Trade receivable : what is it ?
A trade receivable is a sum of money owed to a company after the sale of a good or the provision of a service.
In most sectors, especially B2B, payment is not immediate.
The main stages of a trade receivable are as follows:
- The provision of goods or services is carried out.
- The invoice is issued and sent to the customer.
- Payment has not yet been made.
The trade receivable arises upon delivery of the goods or performance of the service and ends when the customer pays the amount due within the agreed period.
This payment deadline, defined in advance between the two parties, governs the transaction. If it is exceeded, the debt becomes recoverable.
The trades customer receivables
It is essential to distinguish between the different types of trade receivables, as each of them has a specific impact on the company’s balance sheet.
Undue debt
The unpaid debt corresponds to an amount which is not yet due, because the payment period granted to the customer has not yet expired.
Due debt
The due debt becomes payable once the due date has passed. The customer must then pay the amount due.
Unpaid debt
An unpaid debt is an invoice that has come due but has not been paid by the customer. It requires special monitoring to avoid any risk of financial loss.
Disputed debt
This type of dept arises when the customer disputes the invoice, believing that the service provided is incomplete or non-compliant.
Doubtful debt
The debt becomes doubtful when there is a risk that the customer will not pay, in whole or in part, the amount due.
Bad debts
When a company is certain that the amount cannot be recovered, the debt is said to be irrecoverable. In this case, the company can recover the VAT initially paid to the State on the unpaid invoice, in order to limit the financial impact of the loss.
Old debt
Old debts are those that have never been collected. The company has
Trade receivable and balance sheet
Trade receivables must be included in the company’s balance sheet. Here’s the essential information to properly include them.
Trade receivables: asset or liability?
A trade receivable is part of the balance sheet assets. It is included in the current assets category because it represents an amount that the company must collect in the short term.
When a service is invoiced and the debt is not yet due, the following entries must be made:
- Credit to account 70 “Sales of manufactured products, services, merchandise”
- Debit from account 411 “Customers”
These movements reflect the sale made and the amount owed by the customer, awaiting payment.
Paid, doubtful or disputed debts: case to follow!
Depending on the status of the debt, its accounting treatment changes in the balance sheet.
Due debt
When the debt becomes due and the customer does not pay, it is necessary to:
- Credit account 411 “Customers”
- Debit account 416 “Doubtful or disputed customers”
Disputed or doubtful debt
If there is any doubt about the customer’s payment, the debt must be provisioned :
- Credit to account 491 “Provisions for depreciation of customer accounts”
- Debit from account 681 “Allocation to provisions”
Disputed or doubtful debt
If you doubt that the customer will pay his invoice, you must record it for depreciation of the receivable:
- Credit account 491 “Provisions for depreciation of customer accounts”,
- Debit account 681 “Provisions”.
Debt paid
If the customer finally settles his debt, the provision must be taken back and the payment recorded:
- Credit to account 416 “Doubtful or disputed customers”
- Credit to account 781 “Reversals of provisions”
- Debit from account 512 “Bank”
- Debit of account 491 “Provisions for depreciation of customer accounts”
Bad debts
In the event of a definitive loss, the debt is considered irrecoverable. The entries to be made are:
- Credit to account 416 “Doubtful or disputed customers”
- Debit of account 654 “Losses on bad debts”
Calculation of WCR: working capital requirement
Working capital requirements are essential for every business. They help to reflect a company’s financial health. Working capital is the difference between a company’s receivables and its payments.
Calculation of WCR: stocks + trade receivables – supplier payables.
An increase in customer receivables increases the need for working capital and thus weakens a company’s cash flow.
Calculation of outstanding customer accounts
Outstanding receivables represent all outstanding receivables that have not yet been settled within the payment period.
Outstanding receivables are calculated as follows:
Outstanding customer debts = invoices not due + invoices due + invoices to be issued
Calculation of the Day Sales Outstanding (DSO)
DSO (Day Sales Outstanding) is a company’s average payment or collection time. A low DSO indicates good financial health for a company.
Calculation of DSO :
(Accounts receivable / turnover for the period) x the number of days in the period
How to manage customer debt collection?
Trade receivable have a direct impact on your company’s financial health. Poor collection management can weaken your cash flow and threaten your business.
Before initiating legal proceedings, which are often long and costly, opt for amicable recovery. This approach involves following up with the customer by phone, email or mail to obtain payment without dispute.
When managed internally, this process can mobilize your teams and become time-consuming.
That’s why CentralPay offers an automated collection solution. It simplifies payment tracking, sends automatic reminders, and secures your collections.
Result : time saved for your teams and healthier cash flow.
