Trade receivables are amounts owed by customers from credit sales. They are reported at net realizable value: gross receivables minus the allowance for credit losses, sales returns, and trade discounts.
Net trade receivables = Gross A/R − Allowance for credit losses − Allowance for sales returns − Trade discounts
The subledger lists each customer's balance individually. The general ledger carries the single control-account total. The two must agree at every reporting date.
HIGH-FREQUENCY: CECL, the Current Expected Credit Loss model, replaced the incurred-loss model. CECL exists because the 2008 financial crisis exposed how the old model under-recorded losses: banks could not book a loss until it was probable, even when portfolios were obviously deteriorating. CECL forces recognition at the earliest point, inception. You record a lifetime expected loss the day you book the receivable.
The estimate uses three inputs:
- Historical experience: the entity's own loss history on similar assets
- Current conditions: present-day adjustments to the historical baseline (industry stress, customer concentration)
Common mistakes
- Crediting Credit Loss Expense on a recovery. The reversal goes to the allowance, not to expense. Trap: a candidate restores $9,000 to expense, producing $73,000 of credit loss expense instead of $82,000.
- Treating with-recourse factoring as automatic secured borrowing. With-recourse can still be a sale if all three ASC 860 conditions are met. Skipping the test and booking a $500,000 liability misses sale treatment entirely.
- Adjusting net receivables for a write-off. Write-offs reduce both gross A/R and the allowance by the same amount. Net does not change. Trap: a candidate reduces net A/R by $58,000.
Bottom line
- CECL (ASC 326) recognizes lifetime expected credit losses at inception from historical experience, current conditions, and reasonable forecasts.
- The Allowance for Credit Losses is a contra-asset; net receivables equals gross A/R minus the allowance.
- Write-offs reduce gross A/R and the allowance by the same amount, leaving net receivables and net income unchanged.
- Recoveries reverse the original write-off (debit A/R, credit Allowance), then record cash; credit loss expense is untouched.
Exam shortcut
When you see a write-off, mentally lock in: net A/R unchanged, no income statement effect. The two trap answers will be (X expense), eliminate both. For factoring questions, run the ASC 860 three-criteria checklist BEFORE deciding sale vs. secured borrowing. "With recourse" alone does not determine the answer. Allowance rollforward shortcut: write-offs decrease the allowance, recoveries increase it, expense plugs to the required ending balance.
The full lesson (about 2,472 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.B1
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