Question

Provide an original example of a transaction and then identify the type receivable—accounts receivable, a note receivable, or other receivables.

Answer 1

Example :

ABC company sells goods to Customer X for $5,000 on credit basis. The ABC company has a 30-day credit period policy. The customer X requests the company, to lend $10,000 for six months at the rate of 6% p.a.

Classification :

1) Accounts Receivable :

Money owed by the customers in the ordinary course of business are called "Accounts receivable".

In the above transaction, $5,000 sold is to be received from the customer X for credit sales made. This transaction occurs in the ordinary course of business and hence, is classified as "Accounts Receivable"

2) Notes Receivable :

The money due to the company on account of the promissory notes from the customers or others in acknowledgment of their debts is called "Notes Receivable".

In the above transaction, $10,000 due from the customer is to be treated as Notes receivable. These transactions are different from normal credit sales made during the course of business.

3) Other Receivable :

The receivables that do not fall under the both the categories as mentioned in (1) & (2) above, are classified as "Other Receivables".

In the above transaction, the interest payable by the Customer X on the notes due are classified as "Other Receivables" as it does not fall in either of the categories mentioned above.Only the principal amount of the Note due is classified under Notes Receivable, the interest component is classified as "Other Receivable".