Define bills receivable

Bills receivable refer to written promises or formal documents (bills of exchange) that specify a sum of money to be received at a future date. These documents represent amounts owed to a company or individual by customers or other parties, and they are considered a form of short-term asset in accounting. Bills receivable are part of a company's accounts receivable and are recorded on the balance sheet under current assets.

Key Characteristics of Bills Receivable:

1. Written Promise: Bills receivable are formal, written agreements that specify the amount to be paid and the due date.
2. Payee and Drawee: The party that will receive the payment (creditor) is called the payee, and the party that promises to pay (debtor) is the drawee.
3. Fixed Amount: The amount to be paid is specified in the bill and does not change.
4. Maturity Date: Bills receivable have a specific date by which the amount must be paid.

Importance in Accounting:

• Record of Receivables: Bills receivable help businesses keep track of amounts owed by customers, improving the management of receivables.
• Legal Evidence: They serve as legal evidence of debt, providing a basis for legal action if the payment is not made on the due date.
• Financial Planning: Knowing the amounts and dates of future receivables helps in cash flow planning and financial management.

Example:

A company sells goods worth $5,000 to a customer on credit and agrees to receive payment in 90 days. The customer signs a bill of exchange promising to pay $5,000 after 90 days. This bill is now a bill receivable for the company.

Accounting Treatment:

• Recording: When a bill receivable is created, the company records it by debiting the bills receivable account and crediting the sales account.
• Collection: Upon collection, the bills receivable account is credited, and the cash or bank account is debited.
• Dishonor: If the bill is not paid on the due date (dishonored), the company debits the bills receivable account and credits the debtor's account, reinstating the receivable.

Journal Entries:

1. Issuance of Bill: Bills Receivable AccountDr5,000To Sales AccountCr5,000\text{Bills Receivable Account} \quad \text{Dr} \quad 5,000 \\ \text{To Sales Account} \quad \text{Cr} \quad 5,000Bills Receivable AccountDr5,000To Sales AccountCr5,000
2. Collection of Bill: Cash/Bank AccountDr5,000To Bills Receivable AccountCr5,000\text{Cash/Bank Account} \quad \text{Dr} \quad 5,000 \\ \text{To Bills Receivable Account} \quad \text{Cr} \quad 5,000Cash/Bank AccountDr5,000To Bills Receivable AccountCr5,000
3. Dishonor of Bill: Debtor’s AccountDr5,000To Bills Receivable AccountCr5,000\text{Debtor's Account} \quad \text{Dr} \quad 5,000 \\ \text{To Bills Receivable Account} \quad \text{Cr} \quad 5,000Debtor’s AccountDr5,000To Bills Receivable AccountCr5,000

In summary, bills receivable are an important component of accounts receivable management, providing a formal and legal framework for credit transactions and ensuring that businesses can track and collect amounts due from customers effectively.