Match the definitions to the appropriate terms.
Drag and drop application.
Accounts receivable
Notes receivable
Receivable
An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates
Amounts due from customers for credit sales
Amount due from another party
The Correct Answer and Explanation is:
Here are the correct matches of definitions to terms:
- Accounts receivable → Amounts due from customers for credit sales
- Notes receivable → An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates
- Receivable → Amount due from another party
Explanation
Receivables represent amounts owed to a business by its customers or other parties. They are assets because they provide future economic benefits, typically in the form of cash inflows.
Accounts receivable are short-term amounts due from customers as a result of ordinary credit sales. When a company sells goods or services on credit, it does not receive payment immediately but instead records the amount as accounts receivable. These are typically due within 30 to 90 days and are considered current assets on the balance sheet. Accounts receivable are crucial indicators of a company’s operating efficiency and its credit policies. High accounts receivable may indicate strong sales but also a risk of delayed payments or bad debts.
Notes receivable, on the other hand, are more formal agreements. These arise when a borrower signs a written promise (note) to pay a specific amount of money, either on demand or at a certain date in the future. Notes often include interest, and may have longer durations than accounts receivable. They are used when a higher level of assurance or formality is needed in credit arrangements. Like accounts receivable, notes receivable can be current or non-current depending on when they are expected to be collected.
Receivable is a broader term that refers to any amount due to a company from another party. This can include accounts receivable, notes receivable, interest receivable, rent receivable, and other forms of amounts owed. The term encompasses all claims for money, services, or goods from customers or other third parties.
Understanding the differences among these terms is essential in accounting as it affects how receivables are managed, reported, and analyzed for liquidity and credit risk
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