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Accounts Receivables on the Balance Sheet

Updated on :  

08 min read.

Accounts Receivables refer to the amounts a company would receive from customers who have bought goods and services from the company on credit. Typically, the period of credit ranges from short to a few months and, in some cases, a year.

Classification of Accounts Receivables in the Balance Sheet

Largely, accounts receivables are divided into the following:

 As per Schedule III of the Companies Act, the accounts receivables need to be sub-classified as follows – 

As per IND AS –

(i) Trade Receivables considered good – Secured 

(ii) Trade Receivables considered good – Unsecured 

(iii) Trade Receivables with a significant increase in credit risk 

(iv) Trade Receivables – Credit impaired

As per Notified AS –

(i) Undisputed Trade Receivables – Considered good 

(ii) Undisputed Trade Receivables – Considered doubtful

(iii) Disputed Trade Receivables – Considered good

(iv) Disputed Trade Receivables – Considered doubtful

Measurement of Accounts Receivables

Financial analysts use various methods to measure accounts receivables. Some of the commonly used methods are as below:

  • Accounts Receivable-to-Sales Ratio – The accounts receivable-to-sales ratio is one of the simplest methods to measure accounts receivables. This ratio is calculated by dividing the accounts receivable by the sales over a period at a point in time. This ratio indicates the percentage of sales that are still unpaid. A higher ratio indicates a higher risk for the company with lower quality of accounts receivable.
  • Days Sales Outstanding – DSO is calculated by dividing the average accounts receivables by sales and multiplying the result by 365. Shorter DSO implies a higher quality of the accounts receivables as it means that the company can collect cash from its customers quicker. 
  • Accounts Receivable Turnover Ratio – This ratio measures how fast a company can turn its accounts receivable into cash. Higher accounts receivable turnover ratio implies that the quality of accounts receivables is good. It indicates that the company is turning its accounts receivables to cash faster. This ratio is calculated by dividing sales over a period by the average receivables balance over the said period.

Laws on Accounts Receivables Reporting

Booking accounts receivables is done via simple accounting transactions. However, maintaining and collecting the payments due on the said accounts receivables is a tedious job. For recording a sale on credit, you need to debit the receivables account and credit the revenue account. When your customer pays off the dues, you debit the cash account and credit the receivables.

Businesses record their accounts receivables as an asset on their balance sheet as there’s a legal obligation for their customers to pay their debt. Moreover, the accounts receivables are current assets, implying that the balance is due from the customers in a year or less.

When the business collects the cash against its accounts receivable balance, the company alters the balance from one of its current assets to another. Its accounts receivables balance reduces, while its cash balance increases. Using accounts receivables delays the cash payments from the customers that negatively affect the company’s cash flow. The higher the company’s accounts receivable balance, the less cash it realised from its sales activities.

Business scenarios on Accounts Receivables Reporting

(1) Provision for Doubtful Debts – Since all customer debts won’t be collected, businesses usually estimate the amount and record this as a provision for doubtful debt that appears on the company’s balance sheet as a contra account offsetting the total accounts receivable. To create or increase the provision for bad debt, the business debits the bad debt expense account and credits the provision for doubtful debts that appear on the company’s balance sheet.

(2) Trade Discounts – Businesses globally use the well-established process to increase sales of their products by offering trade discounts. The discounts reduce the selling price, making it attractive and affordable. The seller offers these discounts to the customer in price reductions. This discount is not shown in the books, the reduction is adjusted with the final price, and only the discounted price is recorded in the books.