What Are Receivables?
Receivables, commonly referred to as accounts receivable (AR), signify the outstanding invoices a company has or the money that customers owe it. This concept holds paramount significance in business accounting and finance, specially categorized under current assets on the balance sheet. The nature of receivables tallies with the credit terms given to customers – failing payment obligations could cause cash flow disruptions, hence why managing receivables efficiently is crucial.
Examples of Receivables
- Trade Receivables: A business invoices a client for services rendered and allows a payment period of 30 days. Until the client pays the invoice, the amount is recorded as a receivable.
- Notes Receivable: A business issues a formal promissory note to a customer who agrees to pay the amount within a specified period, often with interest.
- Interest Receivables: A financial institution has lent out loans and the interest due but not yet received from the borrowers is recorded as interest receivables.
- Rent Receivables: Property management companies listing the outstanding rent owed by tenants.
- Employee Receivables: Salaries or advances provided to employees that have yet to be repaid.
Frequently Asked Questions (FAQs)
Q1: How are receivables different from payables?
- A1: Receivables are amounts owed to a business by its customers, classified as current assets. Payables, on the other hand, are amounts a business owes for goods or services received, categorized as liabilities.
Q2: What is the significance of aging schedules in managing receivables?
- A2: Aging schedules classify receivables based on the duration they have been outstanding, helping businesses identify overdue accounts and assess the likelihood of defaults.
Q3: How do companies use factoring to manage receivables?
- A3: Through factoring, companies sell their receivables to a third party at a discount, transforming AR into immediate cash flow and reducing the risk of bad debts.
Related Terms with Definitions
-
Accounts Receivable (AR): Money owed to a company by its debtors. It’s a major line item on the balance sheet under current assets.
-
Trade Receivables: Specific to amounts due from customers when a business provides goods or services on credit. Often a synonym for accounts receivable but can also include notes receivable.
-
Bad Debt Expense: The cost to the business when receivables are uncollectible or not yet received. It is recorded on the income statement.
-
Liquidity: The ability of a company to meet its short-term obligations using assets that can quickly be converted to cash, with receivables being a component.
-
Allowance for Doubtful Accounts: An estimate of the portion of receivables that may be uncollectible, offsetting gross receivables to reflect their net realizable value.
Online References
- Investopedia: Accounts Receivable
- Corporate Finance Institute: Receivables
- American Institute of CPAs (AICPA): Managing Receivables
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield.
- “Financial Accounting” by Robert Libby, Patricia A. Libby, and Frank Hodge.
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso.
Accounting Basics: Receivables Fundamentals Quiz
Thank you for exploring the intricate aspects of receivables with us. Successfully managing receivables is critical to maintaining healthy cash flow and ensuring the financial stability of your business!
