Trade receivables definition
/What are Trade Receivables?
Trade receivables are amounts billed by a business to its customers when it delivers goods or services to them in the ordinary course of business. These billings are typically documented on formal invoices, which are summarized in an accounts receivable aging report. This report is commonly used by the collections staff to collect overdue payments from customers. In the general ledger, trade receivables are recorded in a separate accounts receivable account, and are classified as current assets on the balance sheet if you expect to receive payment from customers within one year of the billing date.
Related AccountingTools Courses
Credit and Collection Guidebook
Presentation of Trade Receivables
Trade receivables and other receivables are commonly combined for presentation in a single line item in the balance sheet, which is called Accounts Receivable. This line item may be netted against an allowance for doubtful accounts. The following example shows where the accounts receivable line item appears on a balance sheet.
Accounting for Trade Receivables
To record a trade receivable, the accounting software creates a debit to the accounts receivable account and a credit to the sales account when you complete an invoice. When the customer eventually pays the invoice, the accounting software records the cash receipt transaction with a debit to the cash account and a credit to the accounts receivable account.
Financing Trade Receivables
When a business sells on credit, it can encounter a cash flow imbalance, where it needs cash to pay for materials and labor, but does not expect to receive payment from customers for several more weeks or months. In these situations, the firm can obtain a short-term loan from a lender that uses the outstanding receivables as collateral. There are several variations on the concept, such as selling the receivables directly to the lender. These arrangements involve high interest charges and administrative fees, and so are not recommended unless lower-cost financing is not available.
FAQs
The Difference Between Trade Receivables and Non Trade Receivables
Trade receivables vary from non trade receivables in that non trade receivables are for amounts owed to the company that fall outside of the normal course of business, such as employee advances or insurance reimbursements. Also, most or all of the transactions passing through the main accounts receivable account are generated by the accounting system, as you create customer invoices and credit memos, whereas the transactions recording non trade receivables nearly always involve journal entries.
What is Included in Trade Receivables?
Trade receivables include amounts owed to a business by its customers for goods or services delivered on credit as part of its normal operations. These typically consist of accounts receivable, which are short-term obligations from customers with payment terms usually ranging from 30 to 90 days. The total reflects the outstanding credit sales that are expected to be collected and is reported as a current asset on the balance sheet, net of any allowance for doubtful accounts.
What are Non-Trade Receivables?
Non-trade receivables are amounts owed to a business that arise from transactions unrelated to its core operating activities, such as the sale of goods or services. These receivables typically result from activities like advances to employees, tax refunds due from the government, insurance claims, or loans made to other entities. Unlike trade receivables, which are linked directly to customer sales, non-trade receivables are more incidental in nature and are often recorded within a separate account. They are still considered current assets if expected to be collected within a year, but require careful tracking to ensure timely recovery and proper classification.