Accounts Receivable (AR) is the money that the business expects to receive from its customers or clients for the goods or services that they have provided on credit.
Accounts receivable is a current asset on the balance sheet, meaning it is expected to be received within a year or less.
Some of the features of accounts receivable are:
- Accounts receivable are created when the business issues an invoice to the customer or client and are collected when the invoice is paid.
- Accounts receivable may offer different credit terms, such as discounts for early payment or penalties for late payment, to encourage customers to pay faster.
- Accounts receivable are part of the cash flow from operating activities on the statement of cash flows and show the change in receivables from one period to another.
Managing accounts receivable is crucial for maintaining a healthy cash flow and maximizing profitability. Timely collection of accounts receivable not only improves the business’s liquidity but also minimizes the risk of bad debts.
Additionally, offering diverse credit terms can help attract more customers and boost sales.
Is accounts receivable a liability or expense?
Accounts receivable is classified as asset account and does not fall under the categories of liability or expense. Essentially, it represents the amount of money a business anticipates receiving from their customers or clients for goods or services provided on credit.
What are accounts receivable examples?
Some examples of accounts receivable are:
- A retail store that offers clothing and accessories to its customers on credit. The store keeps track of these sales as accounts receivable until the customers fulfill their payment obligations.
- A consulting firm that provides professional services to its clients on a project basis. The firm invoices the clients after completing the work and records the invoices as accounts receivable until the clients pay them.
- A company that offers loans to both individuals and businesses. When borrowers receive the funds, the company records the principal and interest amounts as accounts receivable until repaid.
- A subscription-based company that offers online services or products to its customers monthly or annually. The company charges the customers in advance and records the fees as deferred revenue, a type of accounts receivable until the services or products are delivered.