Accounts receivable (AR) are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. They are the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. AR is shown in a balance sheet as an asset. The accounts receivable process involves customer onboarding, invoicing, collections, deductions, exception management, and finally, cash posting after the payment is collected.
Accounts receivable are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable represent a line of credit extended by a company and normally have terms that require payments due within a relatively short period, which typically ranges from a few days to a fiscal or calendar year. They are an important aspect of a business’s fundamental analysis and measure a company’s liquidity or ability to cover short-term obligations without additional cash flows.
In accrual accounting, the receivable balance is listed in the general ledger under current assets. When invoices are paid, finance credits the appropriate liabilities account and debits accounts receivable to account for the payment. Payments of accounts receivable can cut a companys debt, reduce financing charges, and improve cash flow, which can be used to hike dividends, invest in Capex (capital expenditure), increase risk capital, or offer new goods and services.
