Trade Debtors Meaning
Trade Debtors (also known as Accounts Receivables or Trade Receivables), are clients that have made a purchase on credit, and have not yet paid for the product or service.
As an example a client may purchase ten laptops from your Computer Hardware business for £5,000. As is usual for your business, you give the client 30 days to pay for the laptops. Until they make payment, they will sit on your Sales Ledger as a Trade Debtor – with a balance of £5,000.
Trade Debtors in the Balance Sheet
Here is a simple balance sheet for our business, Computer Hardware Ltd.
As you can see we consider Trade Debtors to be a current asset.
Why?
This is because a current asset is something that will be sold or used during normal business operations over the next year and we expect to turn the trade debtors into cash within the year.
A business must keep track of it’s Accounts Receivables, to ensure that the debt that customers owe you is getting paid. Companies usually employ a person or team full time in keeping on top of the debt that clients owe – a Credit Controller.
Accountants can measure the performance of collecting cash using the Accounts Receivable Turnover Ratio.
Example of Aged Debtors
| Trade Debtors | |||||
| Client | 90+ Days | 60 Days | 30 Days | Current | Total |
| Sports Technology Company | 3,000 | 3,000 | |||
| Software Company | 5,000 | 5,000 | |||
| Television Company | 1,000 | 500 | 1,500 | ||
| Total | 3,000 | 1,000 | 5,500 | 9,500 |
The above table is a list of our Computer Hardware companies Aged Trade Debtors (Also know as Aged Receivables). This report shows all the clients that have made a purchase with us and still owe us money. It’s very important for a business to keep a close eye on their Trade Debtors, as in business, cash is king, and we need to make sure we get paid!
Let’s have a look at the three clients below, and see how much risk they are causing the business.
Sports Technology Company owe us £3,000! This debt is now over 90 days old, when we agreed on a 30 day payment term. This money looks like it’s at risk of not being received, either due to the other business refusing to pay us, or they may not have the money. Firstly, we may send them one final demand for payment, then refer them to our legal team to chase payment through court.
Looking at our Trade Receivable report we can see Software Company has only just recently made the £5,000 purchase. As they are a regular client and usually pay on time, so we are quite relaxed about this. But, we may have our Credit Controller remind them that the money is due soon though!
Finally, Television Company is another reliable client, but have not paid £1,000 on time. They have assured us we will be paid on the next payment run. As they are reliable, we have agreed to allow them to make another order of £500, but if they don’t pay the £1,000 soon, we will be forced to refuse further business until they pay.
Lets look at our Aged Trade Debtors for the following month!
Trade Receivable Report – The Following Month
| Trade Debtors | |||||
| Client | 90+ Days | 60 Days | 30 Days | Current | Total |
| Sports Technology Company | 0 | ||||
| Software Company | 1,000 | 1,000 | |||
| Television Company | 2,000 | 2,000 | |||
| Music Company | 1,000 | 1,000 | |||
| Total | 0 | 0 | 1,000 | 3,000 | 4,000 |
- Sports Tech – After threat of legal action they quickly paid up. Due to being so poor at paying up, we may not do business again.
- Software Company – £4k was paid on time, while the other £1k is currently being held up due to an issue the client has with one of the laptops provided.
- Television Company – They paid everything they owed and made a further £2k in purchases!
- Music Company – A brand new client. we will be watching how good they are at paying on time!