Accounts receivables refers to the money a business is owed by its customers for goods or services that have been delivered or used but not yet paid for.
It appears as a current asset on the balance sheet because it is expected to be converted into cash within a relatively short period, usually 30 to 90 days.
When a business sells on credit, the customer receives the product or service upfront and agrees to pay later, typically under agreed payment terms. This creates a receivable—an amount the business expects to collect. Tracking and managing accounts receivables effectively is essential for maintaining cash flow, forecasting revenue, and identifying potential credit risks.
Companies issue invoices to customers once a sale is made, and the total of all unpaid invoices forms the accounts receivable balance. This figure can fluctuate over time based on sales volume, customer payment behavior, and the credit policies in place.
Similar Accounting Terms
Accounts payables refer to the amounts a business owes to suppliers or vendors for purchases made on credit. While accounts receivables represent incoming funds, payables reflect outgoing obligations.
Notes receivable differ from accounts receivables in that they are formal written promises to pay a specified amount, often including interest, at a future date. These are often used when longer credit terms are involved.
Trade receivables are a specific type of accounts receivables related directly to a company’s main revenue-generating activities. They do not include loans or advances that might be owed to the company from unrelated transactions.
Accrued revenue is income that has been earned but not yet billed to the customer. While not yet included in accounts receivables, it becomes a receivable once an invoice is issued.
Bad debt expense is recorded when it becomes evident that a portion of accounts receivables will not be collected. This adjustment reduces the total receivables on the balance sheet and reflects a more realistic expectation of cash inflows.
Common Misconceptions
Some believe accounts receivables are the same as revenue. In truth, revenue is recorded at the point of sale, while accounts receivables represent the portion of that revenue which has not yet been collected.
Another misconception is that a large accounts receivables balance is always positive. However, high receivables may indicate that customers are taking too long to pay, which can strain a company’s cash flow.
There is also the incorrect assumption that accounts receivables are equivalent to cash. While receivables are expected to become cash, they are not available for immediate use until payment is received.
It is sometimes thought that all companies handle receivables the same way. In reality, accounting methods, payment terms, and industry standards vary widely across businesses.
Use Cases
Small businesses that offer net-30 or net-60 payment terms to clients rely heavily on accounts receivables to track and follow up on outstanding payments. The process helps them maintain regular cash flow without demanding immediate payment at the time of sale.
Wholesale distributors frequently work with retailers who place large orders on credit. Accounts receivables help the distributor stay organized by showing how much each client owes and when the payment is due.
Professional service providers such as consultants, law firms, and creative agencies commonly invoice clients after services have been rendered. These invoices become part of the receivables until they are settled.
Subscription-based companies may invoice customers in advance or periodically for ongoing access. The outstanding invoices during the billing cycle are considered accounts receivables until collected.
Nonprofits that receive donor pledges for future contributions often record these pledges as receivables when there is reasonable assurance of collection. This allows them to include expected income in their financial statements even before the cash is received.
Accounts receivables also apply in industries like construction, where progress billing is used. Partial invoices are sent as project milestones are met, and these amounts are tracked until payment is received.
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