Everything you need to know about receivables
- Jan Vácha
If we want to work well with receivables, we need to take a look not only at accounting regulations, but also at the Civil Code. Please take a look at what you need to know and what terms you need to work with.
What you need to know:
The definition of a receivable from the perspective of the Civil Code
The moment of booking a receivable according to accounting regulations
The basic principles of valuation of receivables
The main forms of extinguishment of receivables
Definition of a receivable
We will not find a definition of a receivable in the accounting act or degree, but in the Civil Code. We must, moreover, start from the definition of a liability. Act no. 89/2012, the Civil Code, stipulates in article 1721 that based upon a liability, the creditor has a right to certain transaction as a receivable and the debtor is obliged to satisfy this right by fulfilling the debt. A receivable is thus the right of the creditor to a transaction from the debt, as well as a duty of the debtor to fulfil his liability to the creditor.
What does the Civil Code say?
According to article 1723 of the Civil Code, a liability ensues
- from a contract
- from an unlawful act
- from another legal fact, which is eligible for it, according to the legal system.
Article 1789 further stipulates that based on a liability, the debtor is obliged to
- to give something
- to do something
- to refrain from something
- or to suffer something
and the creditor is entitled to demand these duties from him.
From the perspective of the Civil Code, by entering into a contract, both a liability and a receivable for both contracting parties.
The supplier has a liability to supply goods or a service and has a receivable on grounds of payment of the agreed price. The customer has a receivable for supply of goods or a service and a liability to pay the agreed price.
Accounting does not copy the legal situation according to the Civil Code.
Act no. 563/1991 Sb., on accounting, states in article 2 that accounting entities (which keep double-entry accounting) enter double entries
- on the state and movement of property and other assets
- on the state of liabilities including debts and other passives
- on costs and revenues
- on profit and loss.
The moment of booking
An important moment from the perspective of accounting is the moment of realisation of an accounting case. This is the moment, as of which specific accounting entries are made.
The definition says that the moment of realisation of an accounting case is the day, on which
- the supply is fulfilled,
- monetary debt is repayed,
- a receivable is collected,
- a receivable is assigned,
- a receivable is deposited,
- an advance payment or down payment is provided or accepted,
- a debt is acquired etc.
- (this is not a complete list, point 2.4.3. of the Czech Accounting Standard no. 001 states further examples).
We will find a definition in the Czech Accounting Standard for Entrepreneurs (CAS) no. 001, more specifically in paragraph 2.4.3.
Entering into a contract and other reasons for the creation of a liability (and on the other side the creation of a receivable) according to the civil code usually do not meet the definition of the moment of realisation of the accounting case according to CAS and thus do not result in any accounting operation. A receivable or a liability thus gets into the accounting only at the moment, when the object of supply is fulfilled or an advance payment or down payment for a supply agreed by contract is provided.
From the accounting perspective, a receivable is a relatively broad term and receivables can be divided into two main categories:
- monetary (a right to money)
- non-monetary (a right to another type of transaction, usually services or moveable things).
A receivable may ensue from a trade relation. We encounter this daily, if we go to buy something in a shop. On one side is the buyer, for who entitlement to goods ensues, on the other side the seller, who is entitled to payment of the purchase price.
A receivable may also mean a entitlement to the supply of goods or a service. Tato receivable is created by payment of a part or the entire agreed price in advance (it is thus usually a paid advance payment).
Valuation of receivables
According to article 25 of the accounting act, receivables are valuated as of the moment of realisation of the accounting case:
- at nominal value upon their creation
- at acquisition cost in case of acquisition for consideration or as a deposit.
The Czech Accounting Standard no. 001 further states that for the purposes of valuation of receivables denominated in foreign currency as of the day of their creation, the day of issuing of the invoice or a similar document can be considered the moment of realisation of the accounting case.
According to article 50 of the decree, the acquisition price of claims includes
- costs relating to acquisition, for example the costs of valuation of the purchased receivables by an expert, remuneration for lawyers and
Receivables past maturity
Not every receivable can be duly satisfied within the due deadline, and receivables past maturity therefore appear nearly in all accounting entities. An accounting entity can thus register receivables, the realizable value of which (especially with regard to the creditworthiness of the debtor) may be considerably lower than their accounting value (given at the moment of creation of the receivable), and in the extreme case, the value may be down to zero.
Based on the stipulation of article 25 paragraph 3 of the accounting act, accounting entities only include profits in the valuation as of the balance sheet date, which have been achieved as of balance sheet date, and they take into account all predictable risks and possible losses, which relate to assets and liabilities and are known to them by the moment of drawing up the financial statement, as well as all reductions in value regardless of whether the accounting period ends with profit or loss. In practice, the lowering of the value of a receivable is resolved in two ways.
- By creating an adjusting entry, if this is a temporary reduction of its value
- By depreciation, if the creditor reasonably supposes that this is a permanent reduction of value.
Adjusting entries for receivables are created based on internal rules of a company (internal directives), especially with regard to the creditworthiness of the debtor, the probability of payment and the experiences of the accounting entity.
Depreciation of a receivable is only possible in case the receivable provably cannot be recovered.
Extinguishment of a receivable
Receivables are most frequently extinguished
- by fulfilment of the debt – payment or supply of goods or service. In some cases the debtor may agree with the creditor on extinguishment of the liability (and correlatively also the receivable) – cancellation of the liability and replacement with a new liability or remission of debt
- by off-set of receivables (“compensation”), which is governed by article 1982 of the civil code (if parties owe one another mutually fulfilment of the same debt, each of them can declare towards the other party that it offsets its receivable against the receivable of the other party). It is possible to proceed to offset, as soon as a right ensues for the party to demand satisfaction of its own receivable and repay its own debt. By offset, the two receivables are mutually cancelled to the extent, to which they cover one another
- By assignment to another creditor. All rights thereby pass to another creditor.
- By limitation (this is a weakening of the right to claim it at court; the general limitation period has been set at 3 years in article 629 of the civil code).
In case you are interested in this issue, please, contact us.