Receivables arise from a variety of claims against customers and others, and
are generally classified as current or noncurrent based on expectations about
the amount of time it will take to collect them. The majority of receivables
are classified as trade receivables, which arise from the sale of products or
services to customers. Such trade receivables are carried in the Accounts
Receivable account. Nontrade receivables arise from other transactions
and events, including advances to employees and utility company deposits.
To one degree or another, many business transactions result in the extension
of credit. Purchases of inventory and supplies will often be made on account.
Likewise, sales to customers may directly (by the vendor offering credit) or
indirectly (through a bank or credit card company) entail the extension of
credit. While the availability of credit facilitates many business transactions, it is also costly. Credit
providers must conduct investigations of credit worthiness, and monitor collection activities. In
addition, the creditor must forego alternative uses of money while credit is extended. Occasionally, a
creditor will get burned when the borrower refuses or is unable to pay. Depending on the nature of
the credit relationship, some credit costs may be offset by interest charges. And, merchants frequently
note that the availability of credit entices customers to make a purchase decision.
Banks and financial services companies have developed credit cards that are widely accepted by many
merchants, and eliminate the necessity of those merchants maintaining separate credit departments.
Popular examples include MasterCard, Visa, and American Express. These credit card companies earn
money off of these cards by charging merchant fees (usually a formula-based percentage of sales)
and assess interest and other charges against the users. Nevertheless, merchants tend to welcome
their use because collection is virtually assured and very timely (oftentimes same day funding of the