Most businesses sell to their customer on credit. That implies, they sell and deliver goods or services quickly, send an invoice, then get paid a few weeks later. Business keeps track of all money their customers owed them by using an account called Accounts Receivable.
What is Accounts Receivable?
Account Receivable is the balance of money due to a firm for goods or services that were delivered or used but not yet paid for by customers. This term is additionally used to represent the outstanding invoices a company has or money owed by customers to the company. This money is typically collected within a few weeks and is recorded as an asset on the company’s balance sheet. Account Receivables is recognized as a part of accrual basis accounting.
Understanding Accounts Receivable
As mention above, Accounts Receivable is any cash your clients owe you for goods or services you provided prior. It also represents a line of credit extended by a company and has a term that requires payments within a relatively short-term period. The period ranges often from some days to a fiscal year.
Accounts Receivable is recorded as an asset on the company’s balance sheet because of the legal obligations for the customer to pay the debt. As a rule, it is a current asset that suggests the account balance is due from the debtor in a year or less. If it takes a receivable longer than a year for the account to be converted into cash, it is recorded as a long-term asset or notes receivable on the balance sheet. Under the accrual basis of accounting, the account is offset by an allowance for doubtful accounts, since there a possibility that some receivables will never be collected. This allowance is an estimate of the total amount of bad debts related to the receivable asset.
Accounts Receivable & Accounts Payable
In a balance sheet, accounts receivable (AR) and accounts payable (AP) are distinct yet essential components. Accounts receivable represent funds owed to a company by its customers for goods or services provided on credit, indicating future cash inflows. Conversely, accounts payable denote the company's obligations to pay its suppliers or vendors for goods or services acquired on credit, reflecting its short-term liabilities. AR and AP are listed under current assets and current liabilities, respectively, illustrating the company's liquidity and financial obligations.
Read More: Accounting: What are AP and AR ?
Key takeaways
- Accounts Receivable is an asset account on the company’s balance sheet to reflect money due to a company in the short-term.
- Accounts Receivable is created when a company lets a customer purchase their goods or services on credit.
- Accounts Receivable is similar to Account Payable. However, instead of money to be paid, it is money to be received.
- The strength of a company’s AR can be analyzed with the Accounts Receivable turnover ratio or days sales outstanding.
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