Next video:
Loading the player...

Accounts Receivable (A/R) is an accounting term used to refer to the money that is owed to a company by its customers. The customers, who may be individuals or corporations, are the debtors, since they owe money for the goods or services provided by the company on credit.

Accounts receivable is considered to be an important factor in a company’s working capital and is reported as a current asset on the balance sheet.

For example, Tough Tyres Limited receives an order for tyres worth $1 million from Zoom Auto Limited. The order is accepted and the tyres are supplied with an invoice to Zoom Auto Limited. The supply has been made on credit and the customer is given a 90-day period to pay for the tyre purchase. Based on these transactions, Tough Tyres' inventory account decreases by $1 million and its accounts receivable increases by $1 million. When 90 days have passed and the payments are made, the accounts receivable goes down by $1 million while the cash with the company rises by $1 million.

When a product is sold on credit, the company sets a term for its accounts receivable. The term is the number of days given to a customer to honor the commitment of paying the bill amount. If the bill is not paid, then the customer may be charged a late fee or turned over to a collection agency. Most terms are set for 30, 60 or 90 days.

In general, if the amount of accounts receivable is too high, this reflects delays and laxity in the collection process and the company may find it hard to pay its current obligations. On the other hand, if the levels are too low, this indicates the company’s rigidity in its payment terms, as it may not be offering enough leeway to its customers.

Accounts receivable is considered good for a business as it is seen as turning into cash within a certain time frame. But if not handled properly (money due is not recovered) then the company may even be forced to write off its receivables on the balance sheet.

The process of supplying good and services on credit should be based on the reliability of clients and companies should follow up to ensure timely payments.

Related Articles
  1. Investing

    What's an Allowance for Doubtful Accounts?

    The allowance for doubtful accounts represents the percentage of the accounts receivable the company expects to write-off as uncollectible.
  2. Small Business

    Small Business: Speed Up Receivables To Avoid A Cash Crunch

    Waiting for customers to pay can be a losing game. Look to factoring for quicker cash.
  3. Managing Wealth

    Credit (Receivables) Insurance: Does Your Business Need It?

    This type of insurance will reimburse your business if customers don’t pay their bills. It’s not cheap, but some companies shouldn’t be without it.
  4. Managing Wealth

    Checking Account Reviews: Chase Premium Platinum

    Which perks and services come with Premier Platinum and is it worth the cost to you?
  5. Investing

    A Guide to Bank Accounts

    Find out which type of bank account suits your specific needs.
  6. Investing

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  7. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  8. Investing

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  9. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
Hot Definitions
  1. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  2. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  3. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Zero Day Attack

    Zero Day Attack is an attack that exploits a potentially serious software security weakness that the vendor or developer ...
Trading Center