Cash & Receivables
Cash is the most liquid asset. Receivables are the entity’s claims on customers and others for cash. ACC 926 Module 7.
ADMN 201 lists “cash” and “accounts receivable” as current assets in order of liquidity. ACC 926 specifies what counts as cash, how A/R is measured, when it’s derecognized, and how impairment is recorded.
Cash and Cash Equivalents
| Includes | Excludes |
|---|---|
| Coin, currency, demand deposits | Restricted cash |
| Bank drafts, certified cheques | Postdated cheques |
| Money market funds | Compensating balances (restricted) |
| Short-term investments maturing within 3 months of acquisition | Investments maturing > 3 months |
- Restricted cash — disclosed separately; not part of “cash and cash equivalents”.
- Bank overdraft — typically reported as a current liability; under IFRS, may be netted against cash if part of cash management.
- Foreign currency — reported in functional currency at the period-end exchange rate.
Internal Controls Over Cash (Appendix 7A)
Strong cash controls reduce fraud risk:
- Segregation of duties — different people for custody, recording, authorization.
- Daily deposit — all receipts banked intact.
- Bank reconciliation — performed monthly by someone independent of cash handling.
- Petty cash — imprest system; replenished only with documented receipts.
- Authorization — expenditures approved by appropriate level.
Bank Reconciliation Structure
Bank Statement Balance Book (Ledger) Balance
+ Deposits in Transit + Bank Collections / Notes
− Outstanding Cheques + Interest Earned
± Bank Errors − NSF Cheques
− Bank Service Charges
± Book Errors
= Adjusted Bank Balance = Adjusted Book Balance
(both sides must equal)
Receivables — Classification & Measurement
| Type | Description |
|---|---|
| Accounts Receivable | Trade receivables from customers; typically informal, no interest |
| Notes Receivable | Formal written promise; usually interest-bearing |
| Other Receivables | Tax refunds receivable, employee advances, deposits |
Classified current if expected to be collected within 12 months or operating cycle; otherwise non-current.
Initial Measurement
- A/R: invoice price net of trade discounts.
- Notes receivable: PV of future cash flows at the market rate of interest.
Subsequent Measurement
- Amortized cost using effective interest method (notes receivable).
- A/R: net of allowance for expected credit losses.
Trade Discounts vs. Cash Discounts
- Trade discount — reduction off list price (never recorded; just net).
- Cash discount (e.g., 2/10 n/30) — reduction for early payment.
- Gross method: record sale at gross; record discount when taken.
- Net method: record sale at net; record forfeit if discount not taken.
Impairment of Receivables
graph TD M[Impairment Methods] M --> A[Allowance Method<br/>GAAP-required] M --> D[Direct Write-Off<br/>NOT GAAP — tax only] A --> A1[Aging Method:<br/>% by age bucket] A --> A2[% of Sales:<br/>% of credit sales] A --> A3[IFRS 9 ECL:<br/>Expected credit loss]
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Allowance Method (Required Under GAAP)
Estimate the portion of receivables that will not be collected; record an allowance account.
Bad Debt Expense (Dr) X
Allowance for Doubtful Accounts (Cr) X
Net A/R on the balance sheet = Gross A/R − Allowance.
When a specific account is later written off:
Allowance for Doubtful Accounts (Dr) X
Accounts Receivable (Cr) X
This does not affect net A/R or net income — the allowance was already charged.
Two Estimation Approaches
| Method | Logic |
|---|---|
| Aging of receivables | Apply increasing % to older buckets; result = required ending allowance |
| % of credit sales | Apply % to credit sales for the period; result = bad debt expense for the period |
IFRS 9 Expected Credit Loss (ECL)
Forward-looking. Recognize 12-month ECL at origination; transition to lifetime ECL if credit risk has significantly increased.
Direct Write-Off
Charge bad debt to expense only when a specific account is determined uncollectible. Not GAAP — violates matching, used only for tax purposes or when amounts are immaterial.
Derecognition of Receivables
When does an entity remove A/R from its books before collection?
flowchart TD Q[Has the entity transferred<br/>substantially all risks and rewards?] Q -->|Yes| Sale[Treat as Sale<br/>Remove A/R · Recognize gain/loss] Q -->|No — but transferred control| Sale Q -->|No — retained control| SB[Treat as Secured Borrowing<br/>A/R stays on books<br/>Recognize loan + cash]
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Factoring
Sell A/R to a factor.
- Without recourse — factor bears credit risk → typically a sale.
- With recourse — seller retains risk → may be a borrowing.
Securitization
Pool A/R and sell as securities. Typically a sale if substantially all risks/rewards transferred.
Pledging / Assignment
Use A/R as collateral; A/R remains on the books — disclose only.
Receivables Ratios
A/R Turnover = Net Credit Sales / Average A/R
Average Collection Period = 365 / A/R Turnover
Lower collection period = faster cash conversion = healthier working capital.
Cross-Course Connections
- AccountingEquation-FinancialStatements — A/R is a current asset; bad debt expense hits the income statement
- FinancialRatios — Average Collection Period and A/R turnover from ADMN 201’s ratio set
- ShortTermFinancing — factoring is a short-term financing technique
- IFRSvsASPE — IFRS uses ECL; ASPE typically uses incurred loss
Key Points
- Cash equivalents = liquid + < 3 months to maturity at acquisition
- Allowance method required under GAAP; direct write-off used for tax only
- Two estimation approaches: aging (sets ending allowance) vs. % of sales (sets period expense)
- Write-off of a specific account = debit allowance, credit A/R; net A/R unchanged
- IFRS 9 ECL: 12-month expected loss → lifetime expected loss as credit risk worsens
- Derecognition test: substantially all risks and rewards transferred → sale; otherwise secured borrowing
- Factoring without recourse typically = sale; with recourse typically = borrowing
- A/R Turnover = Net Credit Sales / Avg A/R; Collection Period = 365 / Turnover