What is accounts receivable?

31 января 2020 by Forex Broker simple-accounting.org

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Accounts receivable — everything that other companies, the government, or individual clients owe to the company. Accounts receivable, for example, appear when a company sold a product but did not receive the money. Then, the buyer’s debt for the product is receivable. It also happens the other way around: if the company transferred the prepayment, but the product was not delivered. Overpayment of taxes or a loan to an employee also leads to accounts receivable. So, every bookkeeper should be able to answer “What are accounts receivable?” and know how to work with them.

Accounts receivable definition

Accounts receivable is the money that the company has to receive from other parties for the product or services it provided on account. Accounts payable, on the contrary, is when the company owes to someone. Thus, the accounts receivable definition is easy to remember.

Accounts receivable explanation

Accounts receivable appear when two parties of the same contract cannot fulfill their obligations simultaneously. For example, first, one company ships a productб and then another company pays for it. Due to this gap between goods being sold and shipped and money for it being paid, a debt to the first company appears. Such a debt can exist for several hours, or it can hang for years.

It would be ideal for the seller if all buyers paid in advance, but in practiceб this does not happen. Therefore, customers are given a deferred payment. This is beneficial to the participants of the transaction: the buyer can, for example, get goods before their price rises and make more profit reselling them, and the seller increases the sales market. The sellers often give discounts to buyers for paying before the agreed date to improve accounts receivable turnover.

Example of accounts receivable

Accounts receivable can be classified according to several criteria.

By maturity — long-term and short-term. Short- term – debt that is repaid within a year from the date of conclusion of the contract. For example, if payment for shipped materials is due in two months. Long-term — with a maturity of more than a year. For example, a loan for an employee.

By aging — normal or overdue. Normal means it is not yet time to repay the debt. For example, the company delivered the product to the customer, but the customer can pay for it within 10 days under the contract. A week later, his debt is still considered normal. Overdue debt appears when the terms specified in the contract have expired. For example, the same customer did not pay for the product even after a month. This will negatively impact the accounts receivable turnover ratio.

By origin – depending on who owes the company:

  1. Buyers — for example, under-delivery contracts.
  2. Suppliers —the product is yet to be received from suppliers, although the company transferred the prepayment.
  3. The government — for example, when the company overpaid taxes.
  4. Employees — for example, if the company issued them a loan.
  5. Founders — if, for example, they have not paid their share in the company’s authorized capital.

By the likelihood of repayment – bad debt and doubtful debt. The bad debt is considered uncollectible, while the company still hopes to recollect all or portion of the doubtful debt. When uncollectible accounts receivable appear, the company loses profit and is left without working capital. If such debts become large, the company cannot buy raw materials, produce products, pay salariesб and taxes — this is fraught with not only losses but also bankruptcy. Therefore, the task of managers is to stimulate and control debt repayment and, ideally, to prevent such situations. This process is called accounts receivable management. Now, you know an answer to “What is accounts receivable?”.

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