Accounts Receivable Definition

Accounts receivable is money due to a company for goods or services that have not yet been paid for.

Accounts receivable is a figure found on the balance sheet and is classed as a current asset i.e. money that is to be received within the next 12 months. A large majority of companies will sell to their customers on credit, whereby the goods and/or services are immediately delivered, and an invoice is raised. Customers/clients would then pay this invoice in a few weeks or months time. The term Accounts receivable may also sometimes be found abbreviated as ‘AR’.

An example would be where Company X has sold £10,000 worth of material to Company Y. Company X will ship off the material along with an invoice, Company Y will receive this and be required to pay within the next 30 days. In the meantime, Company X will deduct £10,000 from its inventory and add this instead to its Accounts Receivable. Company Y will then later make payment in full, where Company X would deduct £10,000 from its Accounts Receivable and add this instead to its cash balance.

Where a company’s Accounts receivable is too low, it can suggest their payment terms are too harsh which can have effects on customer relationships. However, where a company’s Accounts receivable is too high, it can mean the company is lax in chasing payments and collecting what is owed. It is important a company find a balance in this and assess carefully their customer(s) creditworthiness. The accounts receivable amount is able to tell us about the future growth prospects of a company.

The Accounts receivable (AR) value acts as an excellent complimentary tool that should certainly be used with other metrics when evaluating a company.

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