If you’re looking for the receivables accounting definition, you’re in the right place.
Accounts receivable, also referred to AR, is an accounting term that refers to the money that’s owed to a business for any goods or services it has delivered but hasn’t yet received payment. This is considered an asset to the company and it is the opposite of accounts payable, or money that the company owes but hasn’t been paid.
Understanding accounts receivable (AR)
If a client owes a business money in the form of an unpaid invoice, this is represented by accounts receivable. The business has already delivered the product or service but they are still waiting to get the client’s payment. In some cases, AR is considered to be a line of credit that a company extends that is tied to terms that require payments to be made within a certain time. You can think of it as the company accepting an IOU from the client. The specific agreement will detail when the payment is due; this can range from a few days to 30, 60 or 90 days. Interest on the debt could start to accrue depending on the terms.
The importance of accounts receivable
Now that we have a better understanding of the receivables accounting definition, why is it important? It’s part of a fundamental analysis that helps investors determine a company’s value and securities. The fact that AR is a current asset means that it makes up a company’s liquidity or how well it can cover short-term obligations without tapping into more cash flows.
The accounts receivable turnover ratio helps fundamental analysts evaluate accounts receivable as it relates to turnover. In other words, it measures how often a company has collected accounts receivable balances during an accounting period. This shows how well the company does in collecting debts and the credit quality of its customers.
Examples of accounts receivable
One example of accounts receivable is when an electric company sends a bill to clients after the electricity has already been consumed. Even though the electric company has already provided the power to its clients, they record an account receivable for the unpaid invoices as they wait for customers to pay bills.
The majority of companies allow for a portion of their sales to be run based on a credit. In some cases, businesses offer credits to their top customers who might get an invoice on occasion compared to customers who are expected to pay within a reasonable time frame for a good or service.
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