See Also:
Accounts Receivable Turnover
How to Collect Accounts Receivable
How to Calculate Daily Sales Outstanding
Time Saving Tip for Filing Vendor Invoices
Accounts PayableAccounts Receivable Defined
Accounts receivable is a current
asset account on the
balance sheet. It represents money owed to the company by customers who bought goods or services on credit. Basically, the customers already received the goods and services but have not yet paid for them, so the amount equal to the unpaid bill goes into the accounts receivable account. It is considered a short-term asset account because the receivables are expected to be collected within one year or one operating cycle. Money in accounts receivable is essentially an interest-free loan to customers.
Accounts receivable is used in certain financial ratios as a measure to analyze a company’s liquidity. A company with an uncommonly high accounts receivable amount may be having trouble collecting payment from customers. While a strong accounts receivable turnover ratio may indicate operational efficiency in the company.
A company can manage receivable accounts by relaxing or tightening its customer credit standards. Tightening credit standards can shorten the collection period, but it may also discourage purchases. Relaxing credit standards, on the other hand, may stimulate sales, but increase the chance of having late payments or uncollectable accounts.