Accounting: A Closer Look at Receivables

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Let's take a closer look at receivables, one of the main asset categories on the balance sheet. Accounts receivable, often referred to as trade receivables, may be subdivided into accounts for particular customers. These separate accounts are called subsidiary accounts. If the business maintains subsidiary accounts, the main Accounts Receivable account is called the control account.

Notes receivable, often called promissory notes, may be classified as short- or long-term depending on their maturity date, or the date on which they are due. If the maturity date is within one year, the note is classified as a short-term asset. Otherwise, it goes with the long-term assets.

Most businesses accept payment via credit or debit card. In this arrangement, the purchaser actually pays the card issuer, which then makes payment to the business. One advantage of allowing customers to pay with credit or debit cards is that there is no risk of being unable to collect. However, card issuers typically charge a small processing fee. There is also some risk of fraud. To maintain effective internal control over receivables, employees who handle cash should be separate from the credit department.

Some businesses sell their receivables to another company for a percentage of the overall amount, an arrangement known as factoring. A similar transaction, known as pledging, is when a business uses its receivables as the collateral for a loan.