If you’re running your own business, you probably already know about Accounts Receivable in the general sense: it's money owed to you that you haven't yet received. When you allow a customer to purchase something from you on credit, you're extending them a loan. They, in turn, must make payment within a certain set timeframe.
But did you know that there are a few different types of entries that can occur in your Accounts Receivable?
One of the most common categories of receivables is Notes Receivable, which is not all that different from regular Accounts Receivable except for where payment deadlines are concerned. Whereas you would normally give a customer a two-month window to repay you with a regular receivable, with Notes Receivable this payment due date can be extended, generally up to a year or longer.
This extended payment timeframe is agreed upon between you and the customer (the debtor) by using a promissory note. A promissory note helps enforce your legal claim to the debtor's payment.
(What happens when it becomes clear that a customer is just not going to repay their debt? Find out by reading up on bad debt.)
If the note comes due within a year or less, then the Note Receivable is part of your current assets and will be noted as such on your balance sheet. If the note gives the debtor more than a year to pay, then the receivable becomes a long-term asset.
Another common receivable is Trades Receivable, which applies whenever you make a sale of a product or service to a customer on credit. The only difference between Trades Receivable and regular Accounts Receivable or Notes Receivable is that these accounting entries are the direct result of a sale made by your company.
Quick reminder that easy accounting software makes staying on top of your Accounts Receivable super straightforward.
Other Types of Receivables
What other kinds of receivables might you find yourself recording in the course of running your business? Interest Receivable is one possibility. This is interest earned on Notes Receivable or other assets are added to the Interest Receivable account at the end of each accounting period.
Other receivables include loans made to employees or other companies and advances on wages paid to employees. If you're unsure whether a receivable is distinct enough to merit its own account separate from general Accounts Receivable, ask yourself: does this receivable involve any different risk factors than other receivables? Will it be more (or less) difficult to liquidate than other receivables? If the answer is "yes," then you should definitely think about setting up a separate account for this receivable on your balance sheet.
Familiarizing yourself with the various types of receivables will help you to keep track of who owes you what—and when—in a more organized way. And that’s a crucial step to making sure you bring in the funds needed to maintain and grow your business!
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