Receivables are amounts owed to a company by other companies, clients, customers and other parties for good purchased and services rendered on credit, which are supposed to be paid within a specified and agreed period of time. Receivables are usually classified as current assets (assets that are expected to be converted to liquid cash within the next annual period). They are also the second most liquid form of asset class, losing the top spot to actual cash. John Abio’s blog gives more information on account receivables.
Differentiating between payables and receivables
These concepts are similar in their own ways yet, are sort of antithetical to each other. The similarities lie in the fact that they are both recorded by companies as a way of keeping track of cash flow. The differences lie in the fact that account payables are classified in the liability account, while account receivables would be recorded in the asset account. Payables are basically company debts. A debt is the money or value an entity owes or is required to pay to another, as a result of a loan or purchase made on credit. It is recorded as a liability because it acts as a “handicap” of sorts, holding back businesses and acting as a burden. For instance, when a pencil company purchases raw materials from a lead and wood company without paying upfront, this is recorded as a liability, an amount to be paid later on. This is in stark contrast to the account receivable, in which the company is now the “creditor”, instead of the “debtor”.
Types of receivables
Receivables come in three different types, each with their own payment period, mode of payment, and nature of agreement between the parties involved. The three types of receivables include
- Account receivable
Account receivables are perhaps the most common and usually come up as a result of the exchange of goods and services on credit. It requires short term payment, typically ranging from one to two months.
- Notes receivable
Basically a formal IOU; this type of receivable is in the form of an official note which has on it the debt terms and payment period. It has a payment range of around 2-3 months and if the debt is settled within that time, interest would not be considered. If the debtors default on payment after that time or request for an extension of the agreed-upon payment period, interest would be made a part of the debt.
- Other receivables
These are receivables that have not been clearly defined by the company and are not able to be classified separately. It is recorded on the asset part of the balance sheet. They include various forms of non-trade receivables including interest receivables, employee advances, tax refunds, etc.
The difference between account receivables and note receivables is that, the account receivable is basically an informal agreement between parties, with no interest being attached to it. Payment period is short, usually classified as a current asset type. Note receivable on the other hand is an official, formal agreement between companies with a different set of rules. Payment collection has interest attached if the period is required to be extended.