Accounts receivable are amounts owed to a farmer or rancher for products or services sold but where money has not yet been collected.
In This Section
What are Accounts Receivables?
Accounts receivable refer to the outstanding invoices or money owed to an agricultural business by its customers or clients for products or services delivered but not yet paid for.
This is a crucial aspect of the financial management of agricultural businesses, including farms, agribusinesses, and agricultural suppliers.
Accounts receivable typically arise from credit sales, where the customer agrees to pay at a later date according to the terms of the sale, which may include payment within 30 days, 60 days, or other agreed-upon terms. These receivables are recorded as assets on the balance sheet at their invoiced amount, representing the total amount owed by customers for goods or services provided.
Accounts receivable are typically valued on a balance sheet at their net realizable value. Net realizable value is the amount of accounts receivable expected to be collected, considering any allowances for doubtful accounts or bad debts.
Key Components of Accounts Receivables in Farming & Agriculture
- Sales to Customers: Agricultural businesses sell products such as crops, livestock, dairy, and processed goods to various customers, including wholesalers, retailers, processors, and direct consumers. When these products are sold on credit, the amount due becomes part of the accounts receivable.
- Credit Terms: The terms under which the sales are made determine when the payment is due. Common terms include “Net 30” or “Net 60,” meaning the payment is due in 30 or 60 days, respectively. These terms are agreed upon at the time of sale.
- Invoicing: After delivering the products or services, the agricultural business issues an invoice to the customer. This invoice details the amount owed, the due date, and any applicable terms or discounts for early payment.
- Collection Process: The agricultural business monitors the accounts receivable to ensure timely payments. This may involve sending reminders, following up with customers, and handling any disputes or issues that arise.
Types & Examples of Accounts Receivables
The following are some of the most common instances where a farmer or agribusiness operation may have accounts receivables on their balance sheet:
- Sales of Agricultural Products – If a farmer sells their agricultural products, such as crops, livestock, or produce, to buyers on credit terms, accounts receivable may arise. For example, a farmer may sell a shipment of grain to a food processing company or livestock to a meatpacking plant and allow them to pay at a later date, creating accounts receivable.
- Agri-Services – Farmers may also provide services to other farmers or agricultural businesses, such as custom harvesting, spraying, or equipment rental, and bill their customers for these services. In such cases, accounts receivable would be generated from the services rendered.
- Agri-Business Operations – Some farmers may operate agri-businesses alongside their primary farming activities, such as selling agricultural inputs like seeds, fertilizers, or equipment on credit terms to other farmers. These sales would result in accounts receivable for the farmer’s business.
Other less common examples may include government subsidy payments for agricultural products or sales to local cooperatives.
Accounts Receivables on the Balance Sheet
Accounts receivables are classified as a current asset on the balance sheet since these assets are assumed to be converted into cash within a year.
Accounts receivables is a generally liquid asset and will appear toward the top of middle of the farm balance sheet.
Purpose of Accounts Receivables in Agriculture
Many producers and agribusiness operations sell goods and services on credit. Thus, accounts receivables can represent a significant amount on the producers current assets. Accounts receivables also represents a future inflow of cash from customers and this cash is crucial in sustaining the operation.
Managing accounts receivable is an important aspect of financial management for companies, as it impacts cash flow and liquidity. Companies often have policies and procedures in place to monitor and collect receivables efficiently, such as sending invoices promptly, following up on overdue payments, and establishing credit terms and limits for customers.
Accounts receivable are usually reported on the balance sheet as a current asset, as they are expected to be collected within one year or the operating cycle of the business, whichever is longer. If receivables are not expected to be collected within this time frame, they may be classified as non-current assets.
Monitoring the aging of accounts receivable (i.e., analyzing how long invoices have been outstanding) is essential for assessing the creditworthiness of customers and identifying potential collection issues. Companies may also use financial ratios, such as the accounts receivable turnover ratio, to evaluate the effectiveness of their credit and collection policies and practices.
How to Record Accounts Receivables on Balance Sheet
On a farm balance sheet, accounts receivable should be tracked as a current asset. This reflects the amount of money owed to the farm by its customers for goods or services delivered but not yet paid for. Here’s how accounts receivable should be presented and managed on a farm balance sheet:
Valuation of Accounts Receivables
Here’s how accounts receivable are valued:
- Gross Amount – Initially, accounts receivable are recorded on the balance sheet at their gross amount, which represents the total invoiced amount owed by customers for goods sold or services rendered.
- Allowance for Doubtful Accounts – To reflect the possibility that not all accounts receivable will be collected, a contra-asset account called the allowance for doubtful accounts is established. This allowance represents an estimate of the portion of accounts receivable that may not be collected due to customer defaults, disputes, or other issues. The allowance is based on historical collection experience, industry norms, economic conditions, and specific customer circumstances.
- Net Realizable Value – The net realizable value of accounts receivable is calculated by subtracting the allowance for doubtful accounts from the gross amount of accounts receivable. This adjustment reflects the amount that the company reasonably expects to collect from its accounts receivable.
It’s important to note that the valuation of accounts receivable is based on estimates and judgments, as it involves predicting future collection amounts and assessing the risk of non-payment. Therefore, companies need to regularly review and update their allowance for doubtful accounts to reflect changes in customer creditworthiness, economic conditions, and other relevant factors.
The valuation of accounts receivable at net realizable value provides a more conservative and realistic representation of the amount of cash the company expects to collect from its customers. This approach helps ensure that the balance sheet accurately reflects the financial position of the company and enhances transparency for investors, creditors, and other stakeholders.
Exclusions from Accounts Receivables on the Balance Sheet
When preparing the balance sheet, farmers, ranchers and accountants should be careful not to include items that would generally not fall into the category of accounts receivables.
Certain items are typically excluded from accounts receivable to provide a more accurate and conservative view of the company’s financial health. Common exclusions from accounts receivable include:
- Non-Trade Receivables: These are receivables not related to the core operations of the business, such as loans to employees or officers, advances to suppliers, or any other miscellaneous receivables not directly tied to sales of products or services. Non-trade receivables are usually reported separately.
- Doubtful Accounts: Amounts that are unlikely to be collected are excluded from accounts receivable. Instead, an allowance for doubtful accounts is created as a contra-asset account to reduce the gross receivables to their net realizable value.
- Long-Term Receivables: Receivables that are not expected to be collected within one year are classified as long-term receivables and reported under non-current assets.
- Unbilled Receivables: Amounts for which the billing process has not been completed are typically excluded from accounts receivable. Once the invoice is issued, they can be included in accounts receivable.
- Advances and Prepayments: Advances received from customers for future goods or services are not included in accounts receivable. Instead, these are recorded as liabilities under unearned revenue or customer deposits.
- Notes Receivable: If the receivable is in the form of a promissory note, it is often classified separately as notes receivable, especially if it includes interest payments and has a different term structure.
- Intercompany Receivables: Receivables from related entities within the same corporate group may be excluded from accounts receivable and instead presented as a separate line item to distinguish them from third-party receivables.