Receivable

What it means

A receivable is the company’s right to payment from another party - most often an unpaid sales invoice, but also an advance paid to a supplier or a claim for damages.

In the books it arises on the day the supply happens, not the day it is paid. That is why a company can report profit and have no money in the bank: the revenue is booked and the receivable is open.

A receivable and a liability are two sides of one relationship: what the supplier holds as a receivable, the customer owes as a liability. On the balance sheet receivables are split by maturity into short-term and long-term, with one year as the line, because judging a company’s ability to pay depends on when the money can realistically be expected.

How it works in practice

Receivables are tracked in the sub-ledger by customer and by age. A simple rule works in practice: short payment terms, an automatic reminder the moment they pass, and stopping further supply on repeat lateness.

For longer delays come an acknowledgement of debt with instalments, assignment of the claim, factoring or court recovery. The choice depends on the amount and on how well the supply is evidenced.

With larger customers we recommend a year-end balance confirmation: the customer confirms in writing the amount it records as owed. The confirmation supports the stocktake, and if the figures differ, the gap is traced at once, while the documents and people are still at hand, not a year later.

What to watch out for

A bad debt does not go away by not being mentioned: it is reduced by an impairment allowance and written off under the statutory conditions. Watch limitation periods too - once they expire a court will not award the claim, however undisputed the debt.

On an unpaid invoice with VAT the company has already paid tax on money it never received. It can recover it only through a correction of the tax base, which the law allows under narrowly defined conditions. Until they are met, the VAT stays paid out of the company’s own funds and hits cash twice.