Business Glossary

Understanding Accounts Receivable

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Whatever business you’re in, you expect to be paid for what you sell. Sometimes though, that doesn’t happen right away and, for accounting purposes, any money owed is classified as accounts receivable.

What are accounts receivable?

Accounts receivable is the name given to the money owed to you by your customers until they pay their bills and occurs when you let buyers purchase their goods or services on credit. Typically, the money owed is collected a few weeks after the product/s or work has been delivered.

Accounts receivable refers to both the money owed and the process of collecting it. In accounting, it’s an asset recorded on your company balance sheet. This AR process will also include the issuing of invoices, monitoring payments, chasing payment if the invoice is overdue and reconciling payments with the correct invoices.

Accounts receivable is also the basis for using accrual accounting. If you use a cash accounting system, where income and expenses are recorded at the moment money is exchanged, then this isn’t relevant.

How are accounts receivable recorded?

Anything receivable is considered an asset and is recorded on your company balance sheet under current assets as money coming into, or adding value, to your business. The balance sheet will show the total amount receivable, i.e. owing to your business, but to view individual transactions you’ll need to refer to your accounts receivable subsidiary ledger where you will find details of invoices that are still payable.

Why are accounts receivable important?

Accounts receivable are a vital element of your company’s current financial position and can help with managing cash flow. It is a measure of your company’s liquidity – your ability to cover any short-term obligations without having to use any additional cash flows.
If you know what is payable to your company because you know what invoices are outstanding, then you can keep better control of your cash flow

Are accounts receivable an asset?

Yes, they’re recorded as a current asset and in some cases outstanding invoices are considered so valuable other companies will buy them off you known as invoice factoring. Once an invoice is paid, however, they’re no longer an asset but instead, become cash in the bank.

If it never gets paid, it will ultimately be written off as a bad debt.

Ageing accounts receivable

If an invoice remains unpaid it becomes aged, which you do simply by counting the days that have passed since it fell payable. An ageing report will show invoices from least overdue to most overdue which is important to review regularly because the longer it remains unpaid the more likely it won’t be paid at all.

Accounts receivable vs accounts payable

Accounts receivable are an asset and represent money owed to your business. Accounts payable are a liability and represent money you owe to another business, for example for raw materials.

Frequently asked questions about accounts receivable

What is an example of accounts receivable?

Let’s say you’re a florist and you send The Grand Hotel an invoice of £1400 for their monthly flower displays. You (or your bookkeeper) would record it in your accounts receivable as money payable to you. The hotel would record it in their accounts payable because it is money they need to pay someone else.

Are accounts receivable a revenue or an expense?

Accounts receivable is classified as revenue and as such it’s recorded as an asset on your balance sheet.

Are accounts receivable what you owe?

No, it’s money owed to you. Anything receivable is money you’re expecting to come into your business at a future date.

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