Accounts Receivable (AR) are payments a company expects to receive from its customers (creditors) who purchased its goods and services on credit. Usually, the credit period in accounts receivable is short, ranging from a few days to months or a year.
The term "receivable" means the payment not realized after the sale of goods and services to a customer. It means the company must have sold its goods and services to its customers on credit. Usually, companies and business organizations sell their goods and services to their customers in cash or credit.
When a business gives a client credit, the sale occurs when the invoice is created, but the company gives the customer a grace period to pay the balance later. The duration might range from 30 days to several months.
Account Receivables (AR) are Assets, current assets to be precise (because they are not permanent and don't last for a long time) on the balance sheet.
When not properly managed, AR can lead to bad debts to your business. However, there are ways to improve your accounts receivable process, such as leveraging automation, optimizing your billing process, improving the customer experience, etc.
I will 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 produce tires. A customer placed an order of $100,000 for 100 tires on credit to pay after 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 on payment, the company can charge a late fee or hand over the account to a collections department.
As soon as the customer makes the payment, the cash segment in the balance sheet will increase by $100,000. After all, 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 the customer enjoys from the company. Usually, businesses offer credit to customers who buy goods frequently.