Receivables, also referred to as accounts receivable, are debts owed to a
company by its customers for goods or services that have been delivered or used
but not yet paid for.
Receivables are created by extending a line of credit to customers and are
reported as current assets on a company's balance sheet. They are considered a
liquid asset, because they can be used as collateral to secure a loan to help
meet short-term obligations. Receivables are part of a company’s working
capital. Effectively managing receivables involves immediately following up with
any customers who have not paid and potentially discussing a payment plan
arrangement, if needed. This is important because it provides extra capital to
support operations and lowers the company’s net debt.
Types of Receivables
Classification
–current receivables: expected to be collected within a year
– noncurrent receivables: all others
• Trade receivables: amounts owed by customers for goods sold and
services rendered
• Nontrade receivables: arise from a variety of transactions
Accounts Receivable
Accounts receivable are amount that customers owe the company for normal
credit purchases. Since accounts receivable are generally collected within two
months of the sale, they are considered a current asset. Accounts receivable
usually appear on balance sheets below short-term investments and above
inventory.
Notes Receivable
Notes receivable are amounts owed to the company by customers or others who
have signed formal promissory notes in acknowledgment of their debts.
Promissory notes strengthen a company’s legal claim against those who fail to
pay as promised. The maturity date of a note determines whether it is placed with
current assets or long-term assets on the balance sheet. Notes that are due in
one year or less are considered current assets, while notes that are due in more
than one year are considered long-term assets.
Other Receivables
Accounts receivable and notes receivable that result from company sales are
called trade receivables, but there are other types of receivables as well. For
example, interest revenue from notes or other interest-bearing assets is accrued
at the end of each accounting period and placed in an account named interest
receivable. Wage advances, formal loans to employees, or loans to other
companies create other types of receivables. If significant, these nontrade
receivables are usually listed in separate categories on the balance sheet
because each type of nontrade receivable has distinct risk factors and liquidity
characteristics.
Trade Discount and Cash Discount
Point at Which Discount is Given
A trade discount is given at the point of sale and is deducted from the list price
before any exchange of goods takes place.
A cash discount is given when invoice payment has been made within the early
settlement terms.
Variability of Discount
A trade discount is given at the same rate to all customers and depends on the
quantity/amount purchased.
A cash discount is based on payment terms which vary from customer to
customer.
Recognition of Receivables
Measure the receivable initially at its fair value.
- Fair value may be different from the exchange price.
- After initial recognition, measure receivables at amortized cost.
Direct Write-off Method and Allowance Method
Direct Write-off
The direct write-off method is used only when we decide a customer will not pay.
We do not record any estimates or use the Allowance for Doubtful Accounts
under the direct write-off method. We record Bad Debt Expense for the amount
we determine will not be paid. This method violates the GAAP matching principle
of revenues and expenses recorded in the same period.
Allowance Method
The allowance method follows GAAP matching principle since we estimate
uncollectible accounts at the end of the year. We use this estimate to record Bad
Debt Expense and to setup a reserve account called Allowance for Doubtful
Accounts (also called Allowance for Uncollectible Accounts) based on previous
experience with past due accounts. We can calculate these estimates based on
Sales (income statement approach) for the year or based on Accounts
Receivable balance at the time of the estimate (balance sheet approach).
Receivable Financing
What Is Accounts Receivable Financing?
Accounts receivable (AR) financing is a type of financing arrangement in which a
company receives financing capital related to a portion of its accounts receivable.
Accounts receivable financing agreements can be structured in multiple ways
usually with the basis as either an asset sale or a loan.
Accounts receivable financing is an agreement that involves capital principal in
relation to a company’s accounts receivables. Accounts receivable are assets
equal to the outstanding balances of invoices billed to customers but not yet paid.
Accounts receivables are reported on a company’s balance sheet as an asset,
usually a current asset with invoice payment required within one year.
Types of Receivable Financing
Structuring
Asset Sales
Accounts receivable financing is typically structured as an asset sale. In this type
of agreement, a company sells accounts receivable to a financier. This method
can be similar to selling off portions of loans often done by banks.
A business receives capital as a cash asset replacing the value of the accounts
receivable on the balance sheet. A business may also need to take a write-off for
any unfinanced balances which would vary depending on the principal to value
ratio agreed on in the deal.
Loans
Accounts receivable financing can also be structured as a loan agreement.
Loans can be structured in various ways based on the financier. One of the
biggest advantages of a loan is that accounts receivable are not sold. A company
just gets an advance based on accounts receivable balances. Loans may be
unsecured or secured with invoices as collateral. With an accounts receivable
loan, a business must repay.
Underwriting
Factoring companies take several elements into consideration when determining
whether to onboard a company onto its factoring platform. Furthermore, the
terms of each deal and how much is offered in relation to accounts receivable
balances will vary.
References:
https://www.investopedia.com/terms/r/receivables.asp
https://www.double-entry-bookkeeping.com/bookkeeping-basics/difference-between-trade-discount-
and-cash-discount/
http://www.bwl1.ovgu.de/bwl1_media/pdf/financial_accounting/WS+15_16/FinAcc_10-p-1580.pdf
https://www.teamstudy.com/resources/chapter-7-cash-and-receivables-HhrGqB3v
https://courses.lumenlearning.com/suny-finaccounting/chapter/direct-write-off-and-allowance-
methods/
https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp
