What Is Accounts Receivable (AR)?

Accounts receivable (AR) is an accounting term for money owed to a business for goods or services that it has delivered but not been paid for yet. Accounts receivable is listed on the company's 澳洲幸运5官方开奖结果体彩网:balance sheet as a 澳洲幸运5官方开奖结果体彩网:current asset.

Understanding Accounts Receivable (AR)

Accounts receivable represents money that a business is owed by its clients, often in the form of unpaid invoices. "Receivable" refers to fact that the business has earned the money because it has delivered a product or service but is, at that point in time, still waiting to receive the client's payment.

Accounts receivable, or receivables, can be considered a line of credit extended by a company and normally have terms that require payments be made within a certain period of time. If effect, the company has accepted an IOU from the client. Depending on the agreement between company and client, the payment might be due in anywhere from a fe🍰w days to 30 days, 60 days, 90 days, or, in some cases, up to a year. At some point along the way, interest on the debt might also begin to accr🌜ue.

Companies record accounts receivable as assets on their balance sheets because the customer has a legal obligation to pay the debt and the company has a reasonable expectation of collecting it. They are considered 澳洲幸运5官方开奖结果体彩网:liquid assets because they can be used as 澳洲幸运5官方开奖结果体彩网:collateral to secure a loan to help the company meet its short-term obligations. Receivables are part of a company's 澳洲幸运5官方开奖结果体彩网:working capital.

Furthermore, accounts receivable are classified as current assets, because the account balance is expected from the debtor in one year or less. Other current assets on a company's books might include 澳洲幸运5官方开奖结果体彩网:cash and cash equivalents, 澳洲幸运5官方开奖结果体彩网:inventory, and readily marketable securities.

Assets that could not easily be converted into cash within a year are recorded as 澳洲幸运5官方开奖结果体彩网:noncurrent assets. That category often includes things like physical property, long-term investments, and intellectual pꦡroperty, such as trademarks.

Accounts Receivable vs. Accounts Payable

When a company owes debts to its suppliers or other parties, those are 澳洲幸运5官方开奖结果体彩网:accounts payable. Accounts payable are the opposite of accounts recei𝐆vable. To illustrate, Company A cleans Company B's carpets and sends a bill for the services.

Company B now owes Company A money, so it lists the invoice in its accounts paꦑyable column. While Company A waits to receive the money, it records the amount in its accounts receivable column.

What Accounts Receivable Can Tell You

Accounts receivable are an important element in 澳洲幸运5官方开奖结果体彩网:fundamental analysis, a common method investors use to determine the value of a company 💮and its securities. Because accounts receivable is a ꦆcurrent asset, it contributes to a company's liquidity or ability to cover short-term obligations without additional cash flows. 

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as the 澳洲幸运5官方开奖结果体彩网:accounts receivable turnover ratio. It measur🌼es the number of times a company has collected its accounts receivable balances during an accounting period aꦇnd is considered an indicator of both how efficient the company is in collecting its debts and the credit quality of its customers.

Further analysis would include assessing 澳洲幸运5官方开奖结果体彩网:days sales outstanding (DSO), which measures the average number of days that ඣit takes a company to collect payments after a sale has been made.

Example of Accounts Receivable

An everyday example of accounts receivable would be an electric company that bills its clients a💟fter the clients receive and consume the electricity. The electric compa🔜ny records an account receivable for unpaid invoices as it waits for its customers to pay their bills. 

Most companies operate by allowing a portion of their sales🥂 to be on credit. Sometimes, businesses offer such credit to frequent o🍬r special customers, who receive periodic invoices rather than having to make payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay within some reasonable period after receiving the products or services.

The Bottom Line

Accounts receivable is one of the most important line items on a company's balance sheet. It reflects the money owed to a company from the sale of its goods or services that remains to be paid by the buyer. Even though it is not yet in hand, it is considered an asset because the company expects to receive it in due course. The shorter the period of time a company has accounts receivable balances, the better, as it means the company can use that money for other business purposes.