What Is Accounts Receivable (AR)?

What Is Accounts Receivable (AR)?

Let me explain accounts receivable (AR) directly: it's the money owed to your business for goods or services you've delivered but haven't been paid for yet. You record it as a current asset on your company's balance sheet.

Key Takeaways

You should know that accounts receivable appears on your balance sheet as money due for products or services already provided. It's an asset for your company. Remember, it's the opposite of accounts payable, which is money your company owes but hasn't paid.

Understanding Accounts Receivable (AR)

Accounts receivable is essentially the money your clients owe you, often from unpaid invoices. You've earned it by delivering the product or service, but you're still waiting on payment—that's why it's called a receivable.

Think of it as a line of credit you've extended. Terms usually require payment within a set period, like 30, 60, or 90 days, sometimes up to a year, and interest might kick in eventually.

You list accounts receivable as assets because customers are legally obligated to pay, and you expect to collect. They're liquid, so you can use them as collateral for loans to cover short-term needs. They factor into your working capital.

As current assets, they're expected to be collected within a year. Other current assets include cash, inventory, and marketable securities. Noncurrent assets, like property or trademarks, take longer to convert to cash.

Accounts Receivable vs. Accounts Payable

Accounts payable are debts your company owes to suppliers or others—it's the flip side of accounts receivable. For example, if Company A cleans carpets for Company B and sends a bill, Company B records it as payable, while Company A records it as receivable.

What Accounts Receivable Can Tell You

Accounts receivable is crucial in fundamental analysis for valuing a company. As a current asset, it affects liquidity—your ability to handle short-term obligations without extra cash.

Analysts look at the turnover ratio, which shows how often you collect receivables in a period, indicating efficiency and customer credit quality. They also check days sales outstanding (DSO), the average days to collect after a sale.

Example of Accounts Receivable

Take an electric company: it bills customers after they use the electricity, recording unpaid bills as accounts receivable while waiting for payment.

Many businesses allow credit sales, especially for frequent customers who get periodic invoices. Others let all clients pay after receiving goods or services.

When Does a Debt Become a Receivable?

A receivable forms whenever money is owed for services or products provided but not paid. For instance, buying office supplies without paying upfront creates a receivable for the seller until payment arrives.

Where Do I Find a Company's Accounts Receivable?

You find accounts receivable on the balance sheet, booked as an asset since it's funds owed and likely to be received.

How Are Accounts Receivable Different From Accounts Payable?

Accounts receivable are funds owed to you, an asset. Accounts payable are funds you owe, a liability.

What Happens If Customers Never Pay What's Due?

If a receivable won't be paid, write it off as bad debt expense. You might sell it to a debt collector at a discount, creating discounted accounts receivable.

What Are Net Receivables?

Net receivables are total receivables minus those unlikely to be collected, expressed as a percentage—the lower, the better.

The Bottom Line

Accounts receivable is a key balance sheet item, showing money owed from sales yet to be paid—it's an asset you expect to collect. Shorter receivable periods are better, freeing up cash for your business.