Trade receivables definition
/What are Trade Receivables?
Trade receivables are amounts billed by a business to its customers when it delivers goods or services to them in the ordinary course of business. These billings are typically documented on formal invoices, which are summarized in an accounts receivable aging report. This report is commonly used by the collections staff to collect overdue payments from customers. In the general ledger, trade receivables are recorded in a separate accounts receivable account, and are classified as current assets on the balance sheet if you expect to receive payment from customers within one year of the billing date.
Related AccountingTools Courses
Credit and Collection Guidebook
Accounting for Trade Receivables
To record a trade receivable, the accounting software creates a debit to the accounts receivable account and a credit to the sales account when you complete an invoice. When the customer eventually pays the invoice, the accounting software records the cash receipt transaction with a debit to the cash account and a credit to the accounts receivable account.
Financing Trade Receivables
When a business sells on credit, it can encounter a cash flow imbalance, where it needs cash to pay for materials and labor, but does not expect to receive payment from customers for several more weeks or months. In these situations, the firm can obtain a short-term loan from a lender that uses the outstanding receivables as collateral. There are several variations on the concept, such as selling the receivables directly to the lender. These arrangements involve high interest charges and administrative fees, and so are not recommended unless lower-cost financing is not available.
The Difference Between Trade Receivables and Non Trade Receivables
Trade receivables vary from non trade receivables in that non trade receivables are for amounts owed to the company that fall outside of the normal course of business, such as employee advances or insurance reimbursements. Also, most or all of the transactions passing through the main accounts receivable account are generated by the accounting system, as you create customer invoices and credit memos, whereas the transactions recording non trade receivables nearly always involve journal entries.