Accounts receivable may be defined as the amount of money receivable from a customer for the goods sold to them on credit. Accounts receivables are traded as a current asset on the balance sheet. AR is basically any sum of money owed by customers for purchases made on a credit basis.
In general words, when you sell goods or services with an agreement to receive at a later date, this amount is known as accounts receivable before it is received.
Accounts receivable are an essential part of the fundamental analysis of a company. Accounts receivable is a current asset, so it measures the liquidity or capacity of a company without additional cash flows to meet short-term obligations.
Accounts receivable are often referred to as bills receivable and the cumulative amount to be charged by a corporation is displayed in the balance sheet as an asset under the heading ‘sundry debtor.’
Usually, companies have spent money on the sale of a commodity or the delivery of a service. The inventories decrease after selling the goods, and companies need an asset to balance the financial statements in turn.
In the event of credit transactions, either assets are cash-in-hand or receivables, that’s why receivables are shown on the assets side of the balance sheet.
Accounts Receivable Example
Let’s understand the term Accounts receivable with the help of an example.
XYZ company received an order of £ 20,000 for 50 chairs by a customer. Now, when the invoice is created for that amount, sales are recorded, but the company extends the 30-day credit period to the customer to make the payment.
The amount of £ 20,000 becomes the company’s account receivable until that time since the customer will pay the amount before the expiry of the period. If not, the XYZ company can charge a late fee or hand it over to accounts receivable management for collections.
The cash segment of the balance sheet will increase by £ 20,000 once the payment is made, and the account receivable will be reduced by the same amount because the payment has been made from the customer.
Accounts receivable management is the method of ensuring that clients pay their dues on time. It helps companies to maintain their working capital. Moreover, it prevents late payment or non-payment of the customer’s outstanding amounts.
It enhances the financial and liquidity status of companies. Effective accounts receivable management leads to profitability by reducing the possibility of bad debts.
Accounts receivable management is not just about reminding clients and receiving cash on time. It also involves determining the causes for those delays and seeking a solution to those problems.