What is Accounts Receivable?
In supply chain finance, accounts receivable represents the cumulative total of all the payments receivable by an organization. To put it simply, accounts receivable, also referred to as AR, are the amounts due to an organization for the products sold by them and/or the services rendered by them. It is a common business product to sell goods or provide a service or credit. Such a transaction generates an accounts receivable for the concerned organization.
The accounts receivable for an organization are generally for a short period, which is usually less than a year. The timeline when an organization expects the payment of a particular AR is determined at the time of the sale of a product or provision of a service; this timeline depends upon the credit line the organization is willing to offer to its debtors and/or customers.
Accounts Receivables include, amongst others, the following:
- Any amount that is owed to an organization from its debtors
- Any outstanding subscription installments payable to an organization
Accounts receivables are recorded under the head ‘Current Assets’ on the balance sheet of an organization. If the AR of a company rises, it represents a rise in the quantum of goods and/or services sold on credit and an increase in the company’s liquid assets.
For an individual, accounts receivable may comprise all the payments that are owed to them by a debtor, including the installments of any short-term debt provided by them.
Evolution of the Concept of Accounts Receivable
A majority of organizations now record their accounts receivable in a digital form and categorize them by their aging, that is, the timeline of their expected repayment. Accounts receivable are usually categorized under the following subcategories:
- Amounts due to be received in less than 30 days
- Amounts due to be received between 31 and 60 days
- Amounts due to be received between 61 and 90 days
- Amounts due to be received between 91 and 365 days
Accounts receivable are recorded on an accrual basis. Due to AP being an asset for an organization, it gets debited upon the creation of any receivable. When an organization sells any goods or renders any service without receiving its payment instantaneously, an AR gets debited whilst the relevant revenue account gets credited.
Examples of Accounts Receivable
Some examples of Accounts receivable are:
- The sale of any goods or services on credit
- Payments due to a company for leasing a product
What are the Causes of the Generation of Accounts Receivable?
The primary cause behind the generation of Accounts receivable for an organization is the sale of goods and/or services on credit. The payment for the aforementioned accounts is usually due within a year.
