Accounts Receivable

What is Accounts Receivable (AR)?

The accounts receivable (AR) definition encompasses the money owed to the business for the goods or services that it has delivered but not yet been paid for.

As it represents money due to the company, it is considered an asset to the company.

What is the role of accounts receivable in accounting?

The accounts receivable meaning in accounting is akin to a line of credit that the company extends to its customers with clear terms for payments to be made within a certain period.

Since customers have a legal obligation to pay these amounts and the company can reasonably expect to collect them, AR is listed as liquid assets in the balance sheet.

Why is accounts receivable important?

Accounts receivable management is a vital aspect of how investors determine the value of an organization and its securities. Being a current asset, AR adds to the company's liquidity.

For analysts, the accounts receivable turnover ratio (which is the net credit sales for a given period divided by the average accounts receivable) is a vital parameter of evaluating a company’s efficiency in collecting its debts, and of the credit quality of its clients.

How does accounts receivable work?

The accounts receivable process begins with a purchase agreement between the company and its customer for providing goods or services — after due approval of credit to the customer. This becomes the basis of the accounts receivable workflow. The order is then fulfilled, and an invoice is issued by the company for the goods/services provided — and this is recorded in its books as an account receivable journal entry.

Receivables are continuously tracked through ageing reports. When payment is made, it is recorded as a deposit. This marks the successful completion of the accounts receivable cycle. If the customer fails in the payment, the AR collection process is then initiated in the AR workflow.

How can companies benefit from accounts receivable automation?

Automation of AR operations enhances the efficiency of the accounts receivable workflow. It significantly minimizes effort and time in AR data entries. AR automation software is used to enhance accuracy, improve customer relationships and enable on-time receipt of monies due.

It also provides better visibility of the AR cycle for better decision-making and financial management.

What are some important accounts receivable best practices?

Some of the best practices in accounts receivable include:

• Prudence and meticulousness in credit management.
• Flexible and win-all payment terms.
• Effective dispute resolution processes.
• Transparent and clear communication to minimize ambiguities and create trust.
• Use of analytics, automation, AI and emerging technologies — AI in accounts receivables management especially can deliver tremendous advantages.

How is accounts receivable (AR) different from accounts payable (AP)?

Accounts receivable (AR) is the money owed to the organization by its customers for goods or services purchased by them on credit. As it represents money coming into the organization, it appears as a current asset on the balance sheet.

Accounts payable (AP) ledger reflects the money that a business owes to suppliers or vendors for goods or services purchased. Since this represents money going out, it appears as a debit on a company’s balance sheet.