Introduction to Receivables
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Introduction to Receivables

This article would acquaint the reader with the concept of receivables. After finishing this article, the reader should be able to know the characteristics of receivables, understand how to classify receivables either as trade or non-trade receivables, understand the valuation of receivables and know how to classify the receivables as either current or noncurrent.

Receivables are amounts that are collectible from customers and other parties that frequently arise from the sale of merchandise, performance of services or claims from lent money.

Characteristics of Receivables

  1. Payments are fixed or determinable
  2. They may or may not have a fixed term or maturity
  3. They are not traded in an active securities market
  4. The holder can recover significantly all of its investment except if there is credit deterioration
  5. The holder does not have a demonstrated intention and ability to control them until maturity.

Classifications/Types of Receivables

There are generally two types of receivables:

  1. Trade receivables
  2. Nontrade receivables

Trade receivables are claims that arise from the sale of merchandise or services in the ordinary course of business. In other words, trade receivables are open accounts of customers for sales where cash is not yet collected or services that are not yet billed. The common types of trade receivables are accounts receivable and notes receivable.

Nontrade receivables are claims that arise from events other than the sale of merchandise or the rendering of services in the normal course of operations. Examples include advances to employees, advances to officers, claims against suppliers, subscriptions receivable, rent deposit, dividends receivable and the like. (When solving problems,  those receivable that are not accounts receivable and notes receivable would most certainly fall under nontrade receivables)

Valuation of Receivables                                                                                                                            

Receivables should be valued at their estimated realizable values. The estimated realizable value is computed as follows:

Face Amount

-

Allowance for Doubtful Accounts

-

Anticipated Adjustments

Long term notes receivable could be stated at their discounted amounts (present value) when the notes commonly bear no interest (noninterest bearing) or an interest rate which is unreasonably low.

Interest bearing notes receivable should be valued at fair value (equal to face value).

Receivable denominated in a foreign currency has to be converted to local currency at the exchange rate at the balance sheet date.

Current or Noncurrent?

The following are the rules on when to classify receivables as either current or noncurrent in the balance sheet.

Trade receivables

  • Trade receivables are to be classified as current assets if reasonably expected to be collected within one year from the balance sheet date or within the normal operating cycle whichever is longer.

Long-term installments receivable

  • If the major portion of the receivables will be collected beyond the normal operating cycle, the portion currently due should be classified as current asset and the balance to be shown as noncurrent asset.

Nontrade receivables

  • If collectible within one year, notes receivable are classified as current assets
  • If collectible beyond one year, notes receivable are classified as noncurrent assets

Subscriptions receivable

  • May be classified as current asset if collectible within one year
  • Otherwise, it is preferably shown as a deduction from subscribed capital stock

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Comments (4)

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