Accounts Receivable
The outstanding money or payments that a company is owed by its customers for goods or services delivered but not yet paid for. It represents the credit extended by the company to its customers,
Key Points
- Asset: Accounts receivable is considered a current asset on a company’s balance sheet because it represents money that is expected to be converted into cash within a short period.
- Invoicing: When a business provides goods or services on credit, it issues an invoice to the customer specifying the amount owed and the due date.
- Collection: The business follows up with customers for payment, often through reminders or collections processes.
- Aging: AR is often categorized by the “aging” of the receivables, meaning how long the payment has been due. This can help companies assess the likelihood of receiving payment.
- Bad Debt: Not all accounts receivable will be paid. If the company determines that a receivable will not be collected, it may write off the amount as a bad debt.
- Cash Flow: The efficient management of accounts receivable is crucial for maintaining a company’s cash flow. Delays in collections can lead to cash flow problems.