Bills Receivable: Definition
Bills Receivable represent a business’s claims against other entities for amounts to be received at a future date based on the terms specified in promissory notes or bills of exchange. These are current assets in accounting and are typically classified under accounts receivable. The holder of a bill receivable can expect to receive cash from the issuer upon the maturity of the bill. Bills Receivable are often recorded alongside accounts receivable in financial statements.
Examples of Bills Receivable
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A Promissory Note: Company ABC sells goods worth $50,000 to Company XYZ. Instead of receiving immediate payment, Company ABC accepts a promissory note from XYZ, payable after 60 days. This promissory note will be recorded as a bill receivable in Company ABC’s balance sheet.
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Bills of Exchange: A manufacturer receives an order from a retailer and delivers the goods. The retailer accepts a bill of exchange drawn by the manufacturer for $20,000, payable in three months. The manufacturer records the bill of exchange as a bill receivable.
Frequently Asked Questions (FAQs)
Q1: How are Bills Receivable recorded in the financial statements?
- A1: Bills Receivable are recorded as part of current assets in the balance sheet. They are typically classified under accounts receivable or separately, depending on the company’s accounting policies.
Q2: What is the difference between Bills Receivable and Accounts Receivable?
- A2: Accounts Receivable represents money owed to a company by its customers from credit sales. Bills Receivable specifically refer to written agreements (like promissory notes) indicating that amounts will be paid in the future.
Q3: Can Bills Receivable be discounted before maturity?
- A3: Yes, businesses can discount bills receivable before maturity with financial institutions, which provides them with cash earlier, albeit at a discount.
Q4: Are Bills Receivable considered liquid assets?
- A4: Yes, since Bills Receivable are generally due within a short period, they are considered relatively liquid current assets.
Q5: How does the maturity date of a Bill Receivable affect the accounting treatment?
- A5: The maturity date impacts when the receivable will be settled. Until maturity, it remains recorded as a current asset. Upon receiving payment at maturity, it gets converted to cash or bank balances.
Related Terms
- Accounts Receivable: Amounts due to a company for goods or services delivered or used but not yet paid for by customers.
- Bills Payable: Short-term liabilities representing amounts companies are due to pay as stated in promissory notes or bills of exchange.
- Promissory Note: A financial instrument containing a written promise to pay a specified amount to a specific person at a particular future date.
- Bills of Exchange: A written order binding one party to pay a fixed sum of money to another party on demand or at a predetermined date.
- Current Assets: Resources expected to be converted to cash or its equivalent within one year during the normal course of business.
Online Resources
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Principles of Accounting” by Jack L. Smith and Robert F. Meigs
Accounting Basics: “Bills Receivable” Fundamentals Quiz
### What is the primary feature of a Bill Receivable?
- [ ] It is a bill issued for completed services.
- [x] It is a financial instrument that promises future payment.
- [ ] It is a documentation for returned goods.
- [ ] It is a purchase invoice awaiting payment.
> **Explanation:** Bills Receivable are financial instruments that contain a promise for future payment at a specific date by the issuer.
### Where are Bills Receivable recorded in the financial statements?
- [x] As part of current assets.
- [ ] Under non-current liabilities.
- [ ] In the equity section.
- [ ] As an expense.
> **Explanation:** Bills Receivable are recorded as current assets on the balance sheet as they represent amounts the company expects to receive within a short period.
### What differentiates a Bill Receivable from an Account Receivable?
- [ ] Bills Receivable have no maturity date.
- [ ] Accounts Receivable are promissory notes.
- [x] Bills Receivable are formal written agreements to pay.
- [ ] Accounts Receivable are part of long-term assets.
> **Explanation:** Bills Receivable are formal written agreements such as promissory notes or bills of exchange, while accounts receivable are broader, encompassing all amounts owed by customers.
### Can Bills Receivable be used to obtain funds before maturity?
- [x] Yes, they can be discounted.
- [ ] No, they must wait until maturity.
- [ ] Only if the issuer agrees.
- [ ] As long as they are non-negotiable.
> **Explanation:** Businesses can discount bills receivable with financial institutions to receive cash before the actual maturity date, though typically at a discounted rate.
### Which financial institution commonly discounts Bills Receivable?
- [ ] Government agencies
- [ ] Real estate companies
- [x] Banks
- [ ] Retail stores
> **Explanation:** Banks and other financial institutions commonly provide discounting services for bills receivable, advancing the funds to the business before the bill’s maturity.
### What role does the maturity date play in Bills Receivable?
- [ ] It indicates credit worthiness.
- [ ] It sets the interest rate.
- [x] It specifies when the payment is due.
- [ ] It determines the classification in the balance sheet.
> **Explanation:** The maturity date in a bill receivable specifies when the payment is due, which is essential for managing cash flows and financial planning.
### In which section of the cash flow statement would collected Bills Receivable appear?
- [ ] Cash Flows from Investing Activities
- [x] Cash Flows from Operating Activities
- [ ] Cash Flows from Financing Activities
- [ ] Supplemental Information
> **Explanation:** Collected Bills Receivable are part of the cash flows from operating activities as they relate directly to the primary revenue-generating activities of the business.
### What happens to the value of a Bill Receivable after it matures?
- [ ] It becomes a liability.
- [ ] It is written off as an expense.
- [x] It is converted to cash or bank balances.
- [ ] It increases in amount.
> **Explanation:** Upon maturity, a bill receivable is converted to cash or bank balances as the payment from the issuer is received.
### Why are Bills Receivable considered relatively liquid?
- [x] They are due within a short period.
- [ ] They can be converted to equity.
- [ ] They are non-negotiable.
- [ ] They have long maturity periods.
> **Explanation:** Bills Receivable are considered liquid because they are typically due within a short time frame, making them easier to convert to cash.
### Why might a company accept a Bill Receivable instead of immediate cash?
- [ ] To incur more liabilities.
- [ ] For better long-term recognition.
- [x] To allow the customer more payment flexibility.
- [ ] To avoid taxable income.
> **Explanation:** A company might accept a bill receivable to offer the customer more payment flexibility, helping to maintain good business relations and potentially increase future sales.
Thank you for delving into our comprehensive guide on Bills Receivable. Stay sharp and continue advancing your financial acumen!
