What is Accounts Receivable?

Accounts Receivable(AR) is the term used to describe the money owed to a business by its customers for purchases made on credit. It is a current asset on the balance sheet and is the total value of the outstanding invoices for goods or services the business has sold but for which it has not yet received payment. 

Accounts Receivable is nothing but the money owed to your firm by its customers. Proper Accounts Receivable management requires generating invoices, monitoring due dates for payments, and collecting those payments promptly. Managing accounts receivable well enables firms to ensure that there is proper cash flow and that there is minimal bad debt.

Accounts Receivable Example

When a firm offers services worth $5,000 to a customer, who agrees to pay for it in 30 days, that $5,000 amount will be classified under Accounts Receivable.

The Accounts Receivable Process

• Issuance of invoice: The company provides the good/services and sends the invoice to the customer.
• Recording in the accounting books: Debiting the accounts receivable account increases the asset, and the revenue account is credited.
• Payment of invoices monitored: The company checks the invoices pending payment and ensures that payment is made after the due date.
• Receipt of payment: Upon making payment by the customer, the accounts receivable account is credited, and cash is debited.

Accounts Receivable Vs Accounts Payable

Accounts Receivable is the amount that is due from the customers of the firm, whereas Accounts Payable is the amount payable by the firm to its suppliers/vendors. Accounts Receivable is an asset, whereas Accounts Payable is a liability.

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