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What is accounts receivable and notes receivable

What is Receivables?

Receivables represent the money owed to an organization for any goods or services rendered and not being paid for at the time of purchase or when services were rendered. In other words, they are claims held against the organization’s clients or borrowers who didn’t transfer money for the products yet. They can be current (within one operating cycle or a year, whichever is longer) or noncurrent. In addition, receivable can be classified as trade or nontrade. Accounts receivable are current assets which mean that the seller might get this money from individuals or corporations in a few days, weeks, or months (if at all in the worst case scenario). Normally Accounts Receivable is one of the most liquid asset accounts. It is commonly the largest asset for companies who use accrual method of accounting.

Notes receivable are usually noncurrent assets which commonly have some current portion on the current assets section of the Balance Sheet. However, they can be both short-term and long-term. Notes contain an interest.

Is it good or bad to have large accounts receivable?

To have large accounts receivable is good and bad for any company at the same time. On one hand, it is positive to have a lot of receivable because it indicates that the organization sells plenty of goods, services, or care in case of the health care organization and therefore might have high revenues. The sale on credit boosts usually any company’s sales. It is mainly because normally people will buy more on credit than they would purchase for cash. When individuals pay with someone else’s money (bank’s) they don’t afraid that there might be a possibility of not having a sufficient amount on hand while at register, for example. Therefore, many sellers accept the potential risk of not being paid from some clients in exchange of significant increase in sale volumes.

On the other hand, it may be a negative sign for the business. Aging of account receivable is a huge problem for many firms because the higher amount of AR they have the lower chances of collecting them at least some day for the companies. If the percentage of uncollectible accounts gets too high there might be a risk of not meeting its own obligations by the organization. Therefore, the stay in the business might be in jeopardy.

Ways of improving accounts receivable

In order to protect themselves from not being paid for goods or services rendered, companies offer discounts to their especially large customers. That way they increase timely collections of account receivables and keep their major clients satisfied. They commonly offer 1/10, net 30 terms of discounted sales which mean that if a buyer will pay for the goods within 10 days he gets 1 % off, if not then the payment should be made within 30 days.

When sellers lose hope of ever being paid and don’t worry about the relationship with the client any longer they might sell those account receivable to collection agencies. There is advantage of this that they will get at least something about a year later. However, there is disadvantage of such actions as well: they should pay usually 40 % upfront of the owed money. Therefore, their collections will be just 60 % which means that they lose huge amount of receivables if they had to factor them. In the worst case scenario the company has to write them off which means they won’t get anything at all.