In the accounting world, there are three main types of accounts receivable: trade, non-trade, and other.
When accountants refer simply to “receivables,” they’re typically speaking of trade receivables, which is what companies are owed for standard business activities.
However, non-trade receivables are not uncommon, and it’s important for businesses to understand how they differ to ensure they’re recorded and handled correctly.
In this guide, we’ll go over the definition of non-trade receivables, compare them to trade receivables, and provide some common examples businesses come across.
What are Non-Trade Receivables?
Definition of non-trade receivables
Non-trade receivables are the funds a company is owed from outside of normal business activities. Put differently, it doesn’t include any payments customers owe the company after purchasing products or services on credit, which would be a trade receivable.
Instead, non-trade receivables represent other, non-typical income streams the company is still waiting to collect.
They are usually reported as current assets on the balance sheet as long as the company expects to convert the receivables into cash within one year.
Importance of non-trade receivables
Any type of receivables represents money the company is owed but has yet to collect. Thus, this value is an important figure that companies can use to make informed financial decisions based on future expected payments.
Plus, teams must employ effective strategies to monitor and manage receivables to ensure they collect the maximum amount of what they’re owed.
Even though non-trade receivables tend to be smaller than trade receivables, they still impact a company’s financial positioning and cash flows and need to be properly recorded and managed.
Examples of non-trade receivables
Which types of receivables are considered non-trade receivables? While trade receivables typically result from standard customer invoicing practices, non-trade receivables can stem from a range of other non-core activities, such as:
Loans to employees
If a company loans an employee money and expects repayment, it would be considered a non-trade receivable.
This scenario isn’t extremely common, though it may occur when the company is trying to help the employee cover personal expenses during hardship, like a medical bill or child’s tuition.
In this case, the company may issue the funds to the employee upfront and then collect repayment through payroll deductions going forward. In the meantime, the remaining amount due is considered a receivable in the company’s books.
Advances to suppliers
Sometimes, businesses will make a prepayment to vendors, whether to take advantage of a bulk discount or to secure a certain product or quantity ahead of time.
The amount the company pays upfront is considered a non-trade receivable until the vendor has delivered the ordered goods or services.
Vendor refunds
Maybe a vendor owes the company for undelivered goods, or they’ve received an overpayment. Either way, in the event that a vendor owes the company a refund, this amount is recorded as a non-trade receivable until the funds are exchanged.
Tax refunds
In a similar vein, companies may be owed a refund from tax authorities based on overpayments made throughout the year.
Between filing the company’s tax return and receiving a refund, this amount is considered a non-trade receivable.
Insurance claims
When a business makes an insurance claim for covered losses or damages, the claim amount is a non-trade receivable in the time between when it’s approved and when the payment is settled.
Interest
A company may be owed interest on loans, investments, or bank deposits from various institutions.
Any interest earned that has not been paid to the company is a non-trade receivable on the balance sheet.
Accounting for non-trade receivables
Trade receivables are generally easy to track, as most of the records are kept in the company’s invoicing system when billing customers for products or services.
However, the tracking of non-trade receivables is not as standardized and may differ depending on the specific source.
Still, companies will need to make the appropriate journal entries to recognize these receivables and ensure they’re properly recorded on the balance sheet.
Non-trade receivables example journal entry
Let’s say a company provides an advance of $2,000 to an employee. The initial transaction would result in the following accounts receivable journal entry:
Debit: Non-Trade Receivable ($2,000)
Credit: Cash ($2,000)
Thus, the non-trade receivable account would go up (debited) by $2,000, and the cash balance would go down (credited) by the same value.
In this scenario, the employee is set to repay the company through payroll deductions for the next five months. The following is the accompanying journal entry for these five pay periods, representing a reduction in the employee’s net paycheck to cover the total advance:
Debit: Wages Payable ($400)
Credit: Non-Trade Receivable ($400)
For each of the following pay periods, the employee’s paycheck would net $400 lower than usual, and the balance of the non-trade receivables account would continue to decrease until the advance is fully paid off.
Best practices for tracking and reporting non-trade receivables
Proper management of non-trade receivables means teams promptly collect the funds they’re owed to support healthy cash flows.
Teams might employ accounts receivable factoring or invoice factoring to speed up the collection process for trade receivables. However, these avenues are typically not available for non-trade receivables that originate from other entities besides customers.
Here are some of the tips and best practices for companies to manage non-trade receivables:
- Set clear terms: Whether with employees or vendors, companies should set clear terms with these parties to ensure the prompt payment of refunds or repayment of loans/advances.
- Track separately: Teams should consider recording non-trade and trade receivables separately to ensure each category is handled and assessed properly.
- Regularly reconcile accounts: On a regular basis, reconcile the non-trade receivables account and run an aging report to flag any overdue or incorrect payments.
- Implement collections procedures: Just as with AR processes for trade receivables, teams should have procedures in place to follow up and collect late payments for non-trade receivables.
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FAQs
How are non-trade receivables different from trade receivables?
Trade receivables originate from core business activities, like selling products or services to customers. In contrast, non-trade receivables represent what the business is owed from other sources, like refunds from vendor payments or tax authorities.
Are non-trade receivables an asset?
Yes, non-trade receivables are assets. They are typically recorded as short-term or current assets on the balance sheet, meaning they’ll be converted into cash within a year.
What are some examples of non-trade receivables?
Common examples of non-trade receivables include:
- Employee advances/loans
- Vendor/supplier advances
- Vendor/supplier refunds
- Tax refunds
- Insurance claims
- Interest that is earned and unpaid
Does the accounts receivable turnover ratio include non-trade receivables?
No, this metric typically does not include non-trade receivables in its calculation. The accounts receivable turnover ratio demonstrates the relationship between credit sales and the average balance in accounts receivable. Since non-trade receivables don’t stem from customer sales, this value is typically not considered in the turnover ratio.
