Receivables Defined

Accounts receivable are amounts that customers owe the company for normal credit purchases. Since accounts receivable are generally collected within two months of the sale, they are considered a current asset and usually appear on balance sheets below short‐term investments and above inventory.

Notes receivable are amounts owed to the company by customers or others who have signed formal promissory notes in acknowledgment of their debts. Promissory notes strengthen a company's legal claim against those who fail to pay as promised. The maturity date of a note determines whether it is placed with current assets or long‐term assets on the balance sheet. Notes that are due in one year or less are considered current assets, and notes that are due in more than one year are considered long‐term assets.

Accounts receivable and notes receivable that result from company sales are called trade receivables, but there are other types of receivables as well. For example, interest revenue from notes or other interest‐bearing assets is accrued at the end of each accounting period and placed in an account named interest receivable. Wage advances, formal loans to employees, or loans to other companies create other types of receivables. If significant, these nontrade receivables are usually listed in separate categories on the balance sheet because each type of nontrade receivable has distinct risk factors and liquidity characteristics.

Receivables of all types are normally reported on the balance sheet at their net realizable value, which is the amount the company expects to receive in cash.

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