ACCOUNTS RECEIVABLE

What Is Accounts Receivable (AR)?

Accounts receivable (AR) is the balance of money due to a firm for goods or
services delivered or used but not yet paid for by customers. Accounts
receivables are listed on the balance sheet as a current asset. AR is any amount
of money owed by customers for purchases made on credit.

Understanding Accounts Receivable (AR)

Accounts receivable refers to the outstanding invoices a company has or the money clients owe
the company. The phrase refers to accounts a business has the right to receive because it has
delivered a product or service. Accounts receivable, or receivables represent a line of
credit extended by a company and normally have terms that require payments due within a
relatively short time period. It typically ranges from a few days to a fiscal or calendar year.

Companies record accounts receivable as assets on their balance sheets since there is a legal
obligation for the customer to pay the debt. Furthermore, accounts receivable is current assets,
meaning the account balance is due from the debtor in one year or less. If a company has
receivables, this means it has made a sale on credit but has yet to collect the money from the
purchaser. Essentially, the company has accepted a short-term IOU from its client.

Many businesses use accounts receivable aging schedules to keep taps on the status and well-
being of AR accounts.
Accounts Receivables vs. Accounts Payable
When a company owes debts to its suppliers or other parties, these are accounts payable.
Accounts payable are the opposite of accounts receivable. To illustrate, imagine Company A
cleans Company B's carpets and sends a bill for the services. Company B owes them money, so
it records the invoice in its accounts payable column. Company A is waiting to receive the
money, so it records the bill in its accounts receivable column.

Benefits of Accounts Receivable

Accounts receivable is an important aspect of a businesses' fundamental analysis. Accounts
receivable is a current asset so it measures a company's liquidity or ability to cover short-term
obligations without additional cash flows.

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known
as accounts receivable turnover ratio, which measures the number of times a company has
collected on its accounts receivable balance during an accounting period. Further analysis would
include days sales outstanding analysis, which measures the average collection period for a
firm's receivables balance over a specified period.
Example of Accounts Receivable
An example of accounts receivable includes an electric company that bills its clients after the
clients received the electricity. The electric company records an account receivable for unpaid
invoices as it waits for its customers to pay their bills.

Most companies operate by allowing a portion of their sales to be on credit. Sometimes,

businesses offer this credit to frequent or special customers that receive periodic invoices. The
practice allows customers to avoid the hassle of physically making payments as each transaction
occurs. In other cases, businesses routinely offer all of their clients the ability to pay after
receiving the service.

Related Terms
Receivables Definition
Receivables, or accounts receivable, are debts owed to a company by its
customers for goods or services that have been delivered but not yet paid for.
more
What Is the Average Collection Period?
Learn more about the average collection period, the time it takes for a business
to receive payments from its clients.
more
Accounts Payable (AP)
Accounts payable is an account within the general ledger representing a
company's obligation to pay off a short-term debt to its creditors or suppliers.
more
Current Liabilities Definition
Current liabilities are a company's debts or obligations that are due to be paid to
creditors within one year.
more
The Accounts Payable Turnover Ratio Shows How a Company Manages Debt
The accounts payable turnover ratio is a short-term liquidity measure used to
quantify the rate at which a company pays off its suppliers. Accounts payable
turnover shows how many times a company pays off its accounts payable during
a period.
more
Accounts Receivable Financing Definition
Accounts receivable financing is a type of financing arrangement in which a
company receives financing capital in relation to its receivable balances.
more
Definition of Accounts Receivable
Accounts receivable is the amount owed to a company resulting from the company providing goods
and/or services on credit. The term trade receivable is also used in place of accounts receivable.
The amount that the company is owed is recorded in its general ledger account entitled Accounts
Receivable. The unpaid balance in this account is reported as part of the current assets listed on the
company's balance sheet.

When goods are sold on credit, the seller is likely to be an unsecured creditor of its customer.
Therefore, the seller should be cautious when selling goods on credit.

Good accounting requires that an estimate should be made for any amount in Accounts Receivable
that is unlikely to be collected. The estimated amount is reported as a credit balance in a contra-
receivable account such as Allowance for Doubtful Accounts. This credit balance will cause the
amount of accounts receivable reported on the balance sheet to be reduced. Any adjustment to the
Allowance account will also affect Uncollectible Accounts Expense, which is reported on the income
statement.
Example of Accounts Receivable
Accounts receivable are legally enforceable claims for payment held by a business for goods
supplied and/or services rendered that customers/clients have ordered but not paid for. These are
generally in the form of invoices raised by a business and delivered to the customer for payment
within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. It is one
of a series of accounting transactions dealing with the billing of
a customer for goods and services that the customer has ordered. These may be distinguished
from notes receivable, which are debts created through formal legal instruments called promissory
notes.[1]