Accounts receivable

Accounts receivable refers to money due to a seller from buyers who have not yet paid for their
purchases. The amounts owed are stated on invoices that are issued to buyers by the seller. The
issuance of an invoice implies that the seller has granted credit to a customer. Credit is usually
granted in order to gain sales or to respond to the granting of credit by competitors. Accounts
receivable is listed as a current asset on the seller's balance sheet.

The total amount of accounts receivable allowed to an individual customer is typically limited
by a credit limit, which is set by the seller's credit department, based on the finances of the
buyer and its past payment history with the seller. Credit limits may be reduced during difficult
financial conditions when the seller cannot afford to incur excessive bad debt losses.

Accounts receivable are commonly paired with the allowance for doubtful accounts (a contra
account), in which is stored a reserve for bad debts. The combined balances in the accounts
receivable and allowance accounts represent the net carrying value of accounts receivable.

The seller may use its accounts receivable as collateral for a loan, or sell them off to a factor in
exchange for immediate cash.

Accounts receivable may be further subdivided into trade receivables and non trade receivables,
where trade receivables are from a company's normal business partners, and non trade
receivables are all other receivables, such as amounts due from employees.

Similar Terms

What are Accounts Receivable (AR)?

Accounts receivable (AR) are amounts owed by customers for
goods and services a company allowed the customer to purchase
on credit.

Said another way, when a company delivers a product or service to

its customers, in many instances those customers do not pay
immediately. Instead, they might have, for example, a 30 or 60-day
period before they're required to pay the invoice for those goods or
services. From the perspective of the company that sold the
products or services, the money owed to it is referred to
as accounts receivable.

Accounts Receivable Example

Let's assume that Company XYZ sells $1 million of widget parts to a
widget manufacturer and gives that customer 60 days to pay for
those parts. Once Company XYZ receives the order and/or sends
the parts and/or sends the customer an invoice, itwill decrease
its inventory account by $1 million and increase its accounts receivable by $1 million.
When 60 days has passed and Company XYZ is paid, it will increase cash by $1
million and reduce its accounts receivable by $1 million.

A/R is an asset, and as such, it appears on the balance sheet. In

particular, A/R is acurrent asset, meaning that the amount owed is
expected to be received within the next 12 months.

When accounts receivable go down, this is considered a source of

cash on the company'scash flow statement, and as such, it
increases the company's working capital (defined ascurrent
assets minus current liabilities). When accounts receivable goes up,
this is considered a use of cash on the company's cash flow
statement because the company is "stretching out" the time it takes
to receive money owed to it and thus is using cash more quickly.

Why do Accounts Receivable matter?

Accounts receivable is an important factor in a company's working capital. If it's too
high, the company may be lax in collecting what's owed too it and may soon be
struggling to find the cash to pay the bills; if it's too low, the company may be
unwisely harming customer relationships or not offering competitive payment terms.
In general, accounts receivable leciels correspond to changes in sales levels.

Companies can sometimes use their receivables as collateral for

borrowing money. The level of accounts receivable also affects several important
financial-performance measures, including working capital, days payable, the current
ratio and others.

It is important to note that uncollectible receivables do not qualify as assets

(these uncollectible amounts are reclassified to the allowance for doubtful accounts,
which is essentially a reduction in receivables); thus, companies usually allow only
creditworthy customers to pay days, weeks or even months after they've received the
company's services or goods. Sometimes companies sell their receivables for cents on
the dollar to other companies that focus solely on collecting the owed amounts.