Account Receivable (AR) is the money that a company is yet to receive. It is
for the goods or services that it had sold to a customer. That is, the company
allowed the customer to purchase its products on credit, to be paid within a
short period. In essence, AR is the money owed by the customer for the
purchase made on loan.
The term receivable thus refers to the payment that the company is yet to
A company sells its products both in cash and on credit. When the sale is on
credit, the invoice is generated, but the company extends a short period for
the customer to pay the amount. This period could be a few days, a fiscal or a
year. AR is not usually for more than a year.
Account Receivables a Current Asset
While listing ARs in the balance sheet, they are listed as current assets.
'Current' because it is for a short duration (less than a year) and 'assets'
because the company receives the money from the customers owing to the
legal obligation to repay the debt.
Understand an AR with the following example. Consider a furniture company
manufacturing receiving an order for delivery of 1000 chairs at Rs. 1,00,000.
The company records the sale by generating an invoice. But, it extends a 30-
day time period for the customer to pay for the invoice.
Till the customer repays the amount, the Rs. 1,00,000 becomes an account
receivable. It is registered as a current asset in the balance sheet. The
customer must pay the amount before the expiry of the period. If not, the
company can levy late fee charges or find ways to recover the amount.
When the payment is received from the customer, the cash segment of the
balance sheet increases by Rs. 1,00,000, and the AR or cash asset segment
decreases by the same amount.
Do not get an AR confused with Account Payables. While AR is the money
owed to the company, Account Payables is the opposite of it.
Money owed by the company to a supplier or credit taken for the purchase of
service is recorded under Account Payables.
How Account Receivables Benefits a company?
AR helps in analyzing the business fundamentals of a company. It, being a
current asset, AR helps in assessing the liquidity position of a company or
evaluate a company's ability to run its business without additional cash flows.
Also, AR allows the company to provide flexibility to its customers on
payment. It helps the company gain a loyal customer base.
Risks of AR
The concept of AR is entirely dependent on the reliability of the debtors. Any
non-payment of an outstanding invoice will lead to a loss for the company.
Thus, the company has to monitor its AR regularly. Also, by keeping a large
number of Account Receivables, the company will be carrying a higher risk of
Businesses offer credit to gain customers' trust and to expand their customer
base. Often, it is to unique customers or frequent customers. In some cases,
it is offered to all the customers to make payments a hassle-free process.
Thus, Account Receivable is an essential aspect of a business.