Accounts Receivable

Accounts receivable is divided into three types: trade accounts receivable, notes receivable, and other accounts receivable

1. Trade Accounts Receivable

Trade accounts receivable usually occur because of credit sales. It arises as a result of buying goods or services on credit. In general, the payment period ranges from one to two months.

2. Notes Receivable

This accounts receivable has a physical form of a formal letter. This type of loan has a bill of between 2-3 months. Debt settlement made within that time will not be subject to interest. However, if the debtor requests an extension of the payment period, interest will be charged according to a monthly extension.

3. Other accounts receivable

This accounts receivable is of a broader type, as it includes interest receivables, salary receivables, employee advances, and tax refunds. Due to their general nature, notes can be reported separately on the balance sheet.

The benefits of Accounts Receivable:

• Accounts receivable is an important aspect of a businesses' fundamental analysis.
• Accounts receivable is a current asset so it measures a company's liquidity or ability to cover short-term obligations without additional cash flows.
• Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as accounts receivable turnover ratio, which measures the number of times a company has collected on its accounts receivable balance during an accounting period.
• Further analysis would include days sales outstanding analysis, which measures the average collection period for a firm's receivables balance over a specified period.

Examples of accounts receivable:

An example of accounts receivable includes an electric company that bills its clients after the clients received the electricity. The electric company records an accounts receivable for unpaid invoices as it waits for its customers to pay their bills.

Most companies operate by allowing a portion of their sales to be on credit. Sometimes, businesses offer this credit to frequent or special customers that receive periodic invoices. The practice allows customers to avoid the hassle of physically making payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay after receiving the service.

The golden rule in accounting is that debit means assets (something you own or are due to own) and credit means liabilities (something you owe).

On a balance sheet, accounts receivable is always recorded as an asset, hence a debit, because it’s money due to you soon that you’ll own and benefit from when it arrives. Accounts receivable is also listed as one of the first, or current, assets on your balance sheet since payment is expected in the short-term (ex: in one year or less).

On a trial balance, accounts receivable is a debit until the customer pays. Once the customer has paid, you’ll credit accounts receivable and debit your cash account, since the money is now in your bank and no longer owed to you. The ending balance of accounts receivable on your trial balance is usually a debit.