In the realm of business transactions, the term trade receivables is particularly relevant to trading enterprises. Trade receivables can occur when a sales transaction takes place, either in cash or on credit.
Spend with Flexibility,
Anywhere with Jack Corporate Card
Typically, it is sales on credit that can result in a build-up of trade receivables for a company. In general, trade receivables refer to a sum of money lent by a company to customers through the purchase of goods or services on credit.
So, what is the influence of trade receivables in foreign currency? Find the complete explanation below.
Complete Definition of Trade Receivables
As mentioned earlier, trade receivables are the funds that must be paid to a company for goods or services that have been delivered or used but not yet paid for by customers. Trade receivables are recorded on the balance sheet as current assets.
Trade receivables can also refer to a sum of money owed by customers for purchases made on credit.
Companies record receivables as assets on the balance sheet because there is a legal obligation for customers to repay the debt. Furthermore, receivables are considered current assets, which means the outstanding balances are due from debtors within one year or less.
If a company has receivables, it means they have made sales on credit but have not yet collected the payment from the buyers. Essentially, the company has received a short-term IOU from its clients.
Accounting Issues Related to Trade Receivables
In some cases, trade receivables can create problems related to accounting. The various issues are outlined below.
1. Recognition of Trade Receivables
Trade receivables can be recognized or recorded when the company obtains these receivables. This is done through credit sales transactions, the occurrence of discounts and returns, and the repayment of trade receivables by the company.
2. Valuation of Trade Receivables
According to the accounting principles in Indonesia, trade receivables must be recorded and reported on the balance sheet. The amount recorded is the net cash obtained by deducting the uncollectible receivables reserve.
3. Transfer of Trade Receivables
The transfer of receivables occurs when a company transfers its existing trade receivables to another party, such as a bank, financial institution, or factoring company. The aim is to expedite the receipt of cash from the receivables. There are several reasons why a company may choose to sell or transfer its receivables:
- The company may be experiencing difficulties in obtaining loans and the high interest rates, prompting the company to convert its receivables into cash.
- Collecting receivables from customers usually takes a considerable amount of time and may also incur costs. This prompts the company to choose a smaller cash amount rather than the actual receivable.
Definition of Foreign Currency
After discussing trade receivables, let’s talk about foreign currency. Also known as Forex or FX, foreign currency refers to a currency that is accepted, recognized, and used by businesses for international trade transactions.
Since it is a foreign currency, it cannot be used as a means of payment for domestic trade. However, it’s important to note that not all foreign currencies can be used in international transactions. The currency for foreign exchange must fall into the category of Hard Currency, which means it has a strong value compared to others.
Hard Currency is usually derived from economically influential developed countries that have a significant impact on other countries worldwide. Examples include the Euro, US Dollar, and Japanese Yen.
Influence of Trade Receivables in Foreign Currency
As mentioned earlier, foreign currency is a currency that can be used, employed, and recognized in international trade.
Referring to the Financial Accounting Standards (PSAK) 10 (Revised 2010), there are three groups of transactions that require settlement in foreign currency. These groups are as follows:
- Purchase and sale transactions of goods and services with prices dominated in a foreign currency.
- Deposit and loan transactions, where the sum is in debt or receivable dominated in a foreign currency.
- Disposal and acquisition of assets that represent liabilities dominated in a foreign currency.
From the above explanation, we can see that trade receivables fall into the category of transactions that require settlement in foreign currency, including trade receivables.
The flow of Foreign Currency Transactions
During initial recognition, foreign currency transactions must be recognized using the functional currency. This is based on the exchange rate between the foreign currency and the functional currency on the transaction date.
Monetary and non-monetary items are useful for distinguishing the impact of foreign currency transactions on the financial statement items of an entity. Monetary items represent units of currency with assets and liabilities that will be received or paid in a fixed amount. Examples of monetary items include cash, trade receivables, and bank deposits.
Non-monetary items represent obligations to receive or deliver a sum of money. Examples of non-monetary items include trade payables, bank loans, and tax liabilities. Recording and measurement of foreign currency transactions must use the spot exchange rate on the transaction date.
After using the spot exchange rate, in subsequent reporting periods, the following indications are needed:
- Monetary items need to be presented using the closing rate on the reporting date.
- Non-monetary items are measured at historical cost and need to be presented at the exchange rate on the transaction date.
- Non-monetary items need to be measured at fair value and presented using the exchange rate on the date when the fair value is determined.
If there is an exchange difference upon settlement, the difference is recognized in the income statement for monetary items. There may also be recognition of income statement in comprehensive income for non-monetary items, depending on other reporting requirements.
Use Jack for Your Business Needs
That’s the influence of trade receivables in foreign currency. Hopefully, this information provides benefits to all readers.