Classification of Receivables

Accounts receivable, notes receivable, and other receivables are classified as receivables. Accounts receivable arise from business/trade transactions. Notes receivable arise from written promises to pay a specified amount at a specified time. Other receivables arise from nonbusiness and nontrade transactions.

Receivables can be one of the most liquid current assets held by a company. They reflect claims against others and are generally expected to be settled for cash in the future. Their significance to a company depends on a number of factors, including the industry in which the company operates as well as the company's credit policies. Receivables are frequently classified into three categories: accounts receivable, notes receivable, and other receivables.

Accounts receivable are balances customers owe on account as a result of the sale of goods or services. They are usually short-term, unsecured, noninterest-bearing and represent the most significant receivables held by a company. Because they arise from business or trade transactions, they are also referred to as trade receivables. For example, if goods were sold on account, sales would increase (a credit), and receivables would increase (a debit).

Journal Entry for Sale of Goods

Date Description Debit Credit
January 31, 2018 Accounts Receivable $5,000
     Sales $5,000
To record sale of goods

Later, when the customer pays cash for the amount they owe, the company's cash is debited, which increases the cash balance. Receivables are credited, which reduces the receivables balance.

Journal Entry for Customer Payment

Date Description Debit Credit
March 1, 2018 Cash $5,000
     Accounts Receivable $5,000
To record payment on account

Notes receivable represent written promises (typically evidenced by a formal instrument) to receive a specific amount of money (plus or with interest) at a designated future date or on demand. The promissory note is a written promise to pay a specified amount of money at some definitive date or on demand. The borrower (customer) promises to pay the lender (company) a definite sum of money, plus (or including) interest, at a future date, which is known as the maturity date, or the date on which the maker (or debtor) must pay the note balance to the payee (or creditor). Notes receivable may or may not arise from business or trade transactions, and they are usually issued for longer-term periods. They may be classified as either short-term or long-term. Notes receivable may also be secured, meaning that the borrower (customer) provides the lender (company) a claim to a certain amount of its assets (often referred to as collateral) in the event of the borrower's default, or failure to pay the note.

Other receivables include income tax refunds, interest receivable, and those that do not typically arise from trade or business transactions and include amounts loaned to employees or corporate officers. Accepting receivables in exchange for the sale of goods or services or the lending of monies presents a company with a credit risk—that of nonpayment.