Accounting Business Reporting for Decision Making

CHAPTER 5 Balance sheet 187

Measuring receivables

The carrying amount of receivables on the balance sheet is the expected cash to be received (the cash equiv-

alent). This is the amount owing, less an allowance (provision) for amounts expected to be uncollectable.

The term ‘allowance for doubtful debts’ (also referred to as ‘provision for impairment’ or ‘provision for

doubtful debts’) refers to the amount estimated to be irrecoverable. An entity makes an assessment as to

the estimated irrecoverable amount based on objective evidence. A review of individual receivables and an

examination of the age of the debtors may be useful in assessing the uncollectability of debts.

On the balance sheet, receivables are usually shown at their net amount (that is, gross value less allow-

ance for doubtful debts), with details of the gross value and the allowance for doubtful debts disclosed

in the notes to the accounts.

Figure 5.13 provides an extract of the notes to the accounts from the current receivables section of the

JB Hi-Fi Ltd 2015 financial statements. We can observe that the entity expects to receive $27 682 000

from trade receivables. As the gross amount due is $28 113 000, the allowance for doubtful debts repre-

sents about 1.5 per cent of the balance owing.
Consolidated
2015
$’000

2014

$’000

12. CURRENT ASSETS — TRADE AND OTHER RECEIVABLES
    Trade receivables
    Allowance for doubtful debts

28 113

(431)

24 071

(449)

Non-trade receivables

27 682

53 798

23 622

47 123

81 480 70 745

FIGU R E 5.13 Extract of JB Hi-Fi Ltd 2015 notes to the accounts — trade and other receivables

Source: JB Hi-Fi Ltd 2015, preliminary final report, p. 76.

JB Hi-Fi Ltd discloses additional information related to its trade receivables. Note 9(a) details the

terms and conditions of trade receivables. JB Hi-Fi Ltd has an average credit period of 30 days. It

reviews individual debtors to estimate the amount irrecoverable. Note 9(b) discloses the ageing schedule

of the trade receivables and note 9(c) details the movement in the allowance for doubtful debts account.

The ageing of the impaired trade receivables is shown in note 9(d).

Measuring inventory

The accounting standards prescribe that the carrying amount of inventory must be the lower of its cost

price or net realisable value. Measuring the cost or net realisable value of inventory is a particular issue

for retail and manufacturing entities, but not service entities as they do not manufacture or sell inven-

tory. The process for determining the cost price of a retail or manufacturing firm’s inventory depends

on the inventory system that the entity is using. There are two types of accounting systems to record

inventory — a perpetual inventory system and a periodic inventory system. The former involves keeping

detailed records of inventory movements and tracking specific inventory items from purchase through

to sale. With technological advances such as barcodes and optical scanners, using a perpetual inventory

system is easier than what it once was. Using a perpetual system, when inventory is purchased, an asset

account (inventory) is increased with dual entry being a reduction in cash or an increase in accounts

payable depending on whether the inventory was purchased for cash or on credit. When inventory is

sold, the entity can identify the specific inventory that was sold (e.g. by the barcode). The accounting

entry reduces the inventory account by the cost price of the inventory sold with the dual entry being to

increase an expense account — the cost of sales. Further, at the point of sale, the entity records the sales

proceeds as an increase in revenue with the dual entry being to increase cash or accounts receivable

depending on whether the transaction was for cash or on account. Given how the purchase and sale of