Accounts Receivable

What is Accounts Receivable (AR)?

Accounts receivable is the money balance that is due to a company for services or products delivered but not paid by the customer. They are listed on the Balance Sheet in the form of current asset.

Also, this could be any amount of money that a customer owes for the purchase done on credit.

Understanding Accounts Receivable (AR) Process

Basically, the accounts receivable process talks about the outstanding invoices that a company has. The phrase talks about the accounts that a business has the liability to receive for the products or services delivered. AR represents the credit line extended by the company and generally comprises terms that require payments due within a specific period. Typically, it ranges anywhere from some days to a calendar or Fiscal Year.

Companies record their accounts receivable as assets on the balance sheets as there is a legal responsibility for customers to pay their debt. Moreover, these are current assets, denoting that the account balance is due in a year or less.

Thus, if a company carries Receivables, it simply means that it has made a sale but has to collect the money yet.

Example of Accounts Receivable

Let’s take an account receivable example here to understand more. Suppose there is an electric company that has billed its clients after delivering the services. Now, the company will record the AR for the unpaid bill and will wait for the client to clear out the amount.

There are several companies that operate by giving a certain part of the sales on credit. Sometimes, companies might also provide this offer for regular or special customers.

Benefits of Accounts Receivable Asset

Accounts receivable asset is an essential Factor of the fundamental analysis in a company. Since this one is a current asset, it helps to measure the liquidity or competence of a company to pay off short-term expenses without any extra cash flows.

Often, fundamental analysts assess AR in the turnover context, which is also known as the accounts receivable turnover ratio that helps to measure the number of times the firm has acquired its AR balance during a specific Accounting period.