Types of Receivables: Videos & Practice Problems

In financial accounting, receivables are categorized into several types. The primary types are accounts receivable and notes receivable. Accounts receivable represent amounts owed by customers for goods or services sold on credit, typically expected to be paid within 1 to 3 months. Notes receivable, on the other hand, are formal written promises to pay a certain amount of money at a future date, often including interest and usually extending beyond the typical accounts receivable period. Additionally, receivables can be classified as trade receivables, which arise from normal business operations, and non-trade receivables, which do not arise from the core business activities, such as loans to employees or advances.

Accounts receivable and notes receivable are both types of receivables but differ in several key aspects. Accounts receivable are amounts owed by customers for goods or services sold on credit, typically expected to be paid within 1 to 3 months. They are informal and do not usually involve interest. Notes receivable, however, are formal written promises to pay a specific amount of money at a future date and include interest. They often have longer payment terms, ranging from 3 months to a year or more. The formal nature of notes receivable includes a contract specifying the principal amount, interest rate, and maturity date.

When accounts receivable are converted to notes receivable, the journal entry reflects this change. Initially, the company would have recorded a debit to accounts receivable and a credit to revenue. When the conversion occurs, the entry would be:

$•\text{Debit: Notes Receivable}-\mathrm{12,000}$

$•\text{Credit: Accounts Receivable}-\mathrm{12,000}$

This entry removes the amount from accounts receivable and records it as notes receivable, reflecting the formal agreement and the inclusion of interest.

Trade receivables and non-trade receivables are two categories of receivables. Trade receivables arise from the normal course of business operations and include accounts receivable and notes receivable from customers. These are amounts owed to the company for goods or services provided on credit. Non-trade receivables, on the other hand, do not arise from the core business activities. Examples include loans to employees, advances, or any other receivables not related to the sale of goods or services. Understanding these distinctions helps in accurately categorizing and managing receivables in financial statements.

Interest on notes receivable is calculated using the formula:

$I=P\times R\times T$

where $I$ is the interest, $P$ is the principal amount, $R$ is the annual interest rate, and $T$ is the time period in years. For example, if a company has a $12,000 note receivable with a 6% annual interest rate for 90 days, the interest would be calculated as:

$I=\mathrm{12,000}\times 0.06\times \frac{90}{365}$

This results in an interest amount of approximately $177.26.