Accounting for Receivables

Receivables include all amounts due from third parties. Receivables is a general term which refers to all monetary obligations owed to the business by its customers or debtors. Receivables can be broadly classified as trade-receivables and non-trade receivables.

Trade receivables are those receivables which originate from sales of goods and services by a business to its customers in ordinary course of business. There are two main accounts used for trade receivables which are accounts receivable and notes receivable. When the customers orally promise to pay, the receivables are recorded as accounts receivable. However if the customers' promise is written one, the receivables are recorded as notes receivable. Notes receivable usually require the debtor to pay interest. Both accounts receivable and notes receivable may be current and non-current.

Non-trade receivables are the amounts due from third parties for transactions outside its normal course of business of selling goods and services. Example of non-trade receivables are loans to employees, tax refunds owed to the business by tax authorities etc.

As long as a business expects to recover the money from the debtors, it records its receivables as assets in its balance sheet because it expects to derive future benefits (i.e. cash) from them. It does not matter whether they are due in the current period or not.

Written by Irfanullah Jan