Topics

01

TECHNICAL

TRADE

TRADE RECEIVABLES, IRRECOVERABLE DEBTS AND ALLOWANCES

FOR RECEIVABLES

THE TOTAL VALUE OF TRADE RECEIVABLES FOR A BUSINESS AT ANY ONE TIME

REPRESENTS THE AMOUNT OF SALES WHICH HAVE NOT YET BEEN PAID FOR

BY CUSTOMERS.

Trade receivables arise when a

business makes sales or provides

a service on credit. For example, if

Ben sells goods on credit to Candar,

Candar will take delivery of the goods

and receive an invoice from Ben. This

will state how much must be paid

for the goods and the deadline for

payment, eg within 30 days. Ben now

has a trade receivable – the amount

payable to him by Candar.

The total value of trade receivables

for a business at any one time

represents the amount of sales

which have not yet been paid for by

customers. The trade receivables figure

will depend on the following:

1 The value of credit sales. The greater

the value of credit sales then, other

things being equal, the greater the

total of trade receivables.

2 The period of credit given. The

longer the period of credit given to

customers then, other things being

equal, the greater the total of trade

receivables.

3 The efficiency with which the

business administers its trade

receivables. The more inefficient the

business is in billing its customers

and collecting overdue accounts then,

other things being equal, the greater

the total of trade receivables.

RECORDING THE CREDIT SALE

Let’s imagine that Ingrid makes a credit

sale of $6,450 to Manfredi. The sale

was made on 17 March 2010 and the

goods have been delivered to Manfredi

along with an invoice for $6,450. The

invoice states that the amount owing

should be paid within 30 days from the

date of the invoice.

The invoice will be processed

through Ingrid’s accounting system.

The original entry will be in Ingrid’s

Sales Day Book which lists all credit

sales chronologically. Total credit sales

(including the $6,450) will be posted

from the Sales Day Book to the...