- Accounts receivable
Accounts receivable (A/R) is one of a series of
accountingtransactions dealing with the billingof customers who owe money to a person, company or organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoiceand mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms.
An example of a common payment term is
Net 30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common payment terms include Net 45 and Net 60 but could in reality be for any time period agreed upon by the vendor and client.
While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 - 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
On a company's
balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debita receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balancesheet for accounts receivable is always debit.
Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use
accounting softwareon a computerto perform this task.
Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.
Accounts receivable departments use the sales ledger.
Other types of accounting transactions include
accounts payable, payroll, and trial balance.
Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt via negotiating payment plans, settlement offers or legal action.Outstanding advances are part of accounts receivables if a company gets an order from its customers with payment terms agreed in advance. Since no billing is being done to claim the advances several times this area of collectible is not reflected in accounts receivables. Ideally, since advance payment is mutually agreed term, it is the responsibility of the accounts department to take out periodically the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a
letter of creditor by Trade Credit Insurance.
Companies can use their accounts receivable as
collateralwhen obtaining a loan( asset-based lending) or sell them through factoring (finance). Pools or portfolios of accounts receivable can be sold in the capital marketsthrough a securitization.
Bookkeeping for Accounts Receivable
Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account. The first method is the allowance method, which establishes a contra asset account, allowance for doubtful accounts, or more simply, allowance, as the offset to accounts receivable. Allowance is a contra asset that offsets the accounts receivable account to derive the net accounts receivable depicted in the balance sheet. The amount of the allowance can be computed in two ways; through the analysis based on sales method and analysis based on accounts receivable method. The reason a contra asset receivable account is necessary is to adhere to the
matching principleof accounting, which mandates that accrual basis companies match all revenues and expenses with the period in which expense, and crediting the allowance contra asset account. Once it has been deemed that a particular account is uncollectible, it would be necessary to take the account off a company's books by debiting allowance for doubtful accounts and crediting the associated accounts receivable account.
The second method, known as the direct write-off method, is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting an uncollectible expense account and crediting the respective account receivable.
For tax reporting purposes, the direct write-off method must be used; however, for financial reporting purposes, it is necessary to use the allowance method because it is a period's revenue with associated expenses-a fundamental concept of accounting known as the
Notes and references
* [http://www.ofdict.com/definition/accounts-receivable.php Accounts receivable general details and usage]
Wikimedia Foundation. 2010.
Look at other dictionaries:
accounts receivable — Money due or owed to a business or professional by customers or clients for goods or services. Generally, accounts receivable refers to the total amount due to a business and is considered in calculating the value of the business. Category:… … Law dictionary
accounts receivable — A right to payment for goods sold or services rendered (SA Bankruptcy.com) United Glossary of Bankruptcy Terms 2012 … Glossary of Bankruptcy
accounts receivable — a record of what is owed to you. All of the credit accounts the record of what each customer owes you taken together are your accounts receivable . Glossary of Business Terms An asset account that reflects amounts due from private persons or… … Financial and business terms
Accounts receivable — Money owed by customers. The New York Times Financial Glossary * * * accounts receivable accounts receivable ➔ receivable * * * accounts receivable UK US noun [plural] also UK debtors, also US receivables) ACCOUNTING ► the amounts in a company s… … Financial and business terms
Accounts Receivable - AR — Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually… … Investment dictionary
accounts receivable — trade debtors The amounts owing to a business from customers for invoiced amounts. Accounts receivable are classed as current assets on the balance sheet, but distinguished from prepayments and other non trade debtors. A provision for bad debts… … Accounting dictionary
accounts receivable — trade debtors The amounts owing to a business from customers for invoiced amounts. Accounts receivable are classed as current assets on the balance sheet, but distinguished from prepayments and other non trade debtors. A provision for bad debts… … Big dictionary of business and management
accounts receivable — noun a creditor s accounts of money owed to him; normally arise from the sale of products or services • Usage Domain: ↑plural, ↑plural form • Hypernyms: ↑assets * * * acˌcounts reˈceivable 7 [accounts receivable] … Useful english dictionary
accounts receivable — *Short term, invoiced amounts due from *customers for the supply of goods or services. Accounts receivable are classified as a *current asset in the balance sheet when their recoverability becomes doubtful, an *allowance for bad debts is created … Auditor's dictionary
accounts receivable — gautinos sumos statusas T sritis Gynyba apibrėžtis Sumos, kurios turi būti gautos iš skolininkų. atitikmenys: angl. accounts receivable šaltinis NATO mokymų ir pratybų finansavimo terminų žodynas AAP 43(1), 2009 … Lithuanian dictionary (lietuvių žodynas)