Accounts receivable (AR) is the amount of money owed by a business for goods and services that have been delivered, used, but not yet paid for by customers. On the balance sheet, current assets are accounts receivable. When customers owe money to you for items they purchased on credit (like a TV), it is called "accounts receivable".
What is Accounts Receivable?
Accounts Receivable (AR), refers to unpaid invoices and money owed to clients. This term refers to the business's entitlement to receive accounts as a result of providing a product or service. Receivables are a form of credit that a business extends to customers. They typically require payment within a very short time frame. This can last from a few days up to a whole fiscal year.
Because the customer is legally required by law to pay the debt, businesses classify account receivables as assets on their balance sheets. Accounts receivable can also be considered current assets. This means the debtor must pay the balance within one year. A business that has receivables means it has sold credit but has not received payment from the buyer. The business accepts a short-term IOU from a client.
Accounts Receivable Vs. Accounts Payable
Accounts payable refer to a company's owing money to suppliers and other third parties. Contrary to accounts receivable, accounts payable are the opposite of accounts receivable. Let's say Company A cleans the carpets at Company B. Then, Company B sends a bill. The invoice is placed in the accounts payable column because Company B owes them money. The bill is recorded in the accounts receivable column because Company A is still waiting for payment.
Benefits of Accounts Receivable
The company's fundamental analysis is incomplete without accounts receivable. Because accounts receivables are current assets, they can provide insight into a company's liquidity and ability to meet short-term commitments without generating additional cash flows.
Fundamental analysts often evaluate accounts receivables in terms of turnover. This ratio is also known as the accounts receivable turnover ratio. It indicates how frequently a company collects its accounts receivable balance over an accounting period. Additional analysis could include the number of days that remain, which calculates the average collection period for a company's receivables over a specific period of time.
An Example of Accounts Receivable
An example of an account receivable is a company that bills customers after it receives electricity. The electric company waits for customers to pay their bills and records an account receivable.
Most businesses work on a credit basis for a percentage of their sales. Some businesses extend credit to customers who are loyal or receive periodic invoices. This practice is advantageous to customers as it eliminates the need to pay for each transaction in person. Businesses often allow customers to pay for their services after they have received them.
Conclusion
Receipts are considered assets because they represent money owed to the company for providing services. On the other hand, accounts payable represent money that the business owes to others. Accounts Receivables are considered liabilities on a balance sheet.
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