What are Trade Receivables and Non-trade Receivables?

What are Trade Receivables and Non-trade Receivables?

Trade receivables are the amounts that a company will bill to its clients when it provides goods or services to them as part of their normal business activities (Also see Understanding Asset Conversion Cycle). Typically, companies will document these billings on formal invoices, and it will summarise those invoices in the accounts receivable ageing report. Then, the collections staff will usually use this report to collect late payments from their clients. When an accounting firm in Johor Bahru is preparing the accounts for business owners like you, the accountants will record trade receivables in a different accounts receivable account in your general ledger. On your balance sheet, you will see trade receivables appear as your current assets if you plan to collect the payment from your clients in a year from the date you bill them the invoice.

When recording trade receivables after you have completed an invoice, the accounting software will debit the amount to accounts receivable account and credit the same amount to sales account. As your clients pay you eventually, the accounting software will debit the amount received to the cash account and credit the amount to accounts receivable account if the transaction is in cash (Also see Accounting – Debits and Credits).

The opposite of trade receivables is non-trade receivables. The latter refers to the amounts due for payment that does not belong to the usual invoices for the goods the company has delivered or the services it has provided. Tax refunds that the tax authority owes to the company, the insurance claims that the insurance company owes to it or the amounts the employees owe to the company for wage advances or loans are some of the examples that fall under the category of non-trade receivables.

Typically, you should categorise non-trade receivables as your current assets on your balance sheet. This is because you are likely to expect that you will receive the payment within a year. However, if you predict that you will receive the payment in a short time, then you should categorise the amount as a non-current asset.

If a third party is going to pay you a substantial amount of interest receivable, then you may consider documenting it in another interest receivable account.

Usually, you will not bill the non-trade items stated above by using your company’s accounting software. Rather, you will record them as journal entries. This is a crucial difference between trade receivables and non-trade receivables. This is because there should not be much journal entries (if there is any) that influence the accounts receivable account. Meanwhile, usually, the only form of transaction that the accountant will use in non-trade receivables account is the journal entries. In reality, if a company uses a journal entry when recording a transaction, this clearly indicates that the receivable falls under the category of non-trade receivables.

As a business owner, you need to assess the items listed in the non-trade receivables account and determine whether your company has a high possibility of collecting the full payment. If not, you need to reduce that amount to the sum you think you can get and charge the difference to expenses in the accounting period that you make this resolution (Also see What Are Accounts Receivables and Bad Debt?). You should conduct this assessment as you are closing your business books at the end of an accounting period.