What are accounts receivable (AR)?
Accounts receivable (AR) is the balance of money owed to a business for goods or services provided or used but not yet paid for by customers. Accounts receivable are recorded in the balance sheet as current assets. AR is any amount of money owed by customers for purchases made on credit.
Key points to remember
- Accounts receivable are a balance sheet asset account that represents money owed to a short-term business.
- Accounts receivable are created when a business lets a buyer buy goods or services on credit.
- Accounts payable are similar to accounts receivable, but instead of money receivable, it is money owed.
- The strength of the AR of a company can be analyzed with the ratio of customer accounts turnover or the days of sales in progress.
- An analysis of the turnover rate can be done to know when the RA will actually be received.
Understanding customer accounts (AR)
Debtors refer to unpaid invoices from a business or to money customers owe to the business. The expression refers to the accounts that a business is entitled to receive because it has delivered a product or service. Accounts receivable or accounts receivable represent a line of credit extended by a business and normally have terms that require payments due in a relatively short time. It generally varies from a few days to a fiscal or calendar year.
Companies record accounts receivable in assets in their balance sheet because the customer has the legal obligation to pay the debt. In addition, accounts receivable are current assets, which means that the account balance is owed by the debtor in one year or less. If a business has receivables, it means it has made a sale on credit but has not yet received the buyer’s money. Essentially, the company has accepted a short-term IOU from its client.
Many companies use accounts receivable aging calendars to keep an eye on the status and well-being of AR accounts.
Accounts receivable vs accounts payable
When a business owes debts to suppliers or other parties, these are accounts payable. Accounts payable are the opposite of accounts receivable. To illustrate, imagine that Company A cleans the carpets of Company B and sends an invoice 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 invoice in its accounts receivable column.
Benefits of Accounts Receivable
Accounts receivable are an important aspect of fundamental business analysis. Accounts receivable are a short-term asset, so it measures a company’s liquidity or ability to cover short-term obligations without additional cash flow.
Fundamental analysts often assess accounts receivable in the context of turnover, also known as debtor turnover rate, which measures the number of times a business has recovered its accounts receivable over a period of time. accounting. A more in-depth analysis would include an analysis of the days of sales in progress, which measures the average recovery period of a company’s receivables balance over a given period.
Example of accounts receivable
An example of accounts receivable includes an electricity company that bills its customers after customers have received electricity. The utility company registers an accounts receivable for unpaid bills while waiting for customers to pay their bills.
Most companies operate by authorizing a portion of their sales on credit. Sometimes companies offer this credit to frequent or special customers who receive periodic invoices. This practice allows customers to avoid the hassle of physically making payments with each transaction. In other cases, companies systematically offer all their customers the option of paying after receiving the service.