Accounts Receivable: Definition, Examples, Formula

Accounts Receivable is the amount of money owed to a company for the goods and services that it has already delivered but has not been paid for yet. The Accounts Receivable (AR) is recorded as ‘Current Assets’ in the balance sheet of a company.

AR is considered an asset to the company. It represents the money that a business owes to its clients, generally in the form of unpaid invoices. They are the liquid assets that can be used as collateral to secure a loan. 

Enroll Now for Private Banking Courses

What is Accounts Receivable?

Accounts receivable refers to the money owed to a business by customers for the sales made on credit. When a company offers its products or services but agrees on the payment to be made later, the amount due is recorded as Accounts Receivable on the balance sheet of the company.

Accounts Receivable are listed as ‘Current Assets’ in the balance sheet of a company. The amounts are expected to be converted into cash within the next 30-90 days, depending on the terms of credit. The significance of Accounts Receivable can be summarized as follows:

• Management of Cash Flow: Accounts Receivable is directly connected to the liquidity of a company. The faster a company can collect its pending payments, the more cash it will have on hand to invest in the growth of the company.

• Customer Relationship Management: Extension of credit builds trust and long-term relationships with the customers, but it also increases the risk of defaults if not managed properly.

• Financial Reporting: The proper management and maintenance of the AR Ledger provides a company’s income streams and helps in accurate financial reporting.

Accounts Receivable Formula

The formula for Accounts Receivable can be calculated in terms of the Accounts Receivable Turnover Ratio. It is an important indicator of the operational and financial performance of a company. The ratio measures how efficiently a company collects its outstanding credit sales from its customers.

AR Turnover Ratio = (Net Credit Sales)/Average Accounts Receivable

Here, Net Credit Sales refers to the revenue generated from sales where payment is collected later, and the Average AR refers to to money owed to the company by its customers over a specific period.

 Enroll Now for Private Banking Courses

Accounts Receivable Jobs and Career Prospects

The management of Accounts Receivable is a specific job role within the accounting and finance department of a company. AR Professionals are responsible for tracking receivables, timely collections of credited amounts, and the maintenance of the financial records of the company. The table below mentions details about the job roles and responsibilities of the professionals managing AR:

 Enroll Now for Private Banking Courses

Accounts Payable Vs Accounts Receivable

The management of both Accounts Payable (AP) and Accounts Receivable (AR) is important for the business operations of a company. But both terms are different from each other. They both represent two different sides of financial transactions. The difference between Accounts Payable Vs. Accounts Receivable can be summarized as follows:

Accounts Receivable Examples

The majority of companies operate by allowing a part of their sales to be on credit. Sometimes, the company offers such credits to frequent and special customers, who will be receiving periodic invoices in place of making payments after each transaction. In other cases, the companies routinely offer all their clients to pay within some period of time after receiving the products or services.  

Take, for example, there is an electric company that bills its customers after the customers consume the electricity. The company records an AR for the unpaid invoices as it waits for the customers to pay their respective bills.

And if you’re passionate about mastering personal finance, banking operations, or pursuing a career in the financial sector, don’t miss out on PW BFSI Courses. These industry-relevant programs equip you with practical knowledge and skills for the ever-evolving banking, finance, and insurance sectors. PW BFSI Courses help you confidently handle financial products like checking vs. savings accounts, investment options, loans, and more. It’s time to boost your career and financial literacy.