Match the definitions to the appropriate terms.
Instructions
Accounts receivable
Notes receivable
Receivable
Amounts due from customers for credit sales
An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates
Amount due from another party
The Correct Answer and Explanation is:
Here are the correct matches between the terms and their definitions:
- Receivable – Amount due from another party
- 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
Explanation
Receivables are a broad category of assets that represent amounts owed to a business by customers or other parties. These assets arise from a company’s operations, such as sales made on credit or loans extended to others. Receivables are important to financial statements because they show expected future cash inflows and are key indicators of liquidity.
Receivable is the general term used to describe any amount owed to the business by an external party. It can refer to various types of claims, such as customer debts, loans, or other financial obligations that are expected to be paid in the future.
Accounts receivable are a specific type of receivable and arise mainly from selling goods or services on credit. When a company allows customers to pay after delivery, it creates an accounts receivable. These are usually short-term (30 to 90 days) and do not require a formal written agreement, just an invoice or billing statement. Accounts receivable are considered current assets and are subject to collection risk (e.g., customer default), so companies often estimate and record an allowance for doubtful accounts.
Notes receivable differ from accounts receivable in that they are formal, written promises—commonly called promissory notes. These instruments specify the amount to be paid, the due date, and sometimes an interest rate. Notes receivable can be either short-term or long-term, depending on when they are expected to be collected. They are generally seen as more secure than accounts receivable because they are legally binding and enforceable.
Understanding these distinctions is crucial for financial analysis and internal control, as it impacts cash flow planning, credit policies, and the overall financial health of a company.
