Debtors are monetary claims against others. Debtors are acquired mainly by selling goods and services, or by lending money. Managing trade debtors is an important part of the businesses cash management proccesses. The three most common type to debtors are: accounts receivable or trade debtors, notes receivable and all other types of receivable which we’ll just call other debtors. Let’s learn a little bit more about each of these in detail.
Trade debtors
Trade debtors or Accounts receivable are the amount owed by customer’s that result from the sale of goods and services. Most professional accountants in UK refer to this is referred to as trade debtors because it arises from transactions with our trade customers. (Meaning our ordinary course of business customers). These are usually current assets. Current assets are assets that are expected to be turned into cash within a short period of time. Usually less than twelve months. The ratio of current assets value to long term assets value in a business is normally used to measure the liquidity of that business.
Notes receivable
Notes receivable are claims for which formal instruments of credit are issued as proof of debt-usually a promissory note. Often these arise from lending money or selling Capital Equipment. These could be either current or long-term assets depending on the nature of the agreement.
Other debtors
Other debtors are usually non-trade related trade debtors, meaning they don’t arise from transactions with our customers. Some good examples of non trade debtors are interest receivable, loans to related companies, employee loans, Value added tax recoverable and dividend receivable. These could be current or long-term assets, depending again on the nature of the agreement. Most companies have two records of accounts receivable. They have the general ledger accounts receivable account Which presents the amount owed to a company from all of its customers.
Often this is known in the bookkeeping trade as the control account. They also have subsidiary accounts that track the amount owed by each individual customer. The total of all the subsidiary accounts needs to equal the general ledger control account balance. Here is an example of that. The total amount of accounts receivable is £50,000. Here you can see that the customer subsidiary ledgers add up to that amount.
Companies sell on credit to increase sales revenue. How many would buy a new car, if all car sales had to be in cash? Not many for sure. But selling on credit comes with risks as well, primarily that we will sell to someone who won’t pay us back. This cost is known by a number of different account names depending on the textbook you’re using or the company that you’re working for. Bad debt expense is probably the most common term, but sometimes uncollectible account expense, or doubtful account expense might be used. Again, these terms are all interchangeable. The key is the word expense.