Trade Account Receivables Explained In Accounting With Examples

Trade Account Receivables Explained In Accounting: Trade account receivables is the total amount owed to an organization by its customers as a result of past credit transaction. These transactions involve the sales of goods or services to its customers on credit. Another name for Trade account receivables is “account receivables“.

Trade receivables are been classified as current assets in the balance sheets. Meaning customers are expected to make payment for the debt within one billing year. In other words, account receivables are expected to be converted to cash within 12 months.

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While in the general ledger, trade receivables are recorded in a separate accounts receivable account.

Account receivables that have been paid for are expected to be written off in the balance sheet.

Also, Trade payables are the opposite of trade receivables.

Trade payables are short-term obligations, by an organization usually from credit purchases of inventories or stock from suppliers. they are usually recorded in the liability section of a company’s balance sheet.

According to Wikipedia, “Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. The accounts receivable process involves customer onboarding, invoicing, collections, deductions, exception management, and finally, cash posting after the payment is collected.”

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Trade Account Receivables Explained In Accounting With Examples

Trade Receivables: To illustrate an example of trade receivables, Company XYZ issues an invoice for a credit sale of goods valued at $350 to its customer.

Using the double entry principles for accounting, Company XYZ will credit or decrease the value of its sales account by $350 and debit or increase the trade receivables account by $350. Once the buyer has settled the invoice, Company XYZ will decrease or credit its receivables account by $350 and increase or credit its cash account by $350.

Trade receivables are recorded in the balance sheet under a separate accounts receivable account.

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Financing Trade Receivables: In other words, financing trade receivables means seeking early payment for outstanding debt on credit sales of goods or services to customers.

They have to pay for various factors, such as raw materials, months before receiving their payment from the sale. This can lead to cash flow constraints and make it difficult to fulfill customer orders or invest in business growth.

As a result, Organizations may choose to finance their trade receivables which involves seeking early payments.

A common means organization finance their account receivables is by granting discount rates to the customers to enable early payment.

Additionally, Other trade receivables financing measures organizations take include factoring, line of credit, invoicing discounting, multiple means of payment,  asset-based lending (ABL), and so on.

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Trade Receivables Formula:

Trade receivable days = (Average trade receivables / Net credit sales) * 365

where;

Average trade receivables = (Trade receivables at the beginning of the billing year + Trade receivables at the end of the billing year) / 2

or

Trade receivable days = 365 days / Trade receivables turnover 

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Is Trade Payable An Asset: Absolutely “Yes”. Trade payables are assets because they are expected to generate cash inflow for the organization at a later date. Also, They can be found in the current asset listing of an organization’s balance sheet ( that is, statement of financial position).

Four Types of Receivables:

• interest receivables,
• salary receivables,
• employee advances,
• tax refunds,

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FAQs

1. Is Trade Receivable An Asset Liability or Equity: Trade receivables are assets because they are expected to generate future cash inflow for an organization and are expected to be converted to cash in less than a year.

2. What Type Of Assets Are Receivables: Trade receivables are recorded as current assets in the balance sheet because they are expected to be converted to cash within one billing year.

3. Is Trade Receivables A Debit Or Credit: Trade receivables have a debit balance it is an asset. Every asset has debit balances. Generally, to increase the value of any asset, you should debit the specific asset account. Furthermore, to decrease the value of any asset, you should credit the specific asset account.