January 29, 2022

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Trade Receivables Meaning, Explanations, and Double Entry

Trade Receivables Meaning, Explanations, and Double Entry
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Trade receivables are the new name for debtors. This is in respect to the International Financial Reporting Standards. To this end, you should be aware of this term because it can make or mare a business entity.

Definition of Trade Receivables

Trade receivables are the sum of money owed to a business by its clients or customers. It can be defined as debts not yet collected from customers of goods and services the organization deals on.

Key Explanations

It represents a sum of money or debts not collected from customers or clients. Daily the entity employees sell goods or render a service to one or more persons. These persons are clients or customers. The sales transactions involved might be on cash or credit. If cash is paid, there will be no trade receivables. However, when the entity’s products are sold on credit terms, it results in debtors in the business’s books of account.

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Note that, if it is a cash transaction, there is no need to put down the name of the customers when posting the transaction. The double entry is simply; debit cash/bank account and credit sales/revenue account. However, when the sales are on credit, the customer’s name must be recorded in the ledger book.

The total of trade receivables at any point in time represents the part of the organization’s revenue that is unpaid. More so, it’s treated as a current asset in the balance sheet (statement of financial position). Why? It is expected that the debt will be collected within three to twelve months. In addition, to avoid recognizing profits from credit sales with the probability of debtors not paying the amount owed, an impairment (previously known as provision bad debts) is deducted from the entity’s revenue for the accounting period under consideration.

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There is nothing wrong with selling goods or rendering services on credit. One good reason to do so is to avoid inventory expiring. Another reason is to increase the rate of turnover. A higher turnover rate means the entity is selling its inventories quickly.

Trade Receivables Examples

The following are examples of trade receivables:

  • Debtors for goods
  • Bill of exchange(bills receivables

Trade Receivables Formula

The formula is debtors + bill receivables

Double Entry for Trade Receivables

Sales of goods on credit to Oreva Jones 340,000 Naira on 3rd of December, 2021. Oreva Jones made part payment of 200,000 Naira on the 18th of December. State the double entry for the able transactions.

Solution

Debit: Oreva Jones Account (under sales ledger)
Credit: Sales Account (under general ledger) with 340,000 Naira.

Debit: Cash/Bank Account (under sub-ledger)
Credit: Oreva Jones Account (as stated above) with 200,000 Naira.

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Conclusion

In final words, trade receivables are debts yet to be collected. The total of these debts represents the total credit sales for an entity. Selling an organization’s products on credit is not bad in itself. It increases turnover rates and reduces expiring inventories.

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