Accounts receivables are defined as any credit due as the result of a sale made on credit that the company sold it their customers. The accounts receivables are a balance of money due to the company for goods or services provided to the customers, but for which the customer has not yet paid for
Account receivables are normally classified as current assets because under usual payment agreements the account receivables have to be cleared within a year. But, sometimes account receivables may stretch for more than a year, which is then classified as non-current assets in the balance sheet.
For the product or services that are paid for immediately by the customer, they are not recorded in account receivables in the balance sheet as assets, unless the accounting rules of the company require it to be recorded like that.
Another term used for account receivables is trade receivables. Both terms are used interchangeably, and they mean the same thing. Sometimes, account receivables are classified as administrative assets and trade receivables as account receivables for the sale of raw materials, equipment, etc.
Example
Let us take the example of company A supplying Industrial equipment to one of its clients. One of its clients has purchased an excavator for one hundred thousand US Dollars from the company, but the purchase has been made on credit. It means that the company would have to open accounts receivables in its balance sheet for the purchase of excavator from the company.
In the accounts receivable, company A would be debited with one hundred thousand US Dollars, and at the same time, the sales account has also been credited with one hundred thousand US Dollars. The accounts receivable would be cleared when the client pays for the excavator.
Recognition of account receivables
Account receivable is recognized at fair value and when the company is expected to receive the collection from its customers as the result of the credit sales that the company makes to its customers.
The Company will need to derecognize party or whole of account receivable if they have reason to believe that they will not be able to collect those AR.
Normal Balance
The normal balance is known as the balance which is noted in the books of a company as a result of the analysis of the balance sheet of the company. The normal balance is calculated by the accounting equation, which says that the assets of a company are equal to the sum of liabilities and shareholder’s equity.
For accounts receivable, the normal balance is usually debit. It is due to the reason that most clients do not pay their suppliers on the spot for goods or services, which means that these products or services are on credit for the client’s balance sheet, which would be seen on the debit side for the company.
Explanation
The accounting equation which is used to calculate normal balance is Assets = Liabilities+Equity
This accounting equation is used to determine the normal balance of not only accounts payable but also accounts receivables and accounts payable for a company.
For accounts receivables that are on the assets side, the normal balance is usually debit. In the opposite case, for the accounts payable, the normal balance is credit. Whether the normal balance is in credit or debt, it is determined by the accounting equation.
If the value of the assets is more than the combined value of liabilities and equities, then the normal balance is on the debit side, and if the assets the sum of liabilities and equities is higher than the value of the assets, then the normal balance is on the credit side.
This is a common practice in double-entry bookkeeping. Ultimately, the accounting equation determines whether the normal balance occurs on the debit or credit part of the balance sheet of the company.
Types of normal balances
There are two kinds of normal balances which are expressed in the balance sheet of a company, and these two types of normal balances are credit and debit.
The normal balance, whether they fall on the credit side or they fall on the debit side is mainly determined by the accounting equation, which is the basis for the calculation of normal balance as discussed above.
Debit Normal balance
As we know from the accounting equation assets = liabilities + equity. So, if the left-hand side, which is the asset side, is greater than the sum of the right-hand side, which consists of liabilities and shareholders’ equity, then the normal balance of a firm is considered to be debit.
It is due to the fact that the value of the assets of a company is higher than the sum of liabilities and shareholder’s equity.
The credit normal balance is considered healthy because it means that the company is in a strong financial condition because it has more than enough assets to cover any of the liabilities that it may face in the future.
Credit Normal Balance
The credit normal balance is also determined from the accounting equation. The credit normal balance occurs in an opposite scenario to the debit normal balance.
This occurs when the left-hand side, which is the asset side, is lesser than the sum of the right-hand side, which consists of liabilities and shareholders’ equity, and then the normal balance of a firm is considered to be credible. This also represents a greater value of liabilities and shareholders’ equity than the assets of a firm.
It is generally considered that a company that has a credit normal balance is in financial distress. It is due to the fact that the company does not possess enough assets to cover its financial liabilities.
But, sometimes a company’s financial liabilities go up as it borrows to invest in a new project, such as a new factory. So, it is really important to keep in mind, how the financial liabilities of a company are structured.
Frequently asked questions
Is accounts receivable normal balance?
The accounts receivables can be classified as a debit on the normal balance. Under usual circumstances, whether the normal balance is credit or debit is determined from the accounting equation. Under normal conditions, accounts receivables are classified as debit normal balance.
This is due to the fact that the accounts receivables are the payments that a company has to receive from its customers for a particular product or service it has provided to its clients.
Until the customer has paid for this service, these are referred to as debit in the balance sheet of the company. So, that is why the accounts receivables qualify as debit normal balance.
What is an account receivable on a balance sheet?
The accounts receivables are those payments which a company has to receive from its customer as a result of the product or service it has provided to its customer. The accounts receivables usually are classified on the debit side of the balance sheet of the company, under the current assets section of the company’s balance sheet.
The accounts receivables are derecognized from the company financial statements once the customers are making payments. At the same time, the company will need to recognize the cash on hand or cash in the bank depending on the method that the customers use for making the payment to the company.
What is the normal balance for liabilities?
The normal balance for liabilities is credit. For example, accounts payable are a type of liability, and these are classified as liabilities. Once the company makes the payment to its creditor, the account payable will be derecognized from the company’s financial statements.
