Accounts Receivable

What is accounts receivable?

Accounts receivable (AR) is the money owed to a business by its customers for goods or services provided on credit. When a company allows customers to buy without paying upfront, it creates an account receivable. AR is the business’s claim to future payments.

For example, if a company sells to a customer on credit, the company expects to get paid later. Until the customer pays, that amount is listed as accounts receivable in the company’s records.

Accounts receivable is important to a company’s cash flow as it shows the income the company will receive. It’s key to track AR accurately as it impacts the business’s financial health and liquidity.

Key Points

• Accounts Receivable (AR) is money your business is waiting to receive. When you sell goods or services to customers on credit, the amount they owe you becomes accounts receivable. It’s essentially the money you’re expecting to be paid later.
• AR shows up as a current asset on your balance sheet. Since AR represents money you plan to receive within the year, it’s listed as a current asset. But if customers delay payments or don’t pay at all, it can cause cash flow issues and impact your business’s financial health.
• AR and Accounts Payable (AP) are two sides of the same coin. While AR is money you’re waiting to collect from customers, AP is the money you owe to your suppliers. Effectively managing both is key to keeping your cash flow steady and your business financially stable.

Accounts receivable example

Let’s say a business, ABC Electronics, sells a set of laptops to a customer for $5,000 on 30 days credit. The company has made a sale, but the customer won’t pay immediately. The $5,000 becomes an accounts receivable for ABC Electronics. Until the customer pays, ABC Electronics has an outstanding receivable. In their financial statements, the $5,000 would show up as an asset under “Accounts Receivable.” Once the customer pays the invoice the AR balance will decrease and cash or the corresponding payment method will increase.

Is accounts receivable an asset?

Accounts receivable is a current asset on a company’s balance sheet. Assets are anything of value that a business owns. Accounts receivable is categorized as a current asset because it represents money expected to be received within the year.

While Accounts Receivable is an asset, AR indicates that the business extends credit to customers which can carry risks. If a customer doesn’t pay or delays the payment it could impact the company’s liquidity or the forecast, putting them in an unexpected deficit.

Accounts receivable vs. accounts payable

Accounts Receivable (AR) and Accounts Payable (AP) both relate to money moving in and out of a business but here are the differences:

• Accounts Receivable is money the company is waiting to collect. It’s the amounts customers owe the business for products or services delivered on credit.
• Accounts Payable is money the company owes to its suppliers or vendors for goods or services it has purchased on credit. It’s the opposite side of the equation to AR, as it’s the business’s debts rather than its receivables.

AR is money owed to the company and AP is money the company owes to others. Both are important to a company’s financial health. AR affects cash flow by showing how much the business will receive, and AP shows how much the business needs to pay to stay current.

By understanding accounts receivable businesses can better manage their cash flow, improve collection efforts, and be financially stable.