Accounts Receivables

Accounts receivable (AR) are the amounts of money that customers owe a business for goods or services that have been delivered or used but not yet paid for. AR is a current asset on the balance sheet and represents a company’s right to receive payments from its customers.

AR is created when a business sells goods or services on credit. The customer receives the goods or services and agrees to pay for them at a later date, typically within 30, 60, or 90 days. The business then creates an invoice for the customer and records the amount owed as AR.

AR is a valuable asset to businesses, as it represents money that is owed to them but has not yet been collected. However, AR can also be a liability, as it can tie up cash that could be used for other purposes. Businesses need to carefully manage their AR to ensure that they are collecting payments from customers in a timely manner.

Here is an example of how AR works:

  • A customer orders a new laptop from an electronics store on credit.
  • The store ships the laptop to the customer and invoices them for $1,000.
  • The customer agrees to pay the invoice within 30 days.
  • The store records the invoice as an AR on its balance sheet.

Once the customer pays the invoice, the store debits AR and credits cash. This reduces the amount of AR on the balance sheet and increases the amount of cash on hand.

Businesses can use a variety of methods to manage their AR, such as:

  • Establishing credit policies: Businesses can establish credit policies to determine which customers are eligible to purchase on credit and what their payment terms will be.
  • Tracking AR aging: Businesses can track the age of their AR to identify customers who are past-due on their payments.
  • Sending reminders and collection notices: Businesses can send reminders and collection notices to customers who are past due on their payments.
  • Using factoring: Factoring is a process where a business sells its AR to a third party, such as a factoring company. The factoring company then collects the payments from the customers and pays the business a percentage of the amount collected.

By carefully managing their AR, businesses can improve their cash flow and profitability.

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