What's Account Receivable?

Account Receivable (AR) is any amount of money your customers owe you for goods and services they purchased from you on credit. Usually the credit period is short ranging from few days to months or occasionally maybe a year.

Where do you find Account Receivable ?

Accounts receivable are treated as current asset under balance sheet because they provide value to your company. You use Account Receivable as part of accrual basis.

How do you record Account Receivable?

When you issue an invoice to a customer, you debit the account receivable account (asset account in balance sheet) and credit the sales account ( revenue account).

When you receive a cash payment or cheque from the customer, the entry is debit cash account/ bank account and credit to account receivable account, therefore, knocking off the account receivable.

If a customer cannot pay an invoice, then you debit the bad debt account ( expense account ) and credit account receivable account, therefore, knocking off the account receivable.

Why is Account Receivable Important?

Having a lot of sales is great. But if you have some who pay late or not paying at all, they might be hurting your business. Late payments from customers are one of the top reasons why companies get into cash flow or liquidity problems. Keeping track of exactly who’s behind on which payments can get tricky if you have many different customers. Some businesses will create an accounts receivable aging schedule to solve this problem. A quick glance at this schedule can tell us who’s on track to pay, who’s behind schedule, and who’s really behind.