Accounts receivable are the sums of money owed to an individual or a company for services or goods provided. Most receivables operate in the form of lines of credit and are due in a short period of time. These lines of credit allow customers to avoid the inconvenience of physically paying for a purchase each time a transaction is made. In simpler terms, a receivable is an agreement made by a customer to pay a company in a timely fashion for a good or service rendered.
Time Periods for Accounts Receivable to Be Outstanding
There are no specific legal requirements limiting the time period accounts receivable can be outstanding. Essentially, they are allowed to remain for as long as the company owed money is willing to wait for payment.
The most common lengths of time that accounts receivable generally remain outstanding are net 30 days, net 45 days, net 60 days and 30 days from the end of the month. As an example, if the accounts receivable has an outstanding payment period of net 30 days, it means the customer is expected to pay the balance owed by the end of 30 days from the date of the purchase.
To encourage prompt payment, businesses sometimes extend a discount on the balance to customers who pay before the end of the determined payment period. The creditor usually has the option to charge late fees to the customer if the line of credit is not paid within the expected timeframe.
Depending on the type of industry or business, a certain percentage of debts or customers are commonly estimated to default. A business records an allowance in its records for these questionable accounts. Accounts receivable insurance is carried by many businesses to cover losses sustained from receivables that are paid off slowly or defaulted on entirely.