Accounting | Other receivables and payables

Hello Future Accountant! Let's Master Other Receivables and Payables!

Welcome to a crucial chapter in bookkeeping! So far, you've mainly dealt with money owed by customers (Trade Receivables) and money owed to suppliers (Trade Payables). But in the real world, businesses have lots of other, smaller transactions that aren't about buying or selling stock.

This chapter teaches you how to handle these "extra" amounts – called Other Receivables and Other Payables. Don't worry if this sounds complex; we'll break it down into simple, manageable steps. By the end, you’ll be able to spot these items and know exactly where they belong in the business’s accounts!

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1. Quick Review: Receivables vs. Payables

Before diving into the "Other" category, let's quickly remind ourselves of the core definitions. This is essential for placing items correctly in the Statement of Financial Position (SFP).

What is a Receivable?

A receivable means the business is owed money by someone else. They represent a future economic benefit.

• Classification: An Asset (something the business owns).
• The Rule: Assets increase on the Debit side.
• Analogy: Think of a bank IOU slip – you have money coming your way.

What is a Payable?

A payable means the business owes money to someone else. They represent a present obligation.

• Classification: A Liability (something the business must pay).
• The Rule: Liabilities increase on the Credit side.
• Analogy: Think of a debt or a bill waiting to be paid.

Quick Key Takeaway: Receivables are money coming in (Assets). Payables are money going out (Liabilities).

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2. The Difference: Trade vs. Other

Why do we need two different names for money owed or owing?

Trade Receivables and Trade Payables

These are the amounts that arise directly from the business's main activity:

• Trade Receivable: Money owed by a customer for goods/services sold on credit.
• Trade Payable: Money owed to a supplier for goods/services bought on credit.

Example: A shop sells a £50 item to Mr. Jones on account. Mr. Jones is a Trade Receivable.

Introducing Other Receivables and Other Payables

These are amounts owed to or by the business that do not relate to the normal buying and selling of goods/inventory.

Did you know? Separating "Trade" from "Other" gives users of the accounts a much clearer picture of the business’s performance and normal operations.

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3. Deep Dive into Other Receivables (Assets)

These are assets because they represent value the business is entitled to, but they aren't linked to customer sales. They are sometimes called "Accrued Income" or "Prepayments" depending on the nature of the transaction.

Example 1: Prepayments (The Most Important Other Receivable)

A prepayment occurs when a business pays for an expense before it uses the service or incurs the cost. Because the service hasn't been used yet, the business essentially has an asset (the right to use that service in the future).

How Prepayments Work (The Insurance Analogy)

Imagine the business pays £1,200 for 12 months of insurance on 1st October 20X1. The financial year ends on 31st December 20X1.

• Total payment: £1,200 (for 12 months)
• Cost per month: £100

By 31st December 20X1, only 3 months (Oct, Nov, Dec) have passed. The cost for these 3 months (£300) is the actual Expense for this year.

The remaining 9 months (£900) relates to the next financial year (Jan 20X2 to Sep 20X2). This £900 is the Prepayment (an Other Receivable/Current Asset).

Accounting Tip: The amount prepaid is the amount that has been paid but NOT YET CONSUMED.

Example 2: Other Common Other Receivables

1. Loans to Employees/Directors: Money the business has lent out. (If it's due back within 12 months, it’s Current; otherwise, Non-Current.)
2. Rent Received in Advance: If a business sublets part of its premises and the tenant pays rent covering the next few months, this is sometimes treated as a Receivable until the period is passed. (Though often classified as a short-term liability/accrual depending on specific treatment, at this level, identifying it as "Other" is key.)

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4. Deep Dive into Other Payables (Liabilities)

These are liabilities because they represent an obligation to pay cash in the future, but they are not linked to goods purchased from standard suppliers. They are sometimes called "Accruals."

Example 1: Accruals (The Most Important Other Payable)

An accrual occurs when a business uses a service or incurs an expense before it receives the bill or makes the payment. Even though the invoice hasn't arrived, the expense belongs to the current period, and the obligation to pay exists.

How Accruals Work (The Electricity Bill Analogy)

Imagine your financial year ends on 31st December 20X1. The business has used electricity for December, but the bill won't arrive until January 20X2.

• The cost of the December electricity is an expense that belongs to 20X1.
• Because the business hasn't paid yet, it owes the electricity company.

If the estimated December usage is £150, that £150 is the Accrual (an Other Payable/Current Liability).

Accounting Tip: The amount accrued is the amount that has been CONSUMED/USED but NOT YET PAID.

Example 2: Other Common Other Payables

1. Deposits Received from Customers: Money received by the business as a guarantee before providing the service or delivering the goods. Until the service is delivered, the money is a liability.
2. Taxes Owed: Amounts owed to the government (like sales tax or income tax) are often considered other payables, as they are not related to trade suppliers.
3. Loans from Directors/Banks: If the business has borrowed money, the outstanding balance is a payable (liability).

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5. Classification in the Statement of Financial Position (SFP)

All receivables and payables must be classified as either Current or Non-Current.

Current vs. Non-Current

The standard rule for IGCSE is simple:

Current Items:

Assets that are expected to be converted into cash, or Liabilities that are expected to be settled, within one year (12 months) from the SFP date.

• Most Prepayments (Insurance, Rent) are Current Assets.
• Most Accruals (Electricity, Wages) are Current Liabilities.

Non-Current Items:

Assets or Liabilities that are expected to last or be settled after one year.

• Example: A loan made to an employee that must be repaid in 3 years is a Non-Current Receivable.
• Example: A bank loan due to be paid back in 5 years is a Non-Current Payable.

Summary of SFP Placement

When preparing the Statement of Financial Position, these items fall under the main headings:

Category	Classification	SFP Section	Common Examples
Other Receivable	Current Asset	Current Assets	Prepaid Insurance, Short-term Loan to Staff
Other Receivable	Non-Current Asset	Non-Current Assets	Long-term Loan to Staff
Other Payable	Current Liability	Current Liabilities	Accrued Wages, Tax Owed
Other Payable	Non-Current Liability	Non-Current Liabilities	Long-term Bank Loan

Common Mistake to Avoid: Confusing a prepayment (an asset, because you paid too much) with an accrual (a liability, because you owe money for something you already used).

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6. Summary: Key Takeaways to Remember

You’ve done great! This chapter ensures that your business accounts follow the accruals concept (or matching concept), meaning expenses and income are recorded when they are incurred or earned, regardless of when cash is exchanged.

🧠 Memory Check: The Big Two 🧠

1. Prepayment: Always an Asset (Other Receivable).
2. Accrual: Always a Liability (Other Payable).

Remember, keeping track of these "Other" amounts is critical for preparing accurate financial statements. You now know the difference between the standard trade accounts and these special adjustments!

Keep practicing those definitions and classifications – you're well on your way to mastering the basics of bookkeeping!