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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

7. Receivables and Investments

Types of Receivables

Accounts Receivable, Notes Receivable, Interest Receivable, I want more receivables!


Types of Receivables

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So we've talked about accounts receivable. Let's talk about a few different types of receivables. So receivables. This is a key word. Whenever we see the word receivables, we know that we're talking about assets. Okay, this means that it's an asset account. It's something that the money that the company is owed, right? It represents money owed to the company. Okay. So the first one accounts receivable, we've talked about accounts receivable bit. So let's just start here just to get our groundwork in. So accounts receivable. This is amounts owed to the company from customers. Okay, So this is just general day to day selling stuff to customers and giving them some time to pay us back. Okay. So simple journal entry on April one the company sells $12,000 worth of goods on account to a customer. So when you see that on account, right, that's when we're talking about, we're gonna receive the money later. We gave them the goods now, but they're gonna pay us later. So what we receive the debit in this journal entry is accounts receivable for 12,000. Right, Because this is an asset that at some future date we're gonna receive $12,000. And the credit. Well we sold $12,000 worth of goods. What we earned revenue right? We did our end of the bargain. So we earned some revenue. So will credit revenue in this case for that 12,000 And we would see our assets going up by 12,000 in our a. R and our revenue would increase our equity by 12,000. Right? So pretty straightforward. We've dealt with accounts receivable before. Let's go on to notes receivable. So notes receivable. Well, this is still amounts owed to the company. Right? This is still, it's very similar to an account receivable except these are gonna have interest. Okay, When there's a note receivable, they're gonna pay interest as well. Generally when we have a note receivable, it's going to be for a little more time. We can expect an account receivable to be paid off within 1 to 3 months. While a note receivable, maybe it'll last three months to a year. Sometimes we have long term notes receivable or we loan out money for a long time. So the big deal here is with the notes receivables, we have interest. Okay? And notes receivable. They're accompanied by this formal written contract. Okay? So that's the difference and accounts receivable. It's pretty, you know, standard. Okay, you're gonna pay us in a week, you're gonna pay us in a month. This is more formal. Right? There's gonna be a contract with an interest rate on it, right in general. It's just gonna be more formal of a contract in the end it's still money owed to the company. So let's check it out On April one, the company sells $12,000 worth of goods to a customer on April 30. The customer calls to let the company know that she will not be able to pay on time. However she offers this 90 day 6% note in the same amount. So here is the note receivable right there, right? This lets us know it's a note receivable because we're going to be receiving some money in the future. And it's got an interest rate. So generally with notes notes receivable, we're gonna see that the principle which is the amount that we loan them, the $12,000 in this case plus the interest are due upon maturity. Okay? So let's say this is a 90 day note. That means we're gonna be paid in 90 days. And on that 90 day In in 90 days they're gonna pay us the 12,000 principal plus the interest that we've earned over those 90 days. Okay? But when we first, when we first uh received the note receivable, when when the customer offers it to us, we make a pretty simple entry here. So notice that at first the company sold 12,000 worth of goods to a customer. So at first we would have made some journal entry like we did above right? Where we debited accounts receivable and credited revenue just like we did above. But then it's telling us that the customer wasn't able to pay us right away. So instead of having an account receivable, what's gonna end up happening is we're gonna have a note receivable. So we would debit notes receivable Right? For the 12,000 because now we have a note receivable note receivable in the amount of 12,000 and we're gonna credit. Well in this case we're going to credit the account receivable. Right? Because previously they had owed us this money already in the first century, right? They had owed us this money as an account receivable. And then he said well I can't pay you right away. So take this note receivable instead. So they're not gonna pay us the 12,000 through an account receivable anymore. Now we're going to receive that 12,000 through a note receivable. So we have to credit accounts receivable to get rid of the account receivable. That's what we'll do here. We'll credit for 12,000 and you'll notice that the debit to accounts receivable and the credit to account receivable gets rid of it. And all that's left is the note receivable and the revenue. Right? So we saw that the A. R well it went up by 12,000 in that first one and then down by 12,000. But then we had the note receivable and our note receivable go up by 12,000 And then our equity, right we still have that revenue in the first entry for 12,000. So there you go, it stays balanced. Okay, so well let's go ahead and just finish these off real quick. We've got a couple more here. Um those are the two main ones you're gonna spend most of your time focused on accounts receivable and a little more details about accounts receivable up here, you might still learn a little more details about notes receivable and how to calculate interest and all that. And then these are just some other receivables that you might see. So with the note receivable, you'll see that there's interest receivable, right? And this is when you've earned interest, there's interest that has been earned but not paid yet. Right. We haven't received the cash from the interest, right? The time has passed where we earn the interest, but we haven't received it yet. So we would have interest receivable or dividend receivable. The same kind of idea where dividend is earned. This would be that we own stock in a company. And that company says, hey, we're gonna pay a dividend when they say they're gonna pay a dividend, we have a dividend receivable, but it might take them a little bit of time to pay us. So they haven't paid us yet. But we have that receivable until we get the money from that company. Cool. So another way we can break up receivables is in this idea of trade receivables and non trade receivables. Pretty easy. Trade receivables. Well, they come up in the normal course of business like you see here and they generally just include our accounts receivable and some notes receivable. I'm gonna write that one out. Notes receivable. Okay, uh that would be notes receivable that we get from customers. Something kind of like in our example above, where maybe a customer had difficulty paying us and they'll pay us in the future, compare that to a non trade receivable. Well, these do not arise from the normal course of business. Okay? They do not arise from the normal course of business. This could be a cash advance to an employee. Sometimes when employees work on commission, we might just advance them cash just so they have a steady paycheck. Well, these are non trade receivables. This doesn't have to do with our core business. And sometimes we just have extra cash, right? We might just have some extra cash that we loan out. We're not in the business of loaning, we're not a bank, right? It could just be some company that has some extra cash and they're loaning it out to make some money, right? So that's non trade. They're not in the business of buying and selling loans. That's just something they're doing with their extra cash. Cool. Alright. Let's go ahead and move on to the next video.