The Origin of Accounts Receivable
Accounts receivable (A/R) is the amount of money a customer owes the business for merchandise it purchases from a company or services a company renders. Just about all types of businesses can and probably do have accounts receivable.
Any accounts receivable involve three important facts: recognition, valuation, and disposition. Recognition involves booking the A/R for the exchange price of the goods/services between the customer and the vendor, minus any discounts.
Making sure accounts receivable reflect properly (valuation) on the balance sheet involves the vexing subject of estimating how much the company reckons it won’t be able to collect from its customers. Disposition is what happens ultimately to get the receivable off the books.
Your intermediate accounting textbook talks about four types of receivables: current, noncurrent, trade, and nontrade. At this point in your glorious accounting course work, you realize that anytime you see the term current, it means that whatever is going on will come to fruition within 12 months of the date of the balance sheet. And, of course, noncurrent is the opposite — the receivable will exist beyond 12 months.
But what about trade and nontrade receivables? Trade receivables are what customers owe the business for the goods or services they receive from the company. Examples of nontrade receivables are advances made to officers or employees of the company, investment income receivable, and insurance claims that haven’t been paid.
This accounting event involves two basics: Cash doesn’t exchange hands at the time of the transaction, and the amount of the receivable starts at the invoice or contracted amount. However, as a seasoned accounting scholar, you also know that nothing in financial accounting is ever quite that simple! Stirring up the pot with accounts receivable are discounts and those darn deadbeat customers.