Accounts and Documents Receivable

What are Accounts and Documents Receivable?

Accounts and Documents Receivable represent enforceable rights that a company has for goods sold on credit, services rendered, loan fees or any other similar concept.


Classifications of Accounts Receivable


Accounts receivable are generally classified into three groups which are:

Accounts receivable from the customer

 this is composed of the amounts that customers agree with the company, due to the credit taken by the sale.

Officers and Employees Accounts Receivable

 these are the agreements that officers and employees make with the company for credit sales, salary advances, among others, which are discounted after their salary.

Other accounts receivable

 these arise from a variety of transactions such as advances to an executive, employee, sales or purchases of something, damages or losses among others.

These accounts should be presented in the balance sheet in the group of current assets after cash since this is what can be converted into cash as soon as possible, except for those whose maturity is greater than the normal cycle of operations of the company, which, in most cases, is twelve months.


Partial Balance Sheet

As of Dec. 1, 20XX

(Value in $)



Current Assets:


Cash on Hand and Bank 75,000.00


Accounts Receivable 57,000.00


Uncollectible Accounts


This is more common in companies that sell goods and services on credit, which find themselves with customers that do not pay such bills, which should be accounted for as an expense.


There are three methods for estimating the allowance for doubtful accounts which are:


Method of % of Net Sales on Credit. (2% on the credit sales value)



Let’s see:

Credit sales 725,000.00

Account Estimation

Uncollectible (725,000.00 x .002) 14,500.00

Net Worth 710,500.00

Date Detail Aux. Debit Credit


March 31 General expenses 14,500.00

Uncollectible Account Expenses14,500.00

Provision for uncollectible accounts 14,500.00

Accounts Receivable % Method (2% on credit sales value)


Let’s see:

Credit sales 725,000.00

Account Estimation

Uncollectible (725,000.00 x .002) 14,500.00

Net Worth 710,500.00

Method of the % of each particular client. (This is calculated individually for each client).


Blue house ltd. 257,000.00 (5%)

Red house 200,000.00 (3%)

Pink house 200,000.00 (10%)

Clients Debtor Value Estimate

Blue house ltd. 257,000.00 5% 12,850.00

Red house 200,000.00 3% 6,000.00

Pink house 200,000.00 10% 10,000.00

Total 657,000.00 28,850.00

Date Detail Aux. Debit Credit


March 31 General expenses 28,850.00

Uncollectible Account Expenses28,850.00

Provision for Uncollectible Account 28,850.00


When accounts receivable have been determined as uncollectible, they must appear on the assets line and must be cancelled.

We now have the following:


Accounts Receivable 880,000.00


Provision for Doubtful Account Receivable 71,600.00

Net Balance of Accounts Receivable 808,400.00

(Before Cancellation)

Accounts Receivable Provision for Accounts

Of doubtful collection

880,000.00 60,000.00 60,000.00 1,600.00

820,000.00 70,000.00

60,000.00 71,600.00


We now have the following:

Accounts Receivable 820,000.00


Provision for Doubtful Account Receivable 11,600.00

Net Balance of Accounts Receivable 808,400.00


Partial Balance Sheet

As of Dec. 1, 20XX

(Value in $)




Cash on hand and in bank 75,000.00

Accounts Receivable 880,000.00


Uncollectible Account 71,000.00 808,000.00

Total Current Assets: 883,000.00

Documents Receivable

If the sales are made on credit and a greater guarantee is desired that has legal character, the client is asked to sign a document called pagare.


The documents to be legally collected are covered by negotiable documents among what we have:


Promissory note: represents a promise to pay a sum of money at a stipulated future date.


The bill of exchange: they are documents of short term debts, the above mentioned document does not have legal character, rather they are guaranteed by the morality and confidence of the issuing entity.


To calculate the interest for one year we use the following formulas:


Interest = Capital x Rate x (Number of days / 360)


The documents to be collected can only be registered in one account “Documents to be collected”, since the rights to collect these are available, with an interest rate and the due date.

Documents receivable discounted


This represents the unmatured documents receivable that have been transferred by endorsement or otherwise to a bank, at face value or that of their maturity; sometimes deducted in discount that comes to represent the interest corresponding to the unmatured term.

The documents represent a contingent liability for the endorser and for the seller of a contingent asset with recourse for non-payment. This should be presented in the balance sheet as a deduction from notes receivable.


The specific analysis of a company involves both the study of financial and non-financial information.

Financial information


The most useful sources of financial information are the following:

  • Annual reports

They provide an overview of the company as well as its sectorial positioning. They include comparative financial statements between years that facilitate the analysis of the evolution of the main economic-financial variables of the companies.


Types of Inventory


Inventories are important to manufacturers in general, and vary widely among different industry groups. The composition of this part of the asset is a great variety of items, and that is why they have been classified according to their use in the following types:

Raw Material Inventories: In every industrial activity there is a variety of articles (Raw Materials) and materials, which will be subjected to a process to obtain a finished article or finish. The materials that intervene in a greater degree in the production are considered “Raw Materials”, since their use is made in sufficiently important quantities of the finished product. The Raw Material is that or those articles subjected to a manufacturing process that in the end will become a finished product.

Products in Process Inventory: The products in process inventory consists of all the items or elements that are used in the current production process. That is, they are partially finished products that are at an intermediate stage of production and to which direct labor and indirect costs inherent to the production process are applied at a given time.


One of the characteristics of the Inventory of production in process is that the value increases as it is transformed from raw material into the finished product as a result of the production process.


Finished Goods Inventory: These are the items transferred by the production department to the finished goods warehouse because they have reached their full degree of completion and at the time of physical inventory taking are still in the stores, ie, those that have not yet been sold. The level of finished product inventory will depend directly on sales, that is, its level is given by the demand.


 Inventory of Materials and Supplies of factory or manufacturing: This is distinguished from the inventory of materials, because the materials can be directly associated with the finished product and become parts of it and are used in sufficient quantities to be practical to assign the cost to the product.


Manufacturing supplies are used indirectly in the process of making an item but do not become a formal part of the finished product, e.g., nails, paint, etc.

The manufacturing supplies are used indirectly in the process of elaboration of an article but they do not arrive to formal part of the same finished example: the nail, painting among others.

Inventory Valuation and Revenue Measurement

To calculate the inventory valuation we deduct from the sales revenue the cost of goods sold which leads us to measure the gross income of sales made in the business cycle, the amount that represents the cost of goods sold is calculated by subtracting the goods that we still have to sell – the final inventory which corresponds to the final inventory.

There are two inventory accounting systems to determine the cost of goods sold which are:


Physical Periodic Inventory System: In the periodic inventory system the business does not keep a continuous record of the available inventory, rather, at the end of the period, the business makes a physical count of the available inventory and applies the unit costs to determine the cost of the final inventory. This is the inventory figure that appears on the Balance Sheet. It is also used to calculate the cost of goods sold. The periodic system is also known as the physical system because it relies on the actual physical count of inventory. The periodic system is generally used to account for inventory items that have a low unit cost. Low cost items may not be valuable enough to guarantee the cost of keeping an up-to-date record of available inventory. To use the periodic system effectively, the owner must have the ability to control inventory through visual inspection. For example, when a customer requests certain available quantities, the owner or manager can view the existing goods.


Permanent or Perpetual Inventory System: In the Perpetual Inventory System, the business keeps a continuous record for each item in inventory. The records therefore show the available inventory at all times. Perpetual records are useful for preparing monthly, quarterly or interim financial statements. The business can determine the cost of the final inventory and the cost of goods sold directly from the accounts without having to account for the inventory.


The perpetual system offers a high degree of control because the inventory records are always up to date. Previously, businesses used the perpetual system primarily for high unit cost inventory, such as jewelry and automobiles; today with this method managers can make better decisions about quantities to buy, prices to pay for inventory, customer pricing, and terms of sale to offer. Knowing the quantity available helps protect inventory.


The main valuation bases for inventory are as follows:

– Cost

– Cost or Market, at the lowest


Cost basis for the valuation of inventories:

The Cost includes any additional costs necessary to place the items in the markets. Incidental costs include import duties, freight or other transportation, storage, and insurance costs while the items and/or raw materials are being transported or are in storage, and occasional expenses for any aging period.

Cost or Market Base, whichever is lower:


The market price may be determined on any of the following bases, depending on the type of inventory involved:


Purchase or Replacement Basis: This basis applies to purchased goods or materials.


Replacement Cost Base: applied to items in process, it is determined based on market prices for materials, prevailing wage costs and current manufacturing expenses.


Basis of realization: for certain inventory items, such as out-of-date merchandise or raw materials, or those collected from customers, a purchase or replacement value in the market may not be determinable and it may be necessary to accept, as an estimated market value, the probable selling price, less all possible costs incurred to recondition the merchandise or raw materials and sell them with a reasonable profit margin.