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What Are Receivables and Their Types in Accounting?

28 April, 2022
6 min read
Patrick Petti, AVP, Value Optimization
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What you'll learn

  • Anytime a business sells a good or service on credit, a receivable entry is made
  • Customers or others who have signed official promissory notes in acknowledgment of their debts owed to the company are known as notes receivable
  • Trade receivables are accounts receivable, and notes receivable that result from company sales, but there are other forms of receivables as well
CONTENT
What are receivables?
What are the different types of receivables?
To sum it up
FAQs
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Receivables management is often treated as an alternative accounting function that helps balance the books. To optimize finance operations and optimize cash inflows, the finance team looks at receivables as a strategic area of the business operations.

Receivable entries are beneficial to businesses and their clients because they allow businesses to maintain a steady supply of products. The relationship between the business owner and the account holder can be documented using various receivable entries. In bookkeeping, the different types of receivables are recorded in the financial statements.

When a business has a claim against a customer for a short-term extension of credit, they create a receivable entry in their accounting system and send an invoice to their client to request payment.

What are receivables?

A receivable account indicates money that a corporation expects to collect later. It helps businesses recognize the revenue period for which they anticipate getting paid.

Receivables are created when you sell a good or a service, and the new party pays you after the sale transaction is completed. The receivables are shown as assets on the balance sheet, and the general ledger shows a debit balance.

What are the different types of receivables?

Different types of receivables

There are various types of receivable entries that can be used to note the relationship between the business owner and
the account holder. Generally, receivables are divided into three types: trade accounts receivable, notes receivable,
and other receivables.

  1. Accounts receivable
  2. Accounts receivables is the amount of money a business has to collect in exchange for goods or services supplied to a customer on credit.

    The longer your accounts receivables remain unpaid, the more difficult it will be to arrange funds for manufacturing goods for further sales. Uncollected payments reduce working capital and delay business cycles.

    Collecting all unpaid dues should be a top priority to have a better cash flow. Failure to do so will negatively affect the cash flow available for other business needs.

    Consider the following scenario:

    (An electricity or water company’s accounting processes)

    Customers are given resources like electricity by power companies, who bill the customers after they have used the resources (electricity). Unpaid invoices will be recorded in the accounts receivables section of the balance sheet while the companies wait for payment for the utilities delivered.

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  3. Notes receivable
  4. Notes receivable is a common type of receivables, and it’s similar to the standard accounts receivable except for the payment deadlines. With a conventional receivable, you would ordinarily give a customer a two-month window to pay you back, but with notes receivable, the payment due date can be extended up to a year or more.

    In notes receivables, a promissory note is used to agree on a longer payment period between you and the second party (the debtor). A promissory note helps enforce your legal claim to payment from the debtor.

    For the debt settlements achieved within the agreed time frame, no interest will be charged. If the debtor asks for an extension of the payment period, interest will be set on a monthly basis.

    This series of journal entries will repeat every year until the note is paid in full. On the balance sheet, notes are normally divided into current and long-term categories. The amount due within the following year is the current component of the notes and the amount which has more than a year’s time to be repaid is categorized as long-term notes.

  5. Trade receivable
  6. Trades receivable is another frequent receivable that applies if you sell a product or service to a customer on credit. Trades receivable differ from standard accounts receivable and notes receivable. In trade receivables, these accounting entries are the actual outcome of a sale made by your organization.

    When a customer buys a product and is extended short-term credit in which to repay the loan, this is noted as a trades receivable entry in the current trades receivable account.

  7. Other receivables
  8. Other receivables include Interest receivables, salary receivables, employee advances, tax refunds, loans made to employees or other companies, and advances on wages paid to employees.

    Having an understanding of the different types of receivables can help you track who owes you what and when—in a more structured manner. And that’s an essential step in ensuring you have the finances you need to keep and develop your business!

To sum it up

Managing receivables is not easy, but controlling the process drives business achievement in a positive direction. Receivable automation software allows you to eliminate manual steps and streamline operations. Receivable automation software has features like real-time data management that help you to get the latest details on customers’ financial health and predict credit risk outcomes

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At HighRadius, we offer cloud-based Autonomous Software for the Office of the CFO—using AI-powered solutions to transform your receivables processes.

FAQs

    1. How are receivables different from accounts payable?

    Accounts payable and receivable are the complete opposites in accounting. The differences between them are briefly described in the definitions that follow.

    Accounts payable (AP) refers to the money your organization owes a third party for stock or services purchased on credit.

    Receivable refers to amounts that your company will be paid later. It helps businesses recognize the revenue period for which they anticipate getting paid.

    2. What are the two major types of receivables in accounting?

    • Accounts receivable

      The proceeds or money that the company will receive from its customers who have purchased goods and services on credit is referred to as Accounts Receivable (AR).

    • Notes receivable

      Notes payable is a common category of current obligations recorded in the general ledger. A note is a formal written agreement to repay a debt over an agreed period of time with stated interest.

    3. Are all receivables accounts receivable?

    Accounts receivable are considered receivable, but not all receivables are considered AR. Receivables also include nontrade receivables that are transactions outside the standard business of offering goods and services. Like insurance reimbursements, employee advances receivables, tax refunds, or insurance claims receivable.

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