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Definition:
During the ordinary course of business, credit period is extended by business to their customers. This credit period is the part of operating cash cycle of the entity. Entity provides services but the intended compensation will be received later, that future receivable is accounted as Accounts Receivables.
Accounts Receivables are part of Financial Assets category as they are realisable in Cash. There can be long-term or short-term accounts receivable based on extended credit period and due date from respective reporting date.
As their is risk of non-payment of accounts receivables from a portion and thus, Accounts Receivables are subjected to credit loss assessment on periodic basis. IFRS 9 allows a simplified method for assessing and computing Expected Credit Loss (Provision for Doubtful Debt).
Accounting Entries:
Recognition of Accounts Receivables (short-term, less than a year):
Accounts Receivables A/c DR
Sales/Revenue A/c CR
GST/HST - Output A/c CR
Amount: Receivable would be the full portion of money expected to receive from the customer (incl. indirect taxes).
Recognition of Accounts Receivables (long-term, more than a year):
Accounts Receivables A/c DR
Sales/Revenue A/c CR
GST/HST - Output A/c CR
Finance Income Deferred A/c CR
Amount: Receivable would be the full portion of money expected to receive from the customer (incl. indirect taxes). Revenue is the cash price of the services and any extra portion charged is deferred as a part of finance income over the period of time.
Accretion of Finance income over the period of time:
Finance Income Deferred A/c DR
Finance Income A/c CR
Amount: Finance income can be accounted on straight line basis or on Effective Interest Rate (EIR) method.
Receipt of payment from customer:
Cash/Bank A/c DR
Accounts Receivable A/c CR
Amount: Payment realised from customer.
Recognition of Expected Credit Loss (ECL) (Provision for Doubtful Debts):
ECL / RDD P&L A/c DR
ECL / RDD BS A/c CR
Amount: Computed amount of expected loss.
Accounting for recognition of actual doubtful debts:
ECL / RDD BS A/c DR
Accounts Receivable A/c CR
Amount: Portion of accounts receivable written off from reserve for doubtful debts (RDD).