Accounts receivable refers to the money a company’s customers owe for goods or services they have received but not yet paid for. For example, when customers purchase products on credit, the amount owed gets added to the accounts receivable.
Accounts receivable are considered a cash within the current operating cycle (usually less than 12 months). The faster this conversion happens, the better, because companies use their receivables to pay off current liabilities such as accounts payable. (Converting assets to cash quickly is called “high liquidity.”) Some businesses offer customers special terms for early payment.
On the balance sheet, accounts receivable appear under assets. Often, some portion of accounts receivable go uncollected because customers are unable to pay or for other reasons. To allow for this, the number on the balance is reduced by an estimate for bad debts.
Some companies sell unpaid debts at a discount to collection agencies that then collect on the amounts owing.
More about accounts receivable
The balance sheet below shows ABC Co.’s current assets, including its accounts receivable. The assets are listed in decreasing order of liquidity (that is, how quickly the business can convert them to cash).