Definition
Accounts receivable (AR) represents money due to a company for goods or services delivered to customers who have not yet paid the company. This balance is reported on the company’s balance sheet as a current asset, signifying that the amount is expected to be received in the short-term, typically within a year. Companies record accounts receivable for sales made on credit, implying that the customer has taken possession of goods or received services and is billed at a later date.
Examples
- Retail Example: A clothing retailer sells $5,000 worth of merchandise to a department store on credit. The $5,000 becomes part of the retailer’s accounts receivable until the department store pays the invoice.
- Service Industry Example: A consulting firm provides $10,000 worth of services to a client and issues an invoice to be paid within 30 days. The $10,000 is recorded as accounts receivable until the client settles the bill.
- Manufacturing Example: A machinery manufacturer delivers equipment valued at $50,000 to a buyer with net 60 payment terms. This amount is registered as accounts receivable until the manufacturer receives the payment.
Frequently Asked Questions
What is the difference between accounts receivable and accounts payable?
Accounts receivable represents money owed to a company by its customers, whereas accounts payable represents money a company owes to its suppliers.
How does accounts receivable impact cash flow?
Accounts receivable directly impacts cash flow as it represents sales made on credit. Efficient collection of receivables is essential to maintain positive cash flow.
Why is accounts receivable considered a current asset?
Accounts receivable is considered a current asset because it is expected to be converted into cash within one year.
How do companies manage accounts receivable effectively?
Companies manage accounts receivable through credit policies, regular monitoring, follow-up on overdue invoices, and sometimes by offering discounts for early payments.
Can accounts receivable be sold or transferred?
Yes, accounts receivable can be sold or transferred in processes like factoring, where a company sells its receivables at a discount to a third party to improve liquidity.
Related Terms with Definitions
- Trade Receivables: Another term for accounts receivable, specifically referring to the amounts due from customers for sales on credit.
- Aging Schedule: A report that categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding.
- Bad Debt: Accounts receivable that are considered uncollectible and are written off as an expense.
- Credit Terms: The payment terms agreed upon between a buyer and seller, indicating the deadline for payment.
Online Resources
- Investopedia - Accounts Receivable
- AccountingCoach - Understanding Accounts Receivable and Bad Debts Expense
- Corporate Finance Institute - Accounts Receivable Guide
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Statement Analysis and Valuation” by Peter Douglas Easton, Mary Lea McAnally, and Gregory A. Sommers
- “Accounting All-in-One for Dummies” by Kenneth W. Boyd
Accounting Basics: Accounts Receivable Fundamentals Quiz
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