Classification of Receivables

The receivables that result from sales on account are normally accounts receivable or notes receivable. The term receivables includes all money claims against other enti­ties, including people, companies, and other organizations. Receivables are usually a significant portion of the total current assets.

1. Accounts Receivable

The most common transaction creating a receivable is selling merchandise or services on account (on credit). The receivable is recorded as a debit to Accounts Receivable. Such accounts receivable are normally collected within a short period, such as 30 or 60 days. They are classified on the balance sheet as a current asset.

2. Notes Receivable

Notes receivable are amounts that customers owe for which a formal, written instru­ment of credit has been issued. If notes receivable are expected to be collected within a year, they are classified on the balance sheet as a current asset.

Notes are often used for credit periods of more than 60 days. For example, an automobile dealer may require a down payment at the time of sale and accept a note or a series of notes for the remainder. Such notes usually provide for monthly payments.

Notes may also be used to settle a customer’s account receivable. Notes and ac­counts receivable that result from sales transactions are sometimes called trade receiv­ables. In this chapter, all notes and accounts receivable are from sales transactions.

3. Other Receivables

Other receivables include interest receivable, taxes receivable, and receivables from officers or employees. Other receivables are normally reported separately on the bal­ance sheet. If they are expected to be collected within one year, they are classified as current assets. If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption Investments.

Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.