Trade Receivables: Asset or Liability?

When it comes to your business operations, you would rather have stronger assets than liabilities. Assets are considered items of value owned by the company, while liabilities are the obligations and debts your company holds.

Both elements are listed on the balance sheet to determine how financially healthy a company is.

Trade receivables are the amounts owed to a company for services or goods rendered or sold, but many business managers are unsure how to categorize them.

Trade Receivables Are an Asset

A variety of things can qualify as an asset, since items of value can differ according to company or industry. Resources, property, prepaid expenses or costs with a measurable value in the future make up assets.

Trade receivables get listed on a company’s balance sheet under the category of current assets, keeping company with other assets such as:

  • Investments
  • Cash
  • Prepaid expenses
  • Unsold inventory
  • Foreign currency
  • Unused supplies

Accounts receivable is the usual term for these assets. It falls under the category of an asset because it’s money that is expected from a client or consumer.

Even though there isn’t cash in hand when this item is listed on the balance sheet, there is the expectation that the amount listed will be converted into cash over time (as bills are paid).

Trade Receivables Do Have Liability Concerns

In the strictest terms, a liability is something that you owe to someone else. However, the term liability takes on a different meaning when it comes to working with trade credit.

When companies offer trade credit, the supplier provides services or goods to a customer through credit terms. The customer receives what was paid for, while the supplier finances or expenses the initial purchase. If the customer defaults or doesn’t make a complete payment, the supplier must then write off the debt or spend additional funds to force a collection from the customer.

In any case, the trade creditor will list the amount owed as a current asset on the balance sheet, while the customer lists the amount as a current liability.

In most cases, accounts receivable are converted into cash within one year. If the conversion doesn’t take place by then (because the customer doesn’t pay up), it’s recorded as a long-term asset.

If the amount is never reconciled, the company must deal with the debt. As it relates to terms of risk, trade credit could be seen as a liability. However, companies often have accounting measures to address bad or doubtful debts.

Businesses Can Improve the Value of Trade Receivables

Even when you are confident your customers will pay, waiting on the money could interfere with your business operations. Businesses fail when there isn’t enough money coming in consistently. You can improve your accounts receivables with the following tips:

  • Offer incentives or discounts for early payment
  • Ask for deposits on large orders
  • Establish convenient payment options
  • Communicate with your suppliers to negotiate your own favorable payment terms when funds are delayed

Using PencilPay for Trade Receivables

Simplify your trade receivables with an all-in-one payment processing system. This application is easy to use, allowing customers to set up an account and know immediately if credit is approved.

Let the automated system bill the clients when invoices are due and reconcile accounts with the push of a button. Contact us today to find out more.