Accounts Receivable (AR) is a financial asset recorded on a company’s balance sheet, representing the amounts owed to the company by its customers for goods or services that have been delivered or provided. In other words, accounts receivable is the money that customers owe to the company on credit.

Here are key points about accounts receivable:

1. **Nature of Accounts Receivable:**
– Accounts receivable arises when a company sells goods or services on credit, allowing customers to pay at a later date. It represents a claim or a right to receive cash in the future.

2. **Recording Accounts Receivable:**
– When a sale is made on credit, the corresponding revenue is recognized in the income statement, and the accounts receivable is recorded as an asset on the balance sheet. The accounts receivable account is debited, increasing its balance.

3. **Terms and Credit Period:**
– The terms of credit, including the credit period and payment terms, are usually agreed upon between the seller and the customer. Common credit terms include “Net 30” (payment due in 30 days) or “Net 60.”

4. **Trade Receivables:**
– Accounts receivable is sometimes referred to as trade receivables, distinguishing it from other types of receivables, such as non-trade receivables or notes receivable.

5. **Uncollectible Accounts:**
– Companies may face the risk of customers not paying their accounts receivable, leading to potential bad debts. To account for this risk, companies may establish a provision for doubtful accounts or bad debt expense.

6. **Aging of Receivables:**
– The aging of receivables is a common method used to analyze the composition of accounts receivable based on the length of time they have been outstanding. It helps assess the likelihood of collection.

7. **Factoring Receivables:**
– Some companies may choose to sell their accounts receivable to a third party, known as a factor, to accelerate cash flow. This is known as accounts receivable factoring.

8. **Impact on Cash Flow:**
– While accounts receivable represents amounts owed to the company, it does not represent cash received. The actual cash flow occurs when the receivables are collected.

The management of accounts receivable is crucial for a company’s cash flow and working capital management. Efficient credit policies, timely collection efforts, and monitoring aging schedules help minimize the risk of bad debts and ensure a steady flow of cash into the business. Analyzing the accounts receivable turnover ratio and days sales outstanding (DSO) are common methods to assess how effectively a company is managing its receivables.