Receivables

Receivables are claims held against customers and others for money, goods, or service. Receivables may generally be classified as trade or nontrade. Trade receivables are often the most significant receivables an enterprise possesses. Accounts receivables are oral promises to pay for goods and services sold. Notes receivables are written promises to pay a sum of money on a specified date with principle and usually interest. Nontrade receivables are amounts due for payment of for other than its normal goods or service. (a tax refund owed would be a nontrade receivable).

Accounts Receivable

Discounts must be considered in determining the value of receivables, both trade discounts and cash discounts. A trade discount is reduction of the list price for the purchase of large quantities, also called quantity discount. Trade discounts are also used to avoid updating catalogs. Cash discounts, or sales discounts, are offered as an inducement for prompt payment. ( 2/15, n/30)

It assumed that not all receivables will be collected. There are two recognized methods to account for receivables that ultimately prove to be noncollectable: direct write-off and allowance. With direct write-off method, the receivable account is reduced and an expense is recorded when a specific account is judged noncollectable. The direct write-off method is considered inadequate because it does match costs to revenues. It should be avoided expect if the amounts are immaterial.

The allowance method uses a year-end estimate of expected uncollectible accounts based upon credit sales history and outstanding receivables. The estimate is recorded by debiting an expense and crediting an allowance account in the period in which sales happened. Then when an account is judged uncollectible, an entry is made debiting the allowance account and crediting accounts receivable. There are two common methods of estimating future uncollectible receivables are: the percentage-of-sales which calculates an estimate based on sales and the percentage-of-receivables which calculates an estimate based on accounts receivables.

Notes Receivable

A note receivable is a formal written promise to pay principle and usually interest at a future date. Notes may be Interest-bearing notes that have a stated rate, or they may be zero-interest-bearing notes that include the interest as part of the face amount, rather than stating it explicitly. Short-term notes are generally reported at face value while long-term notes are reported at present value.