What Is Accounts Receivable?

Meaning And Example Of Accounts Receivable

Accounts Receivable (AR) can be defined as the payment which the company is expecting to receive from its customers (creditors) who purchased its goods & services on credit. Usually the credit period in account receivable is short which ranges from few days to months or in some cases a year.

The term "receivable"  means the payment not being realised after the sale of goods and services to a customer. This means that the company must have have sold its goods and services to its customers on credit. Usually, companies and business organizations sell its goods and services to their customers both in cash as well as on credit as the case may be.

When a company extends credit to the customer, the sale is realised when the invoice is generated, but the company extends a time period to the customers to pay the amount after some time. The time period could vary from 30-days to a few months.

Account Receivables (AR) are treated as Assets, current assets to be precise (because they are not permanent and don't last for a long time) on the balance sheet.

I am going to illustrate Accounts Receivable with the help of an example:
For instance, you are a manufacturer with the business name M/S XYZ Pvt Ltd and you produce tyres.

A customer placed an order of $100,000 for 100 tyres. Now, when the invoice is generated or written for that amount, sale is recorded, but to make the payment, the company extended the time of payment by the customer to 30-days.

Until the money is paid, the amount of $100,000 becomes your account receivable because the customer will pay that amount of money before the period expires. If the customer defaults payment, the company can charge a late fee or hand over the account to a collections department.

As soon as the payment is made, the cash segment in the balance sheet will increase by $100,000 because the customer paid in cash or the bank segment will increase if the customer paid via cheque and the account receivable will be decreased by $100,000 because the customer has made the payment.

The amount of account receivable depends on the line of credit which the customer enjoys from the company. Usually, this is offered to customers who buy goods frequently.

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