Understanding Trade Receivables and Other Receivables in Balance Sheet

The Balance Sheet is considered to be one of the primitive sources of decision-making for companies.

This is primarily because it enlists all the details that help stakeholders draw a reflection regarding the company’s financial position.

In this regard, assets tend to be elementary classes because they tell the value of recoverable amounts from various financial statements.

Assets can be broadly categorized into Current Assets and Non-Current Assets. Current Assets are assets that are likely to generate a return for the company within 12 months.

On the contrary, it can be seen that Non-Current Assets are long-term investments that the company makes, and they are expected to generate returns across a period of more than 12 months.

Within Current Assets, several different types of recoverable assets are included. Trade receivable and Other Receivables are some of the primarily Current Asset items in the Financial Statements.

Definition of Trade Receivables and Other Receivables

During the ordinary course of business, several different transactions are extended on credit by the company. The goods (or services) are delivered first, and the payment proceeds later.

Since this is a confirmed sale, it is recognized as revenue as per revenue recognition principles. Therefore, trade receivables can simply be defined as the amount that needs to be collected from the accounts receivables.

On the other hand, Other Receivables can be defined as the amount that needs to be recovered from other parties that the business is in touch with.

This is basically any other receivable that the company has that does not fall under the day-to-day operations or selling of the business.

Therefore, Other Receivables in the Balance Sheet can be defined as the amount of finance owed to the company.

Related article  Understanding Accrued Expenses in the Balance Sheet

Trade Receivables and Other Receivables in the Balance Sheet

As mentioned earlier, it can be seen that Trade Receivables and Other Receivables are categorized as Current Assets in balance sheet. These are the amounts that are expected to be settled in less than 12 months.

The relevant credit entry for the sale has already been made in the revenue of the company. Trade Receivables can only be recognized as Current Assets once Revenue Recognition has been applied. The journal entry to record trade receivable is as follows:

Trade Receivables (Current Asset)($$$) 
   Sales Revenue ($$$)

In the case of a cash sale, Cash and Cash Equivalents would have been debited with the sale amount, not Trade Receivables.

In the same manner, Other Receivables also reflect the amount owed by the business by non-trading elements. This concept is further illustrated in the example below.

Example of Trade Receivable and Other Receivables

Kris Inc. conducted its trading year with a Sales Revenue of $200,000. Out of this, they had $150,000 in cash sales. The remainder were credit sales. In the same manner, they sold some of their Non-Current Assets for an amount of $25,000. The Book Value of those assets was also $25,000.

To the transactions above, the following journal entries will be made:

Cash Sales

Cash (Revenue)$150,000 
   Sales Revenue  $150,000
Accounts Receivable$50,000 
   Sales Revenue $50,000

Credit Sales

Other Receivable

Other Receivable (Sale of Fixed Assets)$25,000 
   Fixed Assets    $25,000

It must also be noted that Trade Receivable (and Other Receivables) are running accounts. This implies that their balance is carried from one year to the next.

Related article  Understanding Stockholders Equity in Balance Sheet - What is included in shareholders equity?

They can only be nullified once all payments have been successfully received from the customers. Therefore, the following journal entry is supposed to be made in the case where a debtor pays back some or all of the amount:

   Accounts Receivable   ($$$)

Importance and Implications of Trade and Other Receivables

As mentioned earlier, it can be seen that trade and other receivables are referred to as the outstanding invoices a company has. It is considered an essential aspect of the businesses’ fundamental analysis.

It is a current asset and looks to measure a company’s liquidity or the ability to cover short-term obligations without having additional cash flows.

Mostly this analysis is considered in terms of evaluating the context of turnover. For analysis purposes, accounts receivable tend to be an important metric because it reflects the company’s overall cash and liquidity position.

For example, it helps in calculating the liquidity ratios, including the current balance and quick ratio.

Using these, the overall performance and liquidity position of the company can be reasonably estimated.

In the same manner, it also helps to decide on the future trajectory regarding the credit limit that needs to be extended and other relevant credit-related policies.

Types of Other Receivables

Other than Trade Receivables, several different types of receivables need to be factored in. Note Receivables are one of the most common types of Other Receivables.

  • Note Receivable: Note Receivable is referred to as the amount owed to the company by customers that have signed promissory notes as an acknowledgment of their debts. They are used to add an additional layer of security to the credit that the company has extended.
Related article  Understanding Office Equipment In Balance Sheet: Classification, Recognition, Measurement, And More!

Promissory messages that the customer has sent also add a different level of legal protection. However, they are only mentioned as current assets if these notes are paid within a time frame of 12 months.

If these notes are due for more than one year, in that particular case, it is referred to as a Non-Current Asset.

  • Other Receivables: Accounts Receivable and Trade Receivables are categorized as such because of their categorization resulting from the business’s trading activities.

However, other than that, it can be seen that there can be several other cases where other receivables might exist on the balance sheet of the company.

For example, interest revenue receivable and returns from any other sources of income that need to be received by the company are categorized as other receivable.

However, it must be duly noted that only those transactions are supposed to be recorded as other receivables that are certain to be received. Transactions that are contingent or are unlikely to happen should be included in other receivables.

What happens if Accounts Receivable is never settled?

If accounts receivable is not settled, and the customers default or go bankrupt, the amount is then supposed to be written off from the books.

This requires companies to write off this amount from assets and then expense it to reflect an incidence of loss in the company’s books.

This needs to be done as soon as there is relative certainty about the trade receivable not paying back the amount. The financial statements do not present an unrealistic financial status of the company. The journal entry to record this is as follows:

Bad Debt Expense($$$) 
   Trade Receivable  ($$$)