Types of Receivables in Accounting

10 April, 2023
6 min
Terri Miller, Director of Business Operations

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6 mins

Table of Content

Key Takeaways
What are receivables?
What is the significance of receivables?
What are the different types of receivables?
Conclusion
FAQ 

Key Takeaways

  • Anytime a business sells a good or service on credit, a receivable entry is made.  
  • An enterprise’s receivables play a crucial role in determining its liquidity and ability to finance its operations.
  • Receivables can be classified into accounts/trade receivable, notes receivable, and other receivables.
keytakeway

What are receivables?

Receivables are unpaid customer debt for products or services delivered. It is a current asset that affects a business’s liquidity and working capital management. Receivables are shown as current assets on the balance sheet, and the general ledger shows a debit balance.

What is the significance of receivables?

Significance of Receivable

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 its accounting system and send an invoice to the client to request payment.

Receivables can be used as collaterals to secure loans that can enable businesses to meet short-term obligations. They are considered liquid assets and are a key part of the business’s working capital. It is critical for any enterprise to handle receivables effectively as they offer additional capital to fund operations and allow the enterprise to reduce its net debt.

What are the 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. Majorly, receivables can be divided into three types: trade receivable/accounts receivable (A/R), notes receivable, and other receivables.

What is trade/accounts receivable (A/R)?

Accounts receivable are the outstanding money owed to a business by its clients or customers for goods or services that have been provided but not yet paid for. It represents the amount of money that a company is entitled to receive and is considered an asset on the balance sheet.  The longer your A/R remains 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.  Often, finance leaders tend to overlook the cash that is tied up under the accounts receivable (A/R) entry on the balance sheet while coming up with financial strategies to optimize their business’ working capital.

Example of accounts receivable (A/R)

An example of accounts receivable is when a water utility company bills its customers for water consumption. Unpaid water bills represent accounts receivable, appearing on the company's balance sheet until customers settle their outstanding balances.
What Are Receivables and Their Types in Accounting?

What is notes receivable?

Notes receivable is a common type of receivable, 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.

What are other receivables?

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!

Conclusion

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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. Managing receivables is not easy, but controlling the process drives business achievement in a positive direction.  

HighRadius’ AI-Driven Autonomous Finance Solution allows you to eliminate manual steps and streamline operations. AI-powered A/R can enable features like real-time data management that help you get the latest details on customers’ financial health and predict credit risk outcomes. Accounts receivable automation can help create a positive working capital impact for businesses by improving cash flow, reducing payment delays and collection costs, and improving customer relationships. By automating the accounts receivable process, businesses can manage their working capital more effectively and improve their financial position.

What Are Receivables and Their Types in Accounting?

FAQ 

How are receivables different from accounts payable?

Accounts payable (AP) refers to the amount your organization owes a third party for stock or services purchased on credit, while receivable refers to the amount that your company will be paid later. 

Where are other receivables recorded?

Other receivables, which have features similar to trade receivables, are recorded under current assets on the balance sheet. Current assets are those that are estimated to be converted to cash in the coming year.

Is other receivables debit or credit?

Other receivables are recorded as an asset. Hence, they remain a debit, as it is the amount due to the company. Receivable is cash due to the company, from which it can sooner or later generate benefits.

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