed for Other receivables. However, when needed, the company shall offer the explanations in notes to accounts.
Other receivables are generally assumed to be disposed of within a accounting cycle that would be 12 months. The nature of each Other receivables needs to be determined. It is important for the management to know about the liquidity of Other receivables.
If accounts in Other receivables in a past year becomes material in the current year, it may need to be disclosed into major defined Current assets accounts. This would slowly create insightful information in the minds of investors.
There is no formula for computing the Other receivables. Either the small amounts will aggregate to form Other receivables or there won’t be any Other receivables.
Other receivables = Petty expenses receivables + Advance weekly wages to cleaning staff + Advance supplies
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about Current assets were available
Petty expenses receivables $ 45
Advance weekly wages to cleaning staff $ 105
Advance supplies $ 95
The Calculation of Other receivables can be done as :
Petty expenses receivables
Advance weekly wages to cleaning staff
When to disclose Other receivables separately?
The probability of disclosing Other receivables separately stands zero. The large listed companies generally go by the heading “Trade receivables and Other” where Other receivables are incorporated.
However, circumstances change abruptly and management hast to evaluate this question carefully before any disclosure is being made. There are very outside chances that other receivables will become any significant.
In normal business generally, there are two types of discounts. Trade discounts and sales discounts or cash discounts.
Trade discount refers to the reduction in the price of a commodity or service sold to wholesalers at the time of bulk purchases.
Trade discounts are not recorded as sales discounts and deduct directly at the time recording sales.
Sales or Cash Discounts are properly recorded and shown in the financial statements. The common terms used for sales discounts are 10%, 2/15, n/30.
Let’s discuss the step by the step accounting treatment of sales discount.
Initial Recognition of Sales Transaction:
The best practice to record a sales entry is debiting the accounts receivable with full invoice and credit the revenue account with the same amount.
For example, XYZ a cement distributor firm issues an invoice worth $25,000 to a customer allowing 3% discount on invoice price if the customer pays within the 10 days. The XYZ should initially recognize the transaction in the following way:
Dr – Accounts Receivable $25,000
Cr – Sales Revenue $25,000
This entry will recognize the sale amount $25k as well as recognizing the account receivable amount $25K in the income statement. The recognition of the sales is at gross before cash discount since the customer does not make the payment yet.
The discount is applicable only if the customer making the payment and the payments are within the term and condition which is within the 10 days.
In case the customer is making the payment for the goods that they purchase based on the term and condition and the company is using or maintaining the Sales discount account, then here is the entry to records the sales discount as well as the payments from the customer.
Dr – Cash/Bank $24,250
Dr – Sales Discount $750
Cr – Accounts Receivable $25,000
As you can see in this entry, $750 is the sales discount or cash discount which is recorded as expenses and the company received cash only $24,250.
The total account receivable of $25,000 is discharged from the account receivable balance during the time the customer makes payment.
In case the company uses or maintain the allowance for sales discount account, then the records will as the following:
Dr – Cash/Bank $24,250
Dr – Allowance for Sales Discounts $750
Cr – Accounts Receivable $25,000
Both cash or sales discount and allowance for sales discount is the same.
They are the expenses account which is reported in the income statement for the period that the allowance or discount occurs.
The above example is for the case that the customer makes the payment within 10 days and the discount is allowed.
What if the payment is after 10 days?
So if the customer is making the payment after 10 days, the discount is not applicable to them. Then the payment needs to be made in full.
Here is the entry in case sales discount is not applicable and customer making the payment for all of the invoices:
Dr – Cash/bank $25,000
Cr – Account receivables $25,000
As you can see, full amounts of cash are received and the full amount of account receivables are discharged from the company account.
Here is how the sales or cash discount is calculated.
Calculation of discount amount* = Gross * Discount Percentage
The above are the entries and the calculation of the sales discount.
But, how do we present it in the income statement?
The sales discount will be shown in the company’s profit and loss statement for an accounting period below as the gross revenue of the company.
Suppose the XYZ company recorded only one invoice in their accounting period.
The other only expense for the period is office rent worth $5,000. The income statement of the XYZ Company will show the following figures.
Sales return is the return of products or commodities by customers to the seller, usually within some agreed time period. There may be countless reasons for sales return but some of the common reasons are:
▪ Goods are defective
▪ Goods are not according to the customer needs
▪ Goods are shipped too late to the customer
▪ Wrong Products sent to the buyer
▪ Products are not according to the specifications
One the buyer identifies these kinds of problems, the buyer will normally need to return the goods back and then asking for returning cash or reducing the credit balance.
This entry will reduce both sales amount and cash or account receivables considering the customer/buyer does not make the payment on the goods that they purchase.
This is not finished yet.
Now we have to deal with inventory/goods that customers just returned.
These inventory/goods need to be stored and recorded in the warehouse.
So when the company’s warehouse physically receives the goods, the inventory account will be debited to increase the asset and the cost of goods sold will be credited.
Here is the entry to recognize inventory and derecognition of the cost of goods sold.
Dr – Inventory / Stock
Cr – Cost of Goods Sold
So one this entry is posted, inventory will be increased and the cost of goods sold will be derecognized.
Now let move to the example,
ABC cosmetics, A cosmetic distributor deals in two products, Product Y and Product Z.
On 2nd Feb 2020 the firm record credit sales of 10 pieces for product Y and 15 pieces for product Z to one of its old customers at a price of $50 and $25 each respectively.
On 5th Feb 2020, the customer sent back 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics.
The ABC cosmetics purchase product Y at $40 per piece and product Z at $20.
Show the general entries to record sales and sales return in the books of ABC cosmetics.
1. On Feb 2, the journal entry to record the sales account.
Dr Account Receivable (ABC cosmetics) $875
Cr Product Y sale (10*$50) $500
Cr Product Z sales (15*$25) $375
2. On Feb 2, the journal entry to adjust inventory and record cost of goods sold account.
Dr – Cost of Goods sold $700
Cr – Product Y (10*$40) $400
Cr – Product Z sales (15*$20) $300
3. On Feb 5, journal entry to record the sales return and adjustment of the buyer’s account.
Dr Sales Return Allowance / Revenue (5*50) $250
Dr Sales Return Allowance / Revenue (6*25) $150
Cr Account Receivable (ABC Cosmetics) $400
4. On Feb 5, journal entry to update the inventory account.
Dr Product Y (5*$40) $200
Cr Product Z sales (6*$20) $120
Cr Cost of Goods Sold $320
At the time of preparing an income statement, the amount in the sales return allowance is deducted from the total sales to calculate the actual sales/net sales of the company.
Sales returns and allowances:
Normally sales returns and allowances are two different kinds of transactions, but accounting treatment for both the transactions is the same and mostly the same account is used to record both types of transactions.
Sales returns occur when a customer returns goods to the seller due to some fault, while the term sales allowance used when the buyer agrees to keep the products, but for a lesser price.
To know the accounting for bad debts recovered, it is necessary to know what bad debts are and how they arise.
When a company supplies goods to a customer or another business on credit, the company has to recognise the same amount of receivables in their books as to that of the value of sold items.
Let’s say after a certain period, our customer goes bankrupt and is not able to pay for our goods supplied to them.
We then recognise this as a loss which is called bad debts. Let’s assume that lately, our customer wants to pay either in full or in partial, we recognize the payment amount as our income. These are explained in detail below:
When a company takes all the actions to make sure receivables are received in full. For example, they may take legal actions against the customer business if they don’t pay after official processes. This makes the company believe that the receivables are no longer recoverable.
Let’s say the company has a receivable amount of $500 from ABC Company. After bankruptcy, the company will put the $500 receivable from ABC Company as bad debts.
This means that the company has recognized a loss against the receivables from ABC Company. The following accounting double entry will be passed in the books of the company:
Debit Bad debts $500 (P&L)
Credit Receivables account $500 (BS)
This entry will directly affect both income statement and balance sheet. Bad debt amount $500 will be recognised as expenses in income statement and account receivable will be reduced by $500.
Bad debt recovery is the payment received that was previously written off against a company’s receivables.
As the bad debt creates a loss for the company initially when recorded as bad debt, bad debt recovery generates income for the company when they are recovered.
This recovered amount may be a partial payment received against the total of the written-off amount or it may be a lower amount agreed with the company for the total written-off amount. In either case, the company will recognize it as income for the business.
In the above example, we assumed that our business had a receivable amount of $500 against ABC Company. This total amount was expensed out as bad debt and was recognized as a loss or expense in the income statement.
Let’s assume, after a specific long time, ABC Company has started its operations again with improved performance and is wealthy now. They offered our company a settlement of $300 against the total amount of $500.
Our company has agreed to ABC Company and received a settled $300. As our company has recognised a loss recently, this will be turned back into income with the rest $200 still as a loss.
Our company will perform the following account double entry after the payment is received from ABC Company.
Debit Cash/bank $300 (BS)
Credit Income $300 (P&L)
The receivables account is not affected in the last entry because we have already credited the receivables account.
Even if the further $200 is recovered from ABC Company, it will not affect the receivables account because in either case the receivables account is credited by the whole amount.
Further $200 received will be treated the same as the $300 received from ABC Company.
When a company has a policy of selling goods on credit, a lot of
times customers end up not paying the amount they owe to the company.
This expense is referred to as a bad debt expense and its treatment and reporting on the financial statements is a bit raveling.
The International Accounting Standards defines the procedure and
methods to record bad debt expense. The Accounting Standards prefer to create a
provision for bad debts expense on the basis of organizations past experience.
The estimated may be a percentage of total credit sales or total
trade receivables balance. The main logic behind the creation of this provision
is to accommodate the bad debts expense in the accounting period which they relate.
In the other methods matching concept is missing which is against
the rules of accounting.
for bad debt with example:
The doubt that some invoices are uncollectible is a forecasted
expense. For example, there are 2000 customers who owe you an amount of
$500,000. You estimate that out of these 2000 customers a few would fail to pay
back a total amount of $25,000.
In the present, you don’t know out of the 2000 specifically which
customer would fail to pay their dues but a probable expense of $25,000 has
This implies that you would be unable to credit the accounts
receivable unless you know the customers that are going to default.
In order to deal with this situation instead of waiting for the
customers to be identified, a contra asset account is created against the
accounts receivable which is also known as allowance for doubtful debt or
provision for doubtful debt account. The entry passed to record this procedure
is given below:
Bad debt expense DR xx
Provision for bad debt CR xx
The provision for doubtful debt account is created to reduce the
accounts receivable balance to its net realizable value without having to
Since it is a contra asset account it has a credit balance as
compared to the debit balance of accounts receivable.
It is reported on the balance sheet along with the accounts
receivable. In our example given above,
the following entry would have been passed:
Bad debt expense DR 25,000
Provision for bad debt CR 25,000
Hence, on the balance sheet a net amount of $475,000 would be
shown which is the amount expected to be collected from the customers.
of Allowance for Doubtful Debts:
A debit to the bad debt expense account meant that the amount
would be reported as an operating expense on the income statement.
The allowance for doubtful debt account lets us report the bad
debt expense as soon as the estimate is calculated and help us in portraying a
true and fair view of the financial statements.
Let me explain how. The uncollectible invoices of the current year
will be reported as bad debt at a later point in the future.
If we report this expense on the income statement at the time defaulting customers are identified this would understate the profit and overstate the expense for that year since the bad debt expense is not related to its revenue.
The bad debt expense is related to the revenue generated in the current year.
Hence in order to achieve the goal of matching principle, bad debt expense or doubtful debts should be recognized as soon as they are expected.
In conclusion, to be able to prepare financial statements as per generally accepted accounting rules, allowance for doubtful debt account must be accordingly maintained.
Revenue also referred to as sales or turnover is the total amount of income that a business has earned through the sale of goods or services to the public.
According to the matching principle and accrual system of
accounting, revenue is recognized or the sale is made when the revenue is
earned i.e. earlier of:
Delivery of goods to the customer.
Goods are made available to the
Hence there are two types of sales: cash sales and credit sales.
As the name suggests, cash sales are when payment is collected at the time of
sale. On the contrary, credit sales are when revenue is accrued.
The sale is made but the payment is collected at a later time in the future. Hence, a background check should be made for every customer making bulk purchases on credit in order to avoid losses. The entry for credit sales is:
As per the prudence concept, revenue shall only be realized when it is certain whereas expenses shall be recognized when they are probable.
This concept exists to avoid overstating the profit or understating the expense. Hence a true and fair view of the financial position of an entity is shown.
Prudence concept applied to sales:
Now when we talk about credit sales, we recognize it when we are certain of collecting the amount i.e. the accrued revenue. However, the chances of fraud still exist.
Hence, at the yearend, an estimate is calculated as a percentage of accounts receivable or sales for the year. This estimate is reported as an operating expense reducing the net income.
It is treated as per the prudence concept and the matching
principle. The probable loss of income related to the sales made this year is reported
as an expense reducing the uncertain revenue recorded as sales.
Since the provision is a contra asset account, in the balance sheet of the entity, accounts receivables are reduced by provision for doubtful debts for the year.