What is Accounts Receivable?

Accounts Receivable (AR) is the amount of money owed to a business by its customers or clients for goods or services that have been delivered or provided but not yet paid for. When a business sells its products or services on credit, it creates an account receivable.

Key points about Accounts Receivable include:

• Recordkeeping:: Companies typically record AR as an asset on their balance sheets. It falls under the category of current assets since the expectation is to convert these receivables into cash within a relatively short period, usually one year.
• Invoicing Practices: Businesses often issue invoices to customers detailing the products or services provided, along with the payment terms. These terms specify the time frame within which the payment should be made.
• Credit Policies: Companies implement credit policies to manage their AR effectively. This includes assessing the creditworthiness of customers, setting credit limits, and monitoring payment behavior to minimize the risk of bad debts.
• Collection Practices: Collection of AR can sometimes be challenging due to various factors such as cultural norms, regulatory environment, and economic conditions. Companies may employ strategies such as regular follow-ups, offering discounts for early payments, or using collection agencies to recover overdue amounts.
• Impact on Financial Statements: AR has a direct impact on a company’s financial statements, particularly the balance sheet and cash flow statement. A high level of AR relative to sales may indicate lenient credit policies or difficulties in collecting payments, whereas a low level may suggest efficient receivables management.

Accounts Receivable (AR) and Accounts Payable (AP) are two fundamental aspects of a company’s financial operations, often found on its balance sheet. Accounts Receivable represents the amount of money owed to a company by its customers for goods or services provided on credit. Accounts Payable represents the amount of money a company owes to its suppliers or vendors for goods or services purchased on credit.