Accounts Receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.
Key Points of Accounts Receivable
- Accounts receivable is an asset account on the balance sheet that represents money due to a company in the short term.
- These are created when a company lets a buyer purchase their goods or services on credit.
- It is similar to accounts receivable, but instead of money to be received, it’s money owed.
- The strength of a company’s AR can be analyzed with the accounts receivable turnover ratio or days sales outstanding.
- A turnover ratio analysis can be completed to expect when the AR will actually be received.
Example of Accounts Receivable
A manufacturer will record an account receivable when it delivers a truckload of goods to a customer on June 1 and the customer is allowed to pay in 30 days. From June 1 until the company receives the money, the company will have an account receivable and the consumer will have an account payable.
Accounts Payable: Accounts payable (AP) is an account within the general ledger that represents a company’s obligation to pay off a short-term debt to its creditors or suppliers.
- Accounts payable are amounts due to vendors or suppliers for goods or services received that have not yet been paid for.
- The sum of all outstanding amounts owed to vendors is shown as the accounts payable balance on the company’s balance sheet.
- The increase or decrease in total AP from the prior period appears on the cash flow statement.
- Management may choose to pay its outstanding bills as close to their due dates as possible to improve cash flow.