Accounts Receivable (AR)

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What is Accounts Receivable?- Definition

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.

Accounts Receivable

Understanding Accounts Receivable

The word receivable refers to the payment not being realized. This means that the company must have extended a credit line to its customers. Usually, the company sells its goods and services both in cash as well as on credit.

When a company extends credit to the customer, the sale is realized 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 current assets on the balance sheet.

Difference between Accounts Receivable and Accounts Payable

  • Accounts Receivable are an asset account, representing money that your customers owe you.
  • Accounts Payable on the other hand are a liability account, representing money that you owe another business.

Importance of Accounts Receivable

Management of Account Receivables refers to planning and controlling debt owed to the customer on account of credit sales.  In simple words, the successful closure of your order to sales is determined only when you convert your sales into cash. Till your sales are converted into cash, you need to manage ‘how much you need to receive? from whom? And when?

To do this, you need accounts receivables management, popularly known as a credit management system in place.

Another reason, accounts receivables are one of the key sources of cash inflow and given the volume of credit sales, a large amount of money gets tied up in accounts receivables. This simply implies that so much money is not available till it is paid. If these are not managed efficiently, it has a direct impact on the working capital of the business and potentially hampers the growth of the business.

On the other side, managing accounts receivables efficiently will benefit the business in several ways. 

  • The most important being the increased cash inflow by faster realization of sales to cash. 
  • It also helps you to build a better relationship with your customer by not having the discrepancies in pending bills and mitigates the risk of bad debts. 
  • All these require you to be at the top of your account’s receivables and you can easily achieve this by using accounting software. 
  • It helps you track, monitor and on-time action on overdue/long-pending bills resulting in increased inflow of cash that is essential for business growth.

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