Account Receivable: Meaning, Process and Examples
Accounts receivable means money that has yet to be received from customers for goods or services already provided. Managing accounts receivable effectively ensures steady cash flow, reduces financial risks, and helps maintain strong business relationships.
Imagine a local bookstore in Mumbai selling a bulk order of textbooks to a school on credit. The school agrees to pay within 30 days. This transaction is recorded as an Accounts receivable for the bookstore. Accounts receivable represent money owed to a business for goods or services delivered but not paid for.
Accounts receivable are a crucial part of a company's finances. They are listed as current assets on the balance sheet, indicating expected cash inflow and playing a key role in managing cash flow. Learning about Accounts Receivable through online accounting courses can help professionals improve financial management and cash flow strategies. Let’s understand what is Accounts Receivable and other related concepts.
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Account Receivable Meaning
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Accounts receivable (customer dues) occur when a company sells goods or services but hasn't received payment. It's like an IOU from customers. When a business allows a customer to pay later, this amount is recorded as an account receivable, essentially a claim for money owed. These receivables are considered assets and are recorded on the debit side of the company's balance sheet as they represent funds that the business expects to receive in the near future.
Accounts receivable are short-term (current) assets because payment is expected to be received within a year. Businesses set credit terms and may charge late fees or use collection agencies if payments are delayed.
Accounts Payable vs Accounts Receivable
Accounts Payable (AP) is the money a business owes to suppliers for credit purchases (a liability), while Accounts Receivable (AR) is the money customers owe a business for credit sales (an asset). AP reduces cash, while AR increases cash flow.
If you want to explore the differences in detail, read the full article – Accounts Payable vs. Accounts Receivable.
Account Receivable Example
On April 2, 2025, ABC Ltd, sells goods worth ₹50,000 to a customer on credit. The payment is due in 30 days. Since ABC Ltd. has not yet received the payment, this amount will be recorded as Accounts Receivable in its books.
Account Receivable Journal Entry
| Date | J.F | Details | Amount |
| April 2, 2025 | 256 | Accounts Receivable A/C Dr. (Being goods sold on credit to the customer) |
50,000 50,000 |
When the customer makes the payment (e.g., May 2, 2025):
| Date | J.F | Details | Amount |
| May 2, 2025 | 378 | Cash/Bank A/C Dr. (Being payment received from the customer) |
50,000 50,000 |
Account Receivable Process
The Accounts Receivable (AR) process ensures businesses track and collect payments from customers who buy on credit. It helps maintain steady cash flow and reduces financial risk. Let's understand account receivable process in detail.
1. Sale on Credit
A business sells goods or services on credit and issues an invoice with the amount, due date, and payment terms for future collection.
2. Recording the Transaction
The invoice amount is recorded in the Accounts Receivable ledger as an asset, reflecting the amount the business expects to receive from the customer.
3. Sending the Invoice
The invoice is sent to the customer through email or other methods, ensuring they know the payment amount, due date, and any late penalties.
4. Tracking Payments
Businesses monitor outstanding invoices using an aging report to track unpaid amounts, ensuring timely follow-ups for pending payments and avoiding cash flow disruptions.
5. Sending Payment Reminders
Reminder emails, calls, or messages are sent before the due date to encourage timely payment. Discounts or incentives may be offered for early payments.
6. Receiving Payment
When the customer makes the payment, the amount is recorded in the Cash/Bank account, and the Accounts Receivable balance is reduced accordingly.
7. Handling Late Payments
If payment is delayed, penalties or late fees may apply. In extreme cases, businesses may involve collection agencies or take legal action to recover dues.
Conclusion!
Accounts receivable (AR) represent credit sales awaiting payment, vital to a company's financial health. Efficient AR management ensures a steady cash flow, maintains liquidity, and supports operational needs. It requires careful monitoring and strategic policies to balance customer relationships with financial stability. Effective AR management is key to a business's ability to grow and thrive in a competitive marketplace.
Top FAQs on Account Receivables
What are accounts receivable?
Accounts receivable (AR) are the funds that a company is due to receive from its customers for goods or services provided on credit. They are recorded as an asset on the company's balance sheet.
Why are accounts receivable important for a business?
AR is important because it represents the cash that a business is expected to receive, which is crucial for maintaining cash flow, meeting operational expenses, and planning for future investments.
How do companies manage accounts receivable?
Companies manage AR by setting credit policies, issuing invoices, tracking payments, following up on overdue accounts, and using accounting software to maintain accurate records.
What is an accounts receivable aging report?
An accounts receivable aging report is a financial document that categorizes a company's receivables based on the length of time an invoice has been outstanding, helping to identify potential collection issues.
How does accounts receivable affect cash flow?
AR affects cash flow by representing the future cash inflows from credit sales. Efficient management of AR ensures a steady cash flow, while poor management can lead to cash shortages.
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