Trade receivables are the amounts that a company is owed from its customers resulting from the sale of goods or services on credit. These receivables are recorded as assets on the balance sheet under current assets because they are expected to be collected in the short term, usually within the operating cycle of the business. Trade receivables are an important component of working capital management and are a measure of the credit extended by a business to its customers. Companies monitor trade receivables closely to ensure cash flow remains steady.
An example of trade receivables in use is as follows: If a company sells $10,000 worth of merchandise to a customer on credit, the amount will be recorded as trade receivables until the customer pays the agreed amount. Keeping track of trade receivables is essential for maintaining good financial health and liquidity, as delayed payments can disrupt operational cash flows. Businesses may employ credit policies and collection strategies to manage trade receivables effectively.
For businesses utilizing accounting software like "Easy Month End", trade receivables are a key part of the month-end reconciliation and closing process. These software solutions help ensure that the trade receivables figures are accurate and up-to-date, which is crucial for both internal financial management and external reporting purposes.