Chapter 4: Accounts Receivable

Definitions of Receivables and Related Terms

This comprehensive guide provides definitions for the listed terms, covering various aspects of receivables, accounting, and financial transactions.

1. Receivables

• Receivables: Represents the money owed to a company by its customers or other entities for goods or services already delivered or provided. These are considered assets on the company's balance sheet.

2. Types of Receivables

• Accounts Receivable: The most common type of receivable, representing money owed for goods or services sold on credit with standard payment terms.

• Notes Receivable: A written promise from a customer or borrower to repay a specific amount of money at a future date, often with interest.

• Loans Receivable: Money lent out by a company to customers, employees, or other entities, typically with interest.

• Advances: Prepayments made to suppliers or customers for goods or services to be delivered or received in the future.

• Accrued Income: Revenue earned by a company but not yet received in cash. It's recorded when earned, even if payment is pending.

• Deposits: Money held by a company for a specific purpose, such as a security deposit or a customer's advance payment.

• Claims Receivable: Money owed to a company as a result of a legal claim or insurance claim.

• Non-Trade Receivable: Receivables arising from transactions not related to the company's primary business operations, such as loans to employees or investments.

• Trade Receivable: Receivables arising from the company's core business operations, such as sales of goods or services.

3. Related Concepts

• Normal Operating Cycle: The time it takes for a company to convert its inventory into cash from sales. It involves purchasing inventory, selling it on credit, and collecting payments.

• Financial Institutions: Banks, credit unions, and other organizations that provide financial services, including lending, deposit-taking, and investment management.

• Adjusting Journal Entry: An accounting entry made at the end of an accounting period to update accounts and ensure they reflect the correct balances.

• Advances from Customers: Prepayments made by customers for goods or services to be delivered or provided in the future.

• Advances to Suppliers: Prepayments made by a company to suppliers for goods or services to be delivered or provided in the future.

• Scanning: The process of electronically capturing data from documents, such as invoices or purchase orders, to streamline accounting processes.

• Dividends Receivable: Money owed to a company as a result of its ownership of shares in another company that has declared dividends.

4. Pricing and Discounts

• Fair Value Plus Transaction Costs: A method of valuing an asset based on its market value plus any costs incurred in acquiring or selling it.

• Transaction Price: The amount of money a company expects to receive from a customer for a sale.

• Freight on Board (FOB) Shipping Point: The buyer is responsible for the cost of shipping goods from the seller's location.

• FOB Destination: The seller is responsible for the cost of shipping goods to the buyer's location.

• Freight Prepaid: The seller pays for the cost of shipping goods.

• Freight Collect: The buyer pays for the cost of shipping goods.

• Freight-In: The cost of shipping goods purchased by a company.

• Freight-Out: The cost of shipping goods sold by a company.

• Reimbursement Receivable: Money owed to a company for expenses it has paid on behalf of another entity.

• Trade Discounts: Reductions in the list price of goods or services offered to customers based on their volume of purchases or other factors.

• List Price: The original or advertised price of a good or service.

• Invoice Price: The final price of a good or service after any discounts or adjustments have been applied.

• Cash Discounts: Reductions in the invoice price offered to customers for making prompt payment.

5. Accounting Standards and Methods

• PFRS 15: International Financial Reporting Standard 15, which provides guidance on revenue recognition for companies.

• Gross Method: A method of accounting for sales discounts where the full invoice amount is recorded as revenue, and the discount is recorded as an expense if taken by the customer.

• Net Method: A method of accounting for sales discounts where the discounted amount is recorded as revenue.

• Recoverable Historical Cost (Net Realizable Value): The amount of money a company expects to recover from a receivable, taking into account any potential losses.

• Sales Discount: A reduction in the invoice price offered to customers for making prompt payment.

6. Managing Accounts Receivable

• Allowance for Doubtful Accounts: An account used to estimate the amount of receivables that may not be collected.

• Allowance Method: A method of accounting for uncollectible receivables where an allowance for doubtful accounts is created and adjusted periodically.

• Write Off: The process of removing a receivable from the books when it is deemed uncollectible.

• Direct Method: A method of accounting for uncollectible receivables where individual receivables are written off when they are deemed uncollectible.

• Percentage of Net Credit Sales Method: A method of estimating uncollectible receivables based on a percentage of the company's net credit sales.

• Percentage of Receivable Method: A method of estimating uncollectible receivables based on a percentage of the outstanding receivables balance.

• Single Loss-Rate Method: A method of estimating uncollectible receivables using a single percentage for all receivables.

• Aging of Receivables: A process of analyzing receivables based on their age to estimate the likelihood of collection.

7. Expense and Risk Management

• Function of Expense: The category of expense to which a particular cost is assigned, such as selling, general, or administrative expenses.

• Administrative Expense: Costs incurred in managing the day-to-day operations of a company, such as salaries, rent, and utilities.

• Receivables Denominated in Foreign Currency: Receivables owed in a currency other than the company's functional currency.

• Off-Balance-Sheet-Risk: The risk that a company's financial statements do not fully reflect its exposure to financial obligations or losses.

• Risk of Accounting Loss: The risk that a company may experience a loss due to errors or misstatements in its accounting records.

This comprehensive list provides a solid foundation for understanding receivables and related concepts. Remember that specific accounting principles and practices may vary depending on the industry and jurisdiction.