Question

Identify the different types of receivables and explain how companies recognize accounts receivable.

Answer 1

A receivable is money owed to a business by its clients and shown on its balance sheet as an asset.
Receivables can be classified as accounts receivables, notes receivable and other receivables ( loans, settlement amounts due for non- current asset sales, rent receivable, term deposits). Other receivables can be divided according to whether they are expected to be received within the current accounting period or 12 months (current receivables), or received greater than 12 months ( non-current receivables).

Accounts Receivable

Accounts receivable are amounts that customers owe the company for normal credit purchases. Since accounts receivable are generally collected within two months of the sale, they are considered a current asset. Accounts receivable usually appear on balance sheets below short-term investments and above inventory.

Notes Receivable

Notes receivable are amounts owed to the company by customers or others who have signed formal promissory notes in acknowledgment of their debts. Promissory notes strengthen a company’s legal claim against those who fail to pay as promised. The maturity date of a note determines whether it is placed with current assets or long-term assets on the balance sheet. Notes that are due in one year or less are considered current assets, while notes that are due in more than one year are considered long-term assets.

Other Receivables

Accounts receivable and notes receivable that result from company sales are called trade receivables, but there are other types of receivables as well.

How they are Recognized

If you are operating under the accrual basis, you record account receivable transactions irrespective of any changes in cash.

It would be nice if everyone paid their invoices on time ... but this is the realworld.

Some customers are conscientious, others are not

Some are disorganized with paperwork

Some don’t have the money because they:

a) didn’t budget to pay your bill, or

b) haven’t themselves been paid by their customers.

Contact with the customer and following up non-payments

Allowing the customer to pay the account off over several weeks / months

The formula for calculating interest

This is a five-step process for a worse case non-payment scenario.

a phone call

another phone call or two

a letter of demand

a final letter of demand

hand over to debt collection agency

Follow the above procedure to collect the receivables within the due date