In accounting, receivables are amounts owed to a company by customers or entities, representing the right to receive payment for goods or services. They are classified as assets on the balance sheet.
Receivables: Types of Receivables, Calculation & Examples
What Are Receivables in Accounting?
Receivables are claims against customers and others for money, goods, or services. For financial statement purposes, companies classify receivables as either current (short-term) or noncurrent (long-term).
Companies expect to collect current receivables within a year or during the current operating cycle, whichever is longer.
They classify all other receivables as noncurrent. Receivables are further classified in the balance sheet as either trade or nontrade receivables.
A receivable is an amount due from customers for credit sales. Receivables are claims against customers and others for money, goods, or services.
The main sources of receivables are the normal operating activities of a business, i.e., credit sales of goods and services to customers.
3 Types of Receivables
Types of receivables are;
- Current or non-current Receivables,
- Trade or non-trade Receivables, and
- Accounts or notes Receivables.
Current Receivables
Current Receivables are expected to be collected within a year or during the current operating cycle or accounting period.
Amounts due from officers, directors, and major stockholders arising out of sales and subject to the usual credit terms are normally considered current receivable.
| Customer | Invoice Amount | Payment Terms | Due Date |
|---|---|---|---|
| Customer A | $1,000 | Net 30 | June 15 |
| Customer B | $500 | Net 15 | June 8 |
| Customer C | $2,500 | Net 60 | July 20 |
| Customer D | $800 | Net 45 | July 5 |
In this example, the table includes columns for the customer’s name, the invoice amount, the payment terms (indicating when the payment is due), and the due date for each customer’s invoice. These are all components of current receivables, which represent the amounts owed by customers that are expected to be collected within a relatively short period, usually within one year.
Non-current Receivables
Non-current Receivables (long-term) are expected to be collected for more than one or two years.
When claims have arisen from transactions other than sales and current recovery is not assured, such items are Non-current receivable.
| Borrower | Principal Amount | Interest Rate | Maturity Date |
|---|---|---|---|
| Company X | $50,000 | 5% | December 31, 2025 |
| Individual Y | $10,000 | 3% | March 15, 2024 |
| Organization Z | $100,000 | 4.5% | October 10, 2026 |
In this example, the table includes columns for the borrower’s name or identifier, the principal amount of the loan, the interest rate applied to the loan, and the maturity date of each non-current receivable.
Non-current receivables represent amounts owed to the company that are not expected to be collected within a relatively short period, typically extending beyond one year.
These receivables can arise from long-term loans, installment sales, or other financial arrangements where payment is anticipated over an extended period of time.
The company keeps track of these receivables separately from current receivables to reflect their long-term nature and different collection timeline.
Trade Receivables
Trade Receivables are amounts owed by customers for goods sold and services rendered as part of normal business operations.
Normally trade receivables do not involve interest, although an interest or service charge may be added if payments are not made within a specified period.
- Advances to officers, subsidiaries, and employees.
- Deposits to cover potential damages or losses.
- Dividends and interest receivable
- Common carriers for damaged or lost goods.
- Customers for returnable items.
| Customer | Invoice Amount | Payment Terms | Due Date |
|---|---|---|---|
| Customer A | $1,000 | Net 30 | June 15 |
| Customer B | $500 | Net 15 | June 8 |
| Customer C | $2,500 | Net 60 | July 20 |
| Customer D | $800 | Net 45 | July 5 |
In this example, the table includes columns for the customer’s name, the invoice amount, the payment terms (indicating when the payment is due), and the due date for each customer’s invoice.
These components represent trade receivables, which are the amounts owed to a company from its customers for the sale of goods or services on credit terms within the normal course of business.
Trade receivables are typically short-term in nature and are an important component of a company’s working capital. The company uses this table to track and manage the trade receivables, ensuring timely collection and monitoring the payment due dates from its customers.
Non-Trade Receivables
Non-Trade Receivables arise from a variety of transactions and can be written promises either to pay or to deliver, for example-
- Sales of securities or property other than .goods or
- Advances to officers and employees.
- Deposits to cover potential damages or
- Common carriers for damaged or lost goods.
Certainly! Here’s an example table illustrating non-trade receivables:
| Debtor | Amount | Due Date |
|---|---|---|
| Loan A | $50,000 | June 30, 2024 |
| Rent Deposit | $2,000 | July 15, 2023 |
| Employee Loan | $10,000 | December 31, 2023 |
| Vendor Refund | $1,500 | August 10, 2023 |
In this example, the table includes columns for the debtor (the entity owing the money), the amount owed, and the due date for each non-trade receivable.
Non-trade receivables refer to amounts owed to a company that is not directly related to the sale of goods or services in the normal course of business. They can arise from various transactions such as loans provided to employees or external parties, rent deposits, or refunds from vendors.
These receivables are typically classified separately from trade receivables as they involve different types of transactions and may have different payment terms or conditions. The company uses this table to track and manage its non-trade receivables, ensuring timely collection and monitoring of the due dates for each debtor.
Accounts Receivables
Accounts Receivables are oral promises of the purchases to pay for goods and services sold. They are normally collectible within 30 to 60 days.
| Customer | Invoice Amount | Payment Terms | Due Date |
|---|---|---|---|
| Customer A | $1,000 | Net 30 | June 15 |
| Customer B | $500 | Net 15 | June 8 |
| Customer C | $2,500 | Net 60 | July 20 |
| Customer D | $800 | Net 45 | July 5 |
In this example, the table includes columns for the customer’s name, the invoice amount, the payment terms (indicating when the payment is due), and the due date for each customer’s invoice. These components represent accounts receivable, which are the outstanding amounts owed to a company by its customers for goods or services provided on credit.
Accounts receivable reflect the credit sales made by the company and are typically short-term assets that are expected to be collected within a relatively short period, usually within one year.
The company uses this table to track and manage its accounts receivable, ensuring timely collection of outstanding payments and monitoring the due dates for each customer’s invoice.
Notes Receivables
Notes Receivables are promises to pay a certain sum on a specified future date. They may arise from sales, financing, or other transactions. Notes may be short-term or longterm.
| Borrower | Principal Amount | Interest Rate | Maturity Date |
|---|---|---|---|
| Company X | $50,000 | 5% | December 31, 2025 |
| Individual Y | $10,000 | 3% | March 15, 2024 |
| Organization Z | $100,000 | 4.5% | October 10, 2026 |
In this example, the table includes columns for the borrower’s name or identifier, the note’s principal amount, the interest rate applied to the note, and the maturity date of each note receivable.
Notes receivable represent formal written promises by borrowers to repay a specific amount of money to the lender at a future date. These notes can be issued for various reasons, such as loans provided by the company to other entities or individuals. They typically have specified interest rates and maturity dates, at this point, the borrower must repay the principal amount plus any accrued interest.
The company uses this table to track and manage its notes receivable, monitor the repayment schedule, calculate interest earned, and ensure the timely collection of principal and interest payments.
Important Journal for Receivables
| 1 | Purchased good in cash | ||
| Purchased A/C | Debit | ||
| To Cash A/C | Credit | ||
| 2 | Purchased Specific Assets in cash | ||
| Specific Assets A/C | Debit | ||
| To Cash A/C | Credit | ||
| 3 | Goods Sold in Cash | ||
| Cash A/C | Debit | ||
| To Sales A/C | Credit | ||
| 4 | Sold Specific Assets in Cash | ||
| Cash A/C | Debit | ||
| To Specific Assets A/C | Credit | ||
| 5 | Purchased goods on account | ||
| Purchased A/C | Debit | ||
| To Accounts Payable-Name of creditor A/C | Credit | ||
| 6 | Purchased Specific Assets on account | ||
| Specific Assets A/C | Debit | ||
| To Accounts Payable-Name of creditor A/C | Credit | ||
| 7 | Goods Sold on account | ||
| Accounts Receivable: Name of debtor A/C | Debit | ||
| To Sales A/C | Credit | ||
| 8 | Sold Specific Assets on account | ||
| Accounts Receivable-Name of debtor A/C | Debit | ||
| To Specific Assets A/C | Credit | ||
| 9 | Issued a note to the Creditor for purchase on account | ||
| Purchased A/C | Debit | ||
| To notes Payable AC | Credit | ||
| 10 | Received a note from the debtor for sales on account | ||
| Notes Receivable AC | Debit | ||
| To Sales A/C | Credit | ||
| 11 | Received a note from Accounts Receivable | ||
| Notes Receivable A/C | Debit | ||
| Accounts Receivable Name of debtor A/C | Credit | ||
| 12 | Issued a note to Accounts Payable | ||
| Accounts Payable-Name of the creditor | Debit | ||
| To Notes Payable A/C | Credit | ||
| 13 | Received cash on Notes Receivable from debtor its maturity | ||
| Cash A/C | Debit | ||
| To Notes Receivable A/C | Credit | ||
| 14 | Cash paid on Notes Payable to Creditor at maturity | ||
| Notes Payable A/C | Debit | ||
| To Cash A/C | Credit | ||
| 15 | Discounted Note at the Bank with net interest revenue before maturity | ||
| Cash A/C | Debit | ||
| To Notes Receivable Discounted | Credit | ||
| To Interest Revenue | Credit | ||
| 16 | Discounted Note at the Bank with net interest expenses before maturity | ||
| Cash A/C | Debit | ||
| Interest Expenses A/C | Debit | ||
| To Notes Receivable Discounted | Credit | ||
| 17 | Discounted non-interest-bearing note at the Bank before maturity | ||
| Cash A/C | Debit | ||
| Interest Expenses A/C | Debit | ||
| To Notes Receivable Discounted (Here interest expenses mean discount) | Credit | ||
| 18 | Collected notes Receivable discounted by Bank at maturity | ||
| Notes Receivable Discounted A/C | Debit | ||
| To Notes Receivable A/C (Cancelled the original notes receivable foe paid at maturity) | Credit | ||
| 19 | Dishonored not by Debtor or Accounts Receivable | ||
| Account Receivable Name of debtor A/C | Debit | ||
| To cash (Paid cash to bank for dishonored note) | Credit | ||
| 20 | Paid cash on notes payable at maturity | ||
| Notes payable A/C | Debit | ||
| Interest Expenses A/C | Debit | ||
| To Cash | Credit | ||
| 21 | Dishonored the notes payable (Not for payment to creditor at maturity) | ||
| Notes payable A/C | Debit | ||
| To Accounts payable – Name of the creditor | Credit | ||
| 22 | Estimated allowance for doubtful account on accounts Receivable | ||
| Bad debt Expenses A/C | Debit | ||
| To Allowance for doubtful accounts | Credit | ||
| 23 | Written off accounts receivable against allowance for doubtful accounts as un-collectible | ||
| Allowance for doubtful Accounts A/C | Debit | ||
| To Accounts Receivable | Credit | ||
| 24 | Written off accounts receivable directly as Un-collectible | ||
| Bad debt Expenses A/C | Debit | ||
| To Accounts Receivable | Credit | ||
| 25 | Written off accounts Receivable for recovery | ||
| Accounts Receivable A/C | Debit | ||
| To Allowance for doubtful accounts/Bad debt Expenses (Reinstalled accounts receivable for recovery) | Credit | ||
| Received cash from accounts Receivable | |||
| Cash A/C | Debit | ||
| To Accounts Receivable | Credit | ||
| Or; Received cash from accounts Receivable with interest | |||
| Cash A/C | Debit | ||
| To Accounts Receivable | Credit | ||
| To Interest Revenue | Credit | ||
Receivables Turnover Ratio
Analysts frequently compute financial ratios to evaluate a company’s accounts receivable liquidity. To assess the liquidity of the receivables, they use the receivables turnover ratio. This ratio measures the number of times, on average, a company.
Difference between Pledging Receivables and Factoring Receivables
| Points of Distinction | Pledging Receivables | Factoring Receivables |
|---|---|---|
| Definition | A pledge of accounts receivable creates a secured short-term loan through pledging accounts receivables as collateral to a financial institution. | Factoring entails the sale of accounts receivable at a discount. Although factoring is not a form of secured short-term borrowing, it does involve the use of accounts receivable to Obtain needed short-term funds. |
| Process | Pledging accounts receivables involve: Providing the list of A/R to a bank. Matching the collaterals terms and loan terms. Deducting margins and other deductions. Providing Net amount of Advance. | Factoring A/R involves a similar process, but only additional adjustments are necessary for factoring commission. |
| Interest Cost | The interest cost of A/R pledging is 2- 5% more than the prime rate | Factoring A/R involves commission and interest cost |
| Bad debt consideration | The borrower has to consider the bad debt loss as the borrower is still the owner of A/R. | The borrower doesn’t consider the bad debt as the A/R is sold to the factor. |
| Cost savings | Pledging A/R does not save any cost | Factoring saves; Administrative costs, and bad-debt loss |