Accounts Receivable is a current asset account (remember that “current” means they are due within 1 year) shown on the Statement of Financial Position (IFRS)/ Balance Sheet (ASPE). This account represents money that is owed to the company by its debtors, within one year of the reporting date.
As described in the “Accruals” article, Accrued Revenue is added to the Accounts Receivable account once the entity has billed the client. In this situation, an entity may have delivered the goods or services, has billed the client, but has not yet received cash for those services.
Examples of journal entries involving Accounts Receivable can be found below.
When service is rendered/good is delivered, but no invoice has been sent:
Once the invoice is sent, but no money has been received from the client:
Once the money is received from the client:
Accounts Receivable are also considered Financial Assets. We discuss how to measure different financial assets in greater detail in a later article. But for now, we will focus on what makes Accounts Receivable a Financial Asset and how they are measured.
The ASPE and IFRS criteria for Accounts Receivable are more or less the same, so we will only review the IFRS definitions.
Definition
IAS 32 (IFRS) defines a Financial Asset as either:
Cash, OR
An equity instrument from a different entity, OR
A contractual right to receive cash, OR
A contractual right to receive another financial asset from a different entity, OR
A contract that might be settled using the entity’s own equity instruments. (There are some additional requirements within this clause that deal with derivatives. For more information see IAS 32.11)
Accounts Receivable are a contractual right to receive cash - making them Financial Assets.
Recognition
IAS 39.14 states that an entity should only recognize the Accounts Receivable when the contractual provisions are met. In other words - we cannot add an amount to the Accounts Receivable balance unless we have rendered the service and/or provided the goods.
Initial Measurement
Accounts Receivable should be measured at the face value of what is agreed upon in the contract. While interest may be applied to the invoice if payment is late, interest that is expected to be received should not be recognized in the Accounts Receivable account. This is because interest is likely to be immaterial and it is difficult to estimate.
Accounts receivable should also be recorded at the Net Realizable Value. This is the value that is expected to be received. In the next article, we review how to account for uncollectible amounts in Accounts Receivable balances.
Subsequent Measurement
Accounts receivable should continue to be measured at Net Realizable Value.
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