Accounts Receivable
What Is Accounts Receivable?
Accounts receivable refers to money owed to a business by customers for goods or services that have already been delivered but not yet paid for. These amounts represent outstanding invoices that the business expects to collect within a specified payment period.
Accounts receivable typically arise when businesses allow customers to purchase products or services on credit with payment terms such as:
- Net 30 days
- Net 60 days
- Net 90 days
These balances are recorded as current assets on a company’s balance sheet because they represent incoming cash that the business expects to receive.
Why It Matters
Accounts receivable plays a critical role in a company’s cash flow and financial health. While sales may increase revenue, businesses must still collect payments to maintain liquidity.
Managing receivables effectively helps businesses:
- Maintain steady cash flow
- Reduce late payments or unpaid invoices
- Forecast future revenue
- Monitor customer payment behavior
Poor receivables management can lead to cash shortages even when a business is profitable on paper.
How Accounts Receivable Works
When a business sells goods or services on credit, it issues an invoice to the customer.
Example: A consulting firm completes a project and sends the client a $5,000 invoice with payment due in 30 days. Until the payment is received, the invoice is recorded as accounts receivable.
Once the client pays, the receivable converts into cash and is removed from the receivables balance.
Accounts Receivable vs Accounts Payable
Accounts Receivable → Money customers owe the business
Accounts Payable → Money the business owes suppliers or vendors
Together, they reflect the flow of money in and out of business operations.
FAQs About Accounts Receivable
Is accounts receivable considered income?
It represents earned revenue but not yet collected cash.
Why do businesses offer payment terms?
Credit terms can help attract customers and encourage larger transactions.
What happens if receivables are not paid?
Businesses may send reminders, charge late fees, or pursue collections.
Related Terms
