You are currently viewing Introduction to Accounts Receivable

Introduction to Accounts Receivable

What Is the Definition of Accounts Receivable (AR)?

The sum due to a corporation for goods or services provided or utilized but not yet paid for by customers is known as accounts receivable (AR). On the balance sheet, accounts receivable are categorized as current assets. An AR is any amount of money owed by customers for credit purchases. Learn more about the turnover ratio formula here.

Account Receivable Recognition

Accounts receivable refer to a company’s outstanding invoices or the money that clients owe the company. The phrase refers to accounts that a company has the right to receive as a result of delivering a product or service. Accounts receivable, also known as receivables, are a type of credit line extended by a company that typically has terms that require payments to be made within a short period of time. It can be as short as a few days or as long as a fiscal or calendar year. Read all details about accounts receivable meaning further below.

Accounts Payable vs. Accounts Receivable

Accounts payable are debts owed by a company to its suppliers or other parties. Accounts payable are the inverse of receivables. Assume company A cleans company B’s carpets and sends a bill for the services. Because Company B owes them money, the invoice is recorded in the account’s payable column. Because Company A is awaiting payment, it records the bill in its accounts receivable column.

Accounts Receivable: Advantages

Accounts receivable are a critical component of a company’s fundamental analysis. Accounts receivable are current assets, so they measure a company’s liquidity or its ability to meet short-term obligations without generating additional cash flows.

Accounts receivables are frequently evaluated by fundamental analysts in the context of turnover, also known as the accounts receivable turnover ratio, which shows how many times a company’s accounts receivable total has been collected over an accounting period. A step further would be days sales outstanding analysis, which determines the average collection duration for a company’s receivables balance over a given time period.

Example of Accounts Receivable

An example of accounts receivable is an electric company that bills its customers after they have received their power. The electric business keeps track of unpaid invoices as an account receivable while waiting for clients to pay their bills. Most businesses operate by allowing some of their sales to be made on credit. Businesses may grant this credit to frequent or special customers who receive periodic invoices. Customers can avoid the hassle of physically making payments for each transaction by using this method. In some cases, businesses give all of their customers the option of paying after they get the service.

How Do I Locate a Company’s Accounts Receivable?

On a company’s balance sheet, accounts receivable is a good thing because they show how much money is owed to the company.

What Is the Distinction Between Receivables and Payables?

Funds owed to the company for services delivered are recorded as receivables. Accounts payable, on the other hand, are monies that the company owes to others. Suppliers or creditors, for example, are owed money. Liabilities include receivables and payables.